<< Understanding Basic Insurance Needs

Who Needs Life Insurance?

If you have people that depend on you financially (e.g. spouse, children, or possibly parents), you need life insurance. Life insurance comes in two main types, “Term” and “Permanent.” 

Term Life Insurance

Term life insurance lasts for a specified term (usually between 10 and 30 years), typically has a fixed monthly or semi-annual premium, and provides a lump sum benefit to your beneficiaries when you die. This lump sum benefit is typically tax free. Term insurance is the most common type of life insurance, is reasonably priced (although your health and lifestyle can affect this), and according to experts is the right choice for most people.

Permanent Life Insurance

Permanent life insurance lasts for the entire duration of an individual’s life as long as the premiums are paid. It consists of both a death benefit and a “cash benefit.” The cash benefit is essentially a savings vehicle. Typically, part of your premiums are invested and you can receive some of the returns if you cancel your policy. Sometimes you can even borrow against your invested assets. Permanent life insurance policies are more complex than term policies and on average your premiums will be 6-10x more expensive. 

There are reasons that both types of insurance can be good depending on your situation. But Term life insurance is much more common due to lower premiums. Additionally, the invested cash value you can get from a permanent life insurance policy is unlikely to be the best way to invest those dollars. In other words the standard recommendation is to buy cheap term life insurance and invest the difference in the premium prices in other ways if you’re able to.

The amount of insurance you need is often calculated at 10x your annual salary. Some people get a little more detailed and will add in things like debt owed and higher education expenses that they plan provide for their children. But some version of the “10x salary + other expenses” is a good rule of thumb to estimate how much life insurance you need.

Significant Insurance Types to Consider

• Life – if you have financial dependents, you need this insurance. Most people get “Term” life insurance but a minority of people will get “Permanent” (sometimes simply called “Whole”) life insurance.
  

• Auto – if you own a car you need car insurance and the “Liability” component of car insurance is legally required in most states.
  

• Home – this protects your home and may also provide a layer of liability protection for certain types of accidents – sometimes even ones that didn’t happen on your property.
  

• Renters – this can provide protection for your belongings, costs associated with water damage, temporary housing if your unit becomes unlivable, liability protection and more. 

• Disability (LTDI) – this provides a level of income replacement should you become disabled and unable to work. It may be offered through your employer.
  

• Long-term Care (LTCI) – this provides payouts for specific costs associated with skilled nursing or facilities should you require these for health-related reasons.
  

• Umbrella – this provides an extra layer of liability protection (beyond what you may have with home or auto) in the event someone tries to sue you for an accident.

Details

Your focus is to become financially independent and you have worked incredibly hard to reach this stage. But unforeseen events and accidents happen. If you’re not prepared, everything you’ve worked for can be put at risk in a matter of moments.

But here’s the good news: Each type of insurance listed above is easily understood, and easy to acquire. Additionally, relative to health insurance, these types of insurance are comparatively inexpensive.

Some of these insurance types can be purchased and bundled together with your traditional “Home, Auto, Life” companies (and bundling usually saves you money). Others can be purchased through your current employer. (Important: If the policy is paid through your paycheck it will become inactive when you leave that job.) Finally, some insurance types are most easily purchased through an insurance broker.

Action

If any of the insurance types above might make sense for you, click their links to learn more. If you decide you need that type of insurance, add the task to your plan.

<< Understanding Basic Insurance Needs

Extra Protection is Worthwhile

Umbrella insurance adds liability coverage in the event you or a family member is sued or in some way liable for someone else’s costs from an accident. While you may already have some form of liability coverage via a home, renters, or auto insurance policy, it may not be enough to cover all your expenses. For example, if you (or your teenager) cause an accident that involves multiple cars, while your auto insurance liability would kick in first, if it wasn’t enough to cover all the cars, an umbrella policy would kick in. 

In other instances, your other liability coverage may not cover any expenses. For example if you were involved in a skiing accident your umbrella policy might be the only option available. 

Who Needs Umbrella Insurance?

While umbrella insurance could be useful for anyone who might be sued (which is just about everyone), it may be particularly important for the following:

• Landlords
• Parents (and dog owners)
• Public figures
• Property owners with “risky” home features like pools or trampolines

Umbrella Insurance is Pretty Cheap

Finally, given that umbrella insurance isn’t typically the only form of liability coverage, it’s generally priced very reasonably. According to the Insurance Information Institute, “For about $150 to $300 per year you can buy a $1 million personal umbrella liability policy. The next million will cost about $75, and $50 for every million after that.” For most, this is a reasonable price to pay for the added peace of mind that comes with protecting your financial assets.

<< Understanding Basic Insurance Needs

Long-term Care Insurance ≠ Disability Insurance

The most important thing to understand about long-term care insurance (LTCI) is that it is not the same thing as long-term disability insurance (LTDI). Disability insurance protects your existing income. LTCI pays benefits towards your care services costs. Costs may include a skilled nursing home, assisted living facility, adult daycare, or home assistance when you can no longer take care of yourself.

While most of us associate needing LTCI when we’re older and in declining health, it’s important to remember that your health can decline for many reasons beyond old age. For example, imagine you’re in a car accident. While your health insurance would pay for your immediate medical needs, it would not cover ongoing care that you may need for months, years, or possibly the remainder of your life. 

