You’re not alone if insurance makes you scratch your head, or even pull out your hair (don’t do that). The insurance industry is complicated, tricky, and confusing in every way. But don’t worry about it. We’ll boil this complex subject down to its essentials so you can get what you need.
Let’s get started!
Basic Terms and Definitions
Everyone requires some form of insurance. It’s an important part of your defensive strategy because it protects your finances from all the bad (and costly) things that can happen. And whether you’re just starting out on your own after graduating from college or you’re married with kids, a dog, and a white picket fence, knowing you’re covered gives you peace of mind.
You can obtain insurance for your car, home, apartment, condo, business, pet, health, and other assets. (If you really want to delve into the areas where you might have insurance gaps, try our free five-minute Coverage Checkup.)
Before we get into the fundamental insurance policies that everyone should be aware of, let’s go over some Merriam-Webster definitions:
The amount of money you pay an insurance company (usually monthly) to keep your insurance active is referred to as the premium.
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Deductible: Your deductible is the amount of money you must pay out of pocket before your insurance company will pay for you. Assume your car insurance has a $1,000 deductible and you are involved in a car accident that causes $2,000 in damage to your vehicle. You must contribute $1,000 to the repair before your insurance will cover the rest. A higher-than-average deductible will generally result in a lower premium. (However, only do this if you have a substantial emergency fund in place.)
Copay/copayment: A copay is a health insurance term that refers to the amount you pay each time you require a specific type of service, such as a doctor’s visit. Copayments do not usually count toward your deductible.
Liability: This is the portion of your insurance that pays for other people’s expenses if you are at fault for an incident that causes them bodily harm or property damage. Assume you’re renting an apartment and you start a kitchen fire that destroys your neighbor’s property (who set the microwave for 20 minutes?). It would be your responsibility to replace their belongings (not your landlord). However, you would be protected by a $500,000 liability renters insurance policy.
The declarations page serves as your formal proof of insurance. This document, also known as a certificate of insurance, contains information such as the policy’s effective dates, premium and deductible amounts, liability limits, and the amount of coverage.
Claim: A claim is a request to the insurer for payment or reimbursement following an incident. To file a claim, you must provide personal information about yourself, details about the incident, and personal contact information for everyone involved. Your insurance company will review the information, and if the claim is approved, you will be reimbursed for any damages.
So, now that we’ve covered the fundamentals of insurance—Insurance 101—you’re well on your way to becoming an insurance expert. Let’s get started with Insurance 202: the fundamental types of insurance.
Car Insurance for Beginners
Car insurance is one of the most common types of insurance. This is partly due to the fact that it is required by law, so you really don’t have a choice in the matter. For full coverage, the average auto insurance premium is about $1,529 per year, or about $127 per month. 1,2 However, premiums vary depending on your deductible, age, car make and model, driving history, state of residence, and type of insurance purchased.
You should select your type based on the amount of car insurance you require. Liability, comprehensive, and collision coverage are the three most basic types of auto insurance.
If you are at fault in an accident, your auto insurance liability will cover the expenses of another person. To avoid bankruptcy in the event of an accident, you should purchase at least $500,000 in liability coverage for property damage and bodily injury.
When your coverage limits appear on your insurance statement as $250,000/500,000/250,000 or 250/500/250, they may appear a little perplexing. When you see something like this, it simply means:
- $250,000 of coverage for bodily injury (per person)
- $500,000 of coverage for bodily injury (per accident)
- $250,000 of coverage for property damage (per accident)
Comprehensive insurance pays to repair or replace your vehicle if it is stolen or damaged by a fire, storm, falling tree branches, or other natural disaster.
Collision coverage repairs or replaces your vehicle if you are involved in an accident with another vehicle, an object, or even yourself regardless of who is at fault. Keep in mind that the liability coverage of another driver will only cover your expenses if the other driver is at fault. And only if they have sufficient liability insurance to cover you.
Renters and Homeowners Insurance for Beginners
Renters insurance protects your belongings in the event of a fire or theft if you rent an apartment or a house. Many people (erroneously) believe that their landlord’s insurance will cover their belongings. It will not. A landlord’s insurance will only cover the cost of rebuilding what they own—the building.
What’s the bottom line? Don’t leave home without renters insurance. Plus, it’s dirt cheap! Renters insurance typically costs around $15 per month or $180 per year.
What if you own a house? Then you need homeowners insurance, and you should have enough to replace your home and belongings. The average annual homeowners insurance premium is $1,249, or about $104 per month.
Renters and homeowners insurance typically include the following three types of coverage:
- Personal property insurance covers the cost of repairing or replacing items such as electronics, clothing, and furniture.
- Liability insurance pays for repairs if you accidentally damage another person’s property or medical bills if you cause their injuries.
- Additional living expenses cover costs incurred if you are responsible for damage that renders the space unlivable.
Here’s another piece of advice: Check with an agent before purchasing renters or homeowners insurance to see if you can save money by bundling it with your car insurance. One of our Endorsed Local Providers (ELPs) independent insurance agents can help you review your policies to see if you can save money.
Health Insurance for Beginners
Everyone requires medical insurance. Even if you believe you are in good health, medical emergencies can occur