Insurance: the one bet in your life that you don’t want to have pay off

Welcome to the latest post in my journey to build financial literacy for young adults and their families. Today’s post is the third part on insurance. In the first part, I discussed why insurance is necessary and provided an explanation of legally-required types. In the second part, I covered the insurance types which are not legally required but will be required by other parties such as your mortgage lender, your local or state government or a professional association. In today’s final post on insurance, I will cover additional insurance types which are not legally required, but serve important purposes, nonetheless.

What types of insurance are there?

In my first post on insurance, I provided an overview of three categories of insurances:

• Legally required: Usually health insurance and auto insurance, although this may differ by state or country. I covered these in my first insurance post
• Discretionary yet required: these are required in certain instances. For example, if you have bought a home with a mortgage the bank will require home insurance. If you have a limited amount of equity in the house, the bank will also require mortgage insurance. I covered these in my second insurance post
• Discretionary but not required: there are many insurances which are not required but will make sense based on your life circumstances. For example, if you have a spouse or children, you will most likely want life insurance. These are the subject of today’s post

Let’s now dive into Discretionary but not required insurances. As described above, these are insurances which you do not have to buy but would be very advisable in certain circumstances.

This part of the world of insurance is very interesting as you can buy insurance for almost anything, no matter how esoteric. If you have a few minutes and want to get a good laugh, you can read about some of the strangest insurances that can be bought. For example, if you are worried about being abducted by aliens, there is a company in the UK that will sell you “Alien abduction” insurance or if you are worried that the bride or groom will have second thoughts on your wedding day, you can buy “Change of heart” insurance (9 weird types of insurance you never knew existed). Alternatively, if you are really concerned about the protecting the value of your individual body parts, you can buy insurance for your feet, mustache or any number of other body parts (https://insurancewhat.com/most-bizarre-insurance-in-the-world-weird-and-absurd/).

Now, just because you are able to buy insurance on something, doesn’t mean you should. Remember that there is a cost for insurance which needs to be traded off versus the benefit if the situation triggering the insurance were to occur. You have to look at your life circumstances and, where there is a valid reason for buying a type of insurance, it’s worth looking into it. If you read the linked article above on buying insurance for body parts, you would have seen that buying insurance on your feet makes sense if you are a world class soccer star like Cristiano Ronaldo. However, for the vast majority of us, there is absolutely no need to buy insurance on our feet as the cost of that insurance highly outweighs any potential benefit we’d get for it.

There are, however, three types of Discretionary but not required insurances which I would definitely recommend that you look at and, potentially buy:

Life insurance

Life insurance is a contract through which a policyholder pays an insurer in exchange for a payout when the insured dies. * If you have a spouse and/or children (or any other type of dependent), this type of insurance is an absolute must in my view. In particular, if you are the primary earner in the family. The payout provides some level of financial support to the people who are dependent on you in the event that you pass in an untimely manner – the last thing you want when you pass is for your loved ones to endure financial insecurity in addition to the grief at your loss.

There are two types of life insurance:

Term insurance:

A life insurance policy that lasts for a specified period or term, as determined in the insurance contract. ** You are only covered in the time period (term) specified in the insurance contract and as long as you are current on your premiums. Once the term ends, the contract expires. If you want to reestablish life insurance at that point, you will need to get a new contract with a new term and updated pricing.

This type of insurance is typically cheaper than permanent life insurance as you don’t build up any cash value (see next section on what cash value is) and it is time constrained as to when it is in force.

Permanent life insurance:

Insurance coverage [which] never expires and pays a benefit upon the policyholder’s death. Additionally, many permanent life insurance policies have a cash value component, and so they are sometimes referred to cash value insurance policies. With a cash value component, a portion of your premium payment goes toward cash accumulation, which grows on a tax-deferred basis. ***

Permanent life insurance comes in a number of flavors such as whole life insurance or universal life insurances. This insurance covers you throughout your entire life and also, in the instances where it has a cash value, provides a tax-advantaged means of savings. On a headline basis, premiums for permanent life insurance will typically be more expensive than term life. However, based on your personal circumstances, this may turn out to be the more efficient choice.

As mentioned above, life insurance is an absolute must in my view for anyone who has dependents. When you reach the life stage where you get dependents, it is worth taking the time to talk to an insurance agent and look through the various life insurance options available to you.

Disability insurance

Disability insurance is a type of insurance product that provides income in the event that a policyholder is prevented from working and earning an income due to a disability. ****

Similar to life insurance, disability insurance is a way to protect your dependents in case you are no longer able to provide for them. This type of insurance is typically offered by employers at an additional cost as part of their employee benefit packages.

While most people have heard about and buy life insurance, this insurance is typically under bought as many people either don’t know about disability insurance or underestimate the likelihood that they will need it. Studies show that the average 20-year-old has a 25% chance of disability before they retire but only 20% of people buy disability insurance. ***** Just as I would recommend you look at buying life insurance when you have dependents, I would also strongly urge you to look at investing in disability insurance at that life stage. In particular if you are the primary earner in your family.

Travel insurance

Travel protection is coverage that can help protect you from losses and unexpected events that occur when you’re traveling. With benefits to cover trip cancellation, medical expenses, and even travel inconveniences like lost luggage, travel protection is a smart way to help guard against costly disruptions to your travel plans. ******

In today’s Covid-affected world, I would definitely recommend adding travel insurance to any trips that you have planned. With all the variability that Covid has brought to the world of travel – potentially testing positive when you are on your trip or a chance that you might get stuck at your destination due to rapidly changing regulations – the amount of uncertainty when one travels has increased dramatically. It’s bad enough that this additional uncertainty can make you more anxious and have less fun during your trip. However, you could also find yourself having to shoulder a meaningful amount of unexpected costs. While travel insurance won’t make the trip more fun, it can help you limit the excess costs you have to bear in case something were to happen during your trip.

This completes today’s post on Discretionary and not required insurances. The practical steps you can start taking from today’s post are:

• Audit the insurances that you have either every year or when you have a change in life circumstance such as getting married or having a child
• Ensure that you have all legally required insurances to at least the minimum required levels where you live (as covered in my first insurance post)
• For discretionary insurances, determine any contractual or license-based requirements you have from your mortgage or business (as covered in my second insurance post)
• Map your insurance to each person or entity to whom you are responsible. If there is one which doesn’t have an insurance that ties to them, add that insurance

Thank you again for joining me on my journey to build financial literacy for young adults and their families. If you have found this post interesting and have friends and family who would benefit from it, please share it with them. If you are interested in reading more of my posts, please consider becoming a subscriber by clicking the button on the right. You can always access all the posts I have published on my author page. Additionally, if you have any questions on today’s topic or if there are any topics you’re interested in my broaching in future posts, please let me know. I can be reached at [email protected].

* https://smartasset.com/financial-advisor/what-is-life-insurance

** https://smartasset.com/life-insurance/3-pros-of-term-life-insurance

*** https://smartasset.com/financial-advisor/permanent-life-insurance

**** https://www.investopedia.com/terms/d/disability-insurance.asp

***** “Only 20% of Consumers Own Disability Insurance Despite Almost Half Saying They Need It”; https://www.lifehealth.com/20-consumers-disability-insurance-despite-almost-half-saying-need/

****** https://www.travelers.com/personal-insurance/travel-insurance