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Insurance You Need

Learn what kind of insurance is worth the money—and what you can skip.

Our Two Cents

Insurance is one of those expenses that can seem discretionary—until you need it. Then it can be the best money you ever spent. The right type of insurance is essential to your overall financial security.

Don't waste money by allowing yourself to be persuaded that you need protection when you don't. Extra car rental insurance is a good example, since you probably already have such coverage. Learn the distinctions and make informed decisions.

Of course, not everyone needs the same coverage—it depends on your personal and financial situation. Here are important areas to review to make sure you're adequately covered.

What's necessary:

Health insurance

Health care is not cheap, and a serious injury or hospital stay can set you back thousands of dollars. Therefore, it is essential that you have the most complete and cost-effective coverage available. Take a look at the Health Insurance Marketplace to comparison shop. You can also review these different types of policies to determine the right choice for you:

If you don't have adequate medical coverage through your employer or another group, you need to consider your options. Possible alternatives include:

  • A low-cost, high-deductible policy to cover major expenses
  • Coverage available at a lower group cost through membership in a professional, educational, or religious organization
  • Student health insurance through a college or university

Car insurance

Most states require you to carry at least basic liability insurance to cover damage you may do to others, including both bodily injury and property damage. Liability insurance also pays for potential legal bills. You can choose to expand your coverage to pay for a variety of other possible costs, like damage to your car in case of a collision, vandalism, fire, or theft. First-time car buyer? Learn more about auto insurance.

Disability insurance

This protects your earning power. Many employers offer some type of disability insurance, many of which cover about 60% of your salary. A few states offer short-term disability insurance. The Social Security Administration also offers limited disability coverage. Look into your current coverage. If a work disruption would be a financial hardship, learn more about what a private disability policy offers.

Life insurance

Not everyone needs life insurance. The important thing is to make sure you have it if you have dependents—and have the right type. At its most basic, life insurance falls into two categories: term (or "temporary") and permanent (or "cash value"). Calculate how much life insurance you need.

  • Term life is pure insurance: You purchase a policy for a set length of time (the term) at a pre-established premium. It can replace your income in the event of your death. It can also make sense if you have a big expense ahead, such as college tuition, that you want to make sure is covered. Depending on the policy, the premium can increase, stay the same, or decrease over time. Unless you renew when the term is over, you no longer have coverage. Although it's the least expensive way to purchase life insurance, it can be very expensive (or impossible) to renew as you get older or develop health problems.
  • Permanent life provides coverage for an indefinite length of time or for the life of the insured, and features an investment, or "cash value," component. As long as you continue to pay your premiums, you have coverage for life. If you purchase a policy at a relatively young age, the premiums will be higher than for term insurance because a percentage of each premium goes into an account managed by the insurance company—called the cash value account—which is designed to grow tax-deferred. You also pay commissions and fees. Depending on the policy, you can either borrow against this cash value or apply it to future premiums.
  • Universal life insurance is a type of hybrid policy that provides a flexible premium structure with a cash-value component. In addition, there are many other variations of permanent policies. Always be sure that you understand all the terms and risks before you make a purchase.

Homeowner's insurance

If you own your home, make sure you have adequate coverage to protect it as well as your possessions. Depending on where you live, you may want to add earthquake or hurricane insurance. However, be wary of lump policies that protect you from a variety of natural disasters. For instance, if you live in the desert, you probably don't need flood protection.

Renter's insurance

Your landlord's policy will cover damage only to an apartment or house, not your possessions. A renter's policy usually covers damage or loss due to events such as fire, theft, and vandalism and may protect you from damage due to things like faulty wiring, water, or weather. In general, renter's insurance is inexpensive and a wise purchase.

Umbrella insurance

For extra protection, you might also consider an umbrella policy. This provides coverage above and beyond your car or homeowner's insurance if you are sued for an injury caused by you or your property. Umbrella policies are generally reasonably priced and can be smart coverage, especially for high-net-worth individuals. You can often get up to a million dollars in coverage for a few hundred dollars a year.

Long-term care insurance (LTCI)

The U.S. Department of Health and Human Services estimates that at least 70% of people over 65 will require some type of long-term care services at some point. Long-term care insurance isn't cheap, and premiums and benefits vary widely. But whether you're concerned for yourself or for aging family members, think about how the cost of care vs. insurance would affect your overall finances.

You'll find more detailed information and answers to commonly asked insurance questions at the Insurance Information Institute.

What you can do without:

Certain insurance types are usually just a waste of money. For instance, if your mortgage is below 80% of the cost of your home, you don't need private mortgage insurance. Here are other types of insurance that are generally unnecessary:

  • Life insurance for kids—Remember, life insurance is for those who have dependents.
  • Car rental insurance—This is usually covered by your own auto insurance and by some credit cards.
  • Pet insurance—Premiums can often be higher than average pet health care costs.
  • Flight insurance—If you have adequate health and life insurance, that's probably sufficient.
  • Wedding insurance, cancer insurance, and mortgage life insurance—Generally, these are unnecessary.

The information on this website is for educational purposes only. It is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner, or investment manager.

The Charles Schwab Foundation is a 501(c)(3) nonprofit, private foundation that is not part of Charles Schwab & Co., Inc. or its parent company, The Charles Schwab Corporation.

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