The Cost of Long-term Care Insurance

The cost of LTCI varies but the younger you are and/or the better health you are in, the lower the cost will be. Other factors including the benefit amount, how it is paid (daily or monthly), if there is a waiting period before the plan kicks in, and more can also affect your premiums.

<< Understanding Basic Insurance Needs

Who needs Long-term Disability Insurance?

If you work and rely on the income from your job to support yourself or your loved ones, you need long-term disability insurance. If you’ve worked long enough to qualify, the government provides disability insurance through Social Security (SSDI). However the benefits are typically less than with private insurance and the qualification requirements are more stringent.

Private disability insurance typically provides between 60-80% of your gross pay (i.e before tax). However, payouts from LTDI are not taxed so you’ll typically receive about the same amount in net pay as you did previously. But make sure to note any caps that may be part of your policy (for example, if you make $2M a year, don’t expect your pay will remain that high on LTDI).

Can you earn additional income while receiving disability?

Depending on the type of LTDI you have, you may or may not be able to earn additional income while receiving disability. For example, if you work in construction and become disabled, an “own-occupation long-term disability” policy would allow you to receive some benefit and you could potentially get a job that was less physically strenuous. Conversely, an “any-occupation” policy would payout if you couldn’t work any job. 

Long-term Disability Insurance Through an Employer

Many employers will offer LTDI. You typically pay your premiums for through your paycheck. However, your policy will become inactive if you leave your job. In this case, you should sign up for LTDI insurance on your own (assuming your next employer doesn’t offer it).

How long can you receive long-term disability payments?

Most LTDI policies will last up to the point you can begin collecting Social Security at which point that will take over.

<< Understanding Basic Insurance Needs

Most Renters Need Renters Insurance

If you rent, getting renters insurance is generally a good idea. And while rates vary by state and location, according to QuoteWizard the national average in 2025 is $214 a year (less than $18 per month) making it quite reasonable.

What does renters insurance cover?

Renters insurance coverage falls into four categories:

• Personal Property – all the things you own including your electronics, furniture and more. If you have high-value items like jewelry, check with your insurer to make sure it’s covered; you may need to itemize or add extra coverage.
  
  
• Personal Liability – if something bad happens to someone in a home you rent, this kicks in to help with associated legal costs.
  
  
• Medical Payments to Others – if something bad happens to someone in a home you rent and they need help covering medical costs, this kicks in.
  
  
• Loss of Use – if you can’t live in your rental property due to some form of damage, this kicks in to cover other expenses while you’re living elsewhere.

<< Understanding Basic Insurance Needs

Homeowners Always Need Home Insurance

If you don’t own a home, you don’t need home insurance (shocking!). If you do own a home, you definitely need it; in fact, you almost certainly already have it. If you have a mortgage there’s a good chance your policy premiums are part of your monthly payment and paid by your mortgage lender.

The Three Levels of Coverage for Home Insurance

When it comes to home insurance, the most important thing to know is what level of coverage your home policy provides. Then, you need to determine if that level is appropriate based on both your risk tolerance, and the location of your home. The three main levels of coverage are:

• Actual Cash Value – this is the lowest level and essentially means the insurer will replace covered items (including the entire house) based on the cost to replace your property with new property of like kind and quality, less depreciation.
  

• Replacement Cost – this covers the actual cash value of your property but does not take into account depreciation. So even though your physical property may have lost value due to a lot of use over the years (i.e. “depreciated”), you’re not penalized for that and in theory, could replace your property up to its original level of quality. The precise definition of this will be defined in your policy.
  
  
• Guaranteed Replacement Cost – this covers the actual cash value but with a built in buffer for inflation, unexpectedly high construction costs, and more. If you want the ability to replace your property to a high standard, this is your best bet.

The level you select will largely depend on both your personal comfort level, and, how likely it is that your home may be completely wiped out. For example if you live in an area that is prone to wildfires, or tornadoes, you may want to opt for Guaranteed Replacement Cost. For a more comprehensive overview of home insurance we recommend this article from Investopedia.

<< Understanding Basic Insurance Needs

Car Owners Require Auto Insurance

If you own a car, you’ll need auto liability insurance at a minimum. Most of the time, you’ll want your auto insurance policy to include all of the five components listed below. If you don’t own a car, you generally don’t need auto insurance (when borrowing a friend’s car you’ll typically be covered under your friend’s auto insurance policy). 

Five Components of Auto Insurance

• Liability – legally required and covers costs associated with injuries to people or property when you are at fault.
• Collision – sometimes legally required and helps to cover the costs of repairs or replacement to your vehicle after an accident. If not required, some people will drop this coverage when the total value of their car is less than $5,000.
• Comprehensive – covers damage from things like theft, fire, hail or vandalism, potentially up to the value of the car. Much like collision, some opt for lower premiums and drop this coverage when their car’s value is less than $5,000.
• Medical & Personal Injury – sometimes legally required and covers a variety of medical expenses for yourself or family members if they are injured in an accident. This sometimes covers other costs like loss of income, childcare expenses incurred due to temporary disability etc.
• Uninsured & Underinsured Motorist – if you are hit by someone who doesn’t have insurance or whose insurance doesn’t cover enough, this portion of your insurance can kick in to cover the difference. Remember that if you are not at fault in an accident, most of the components listed above will be paid from the at-fault driver’s insurance, not your own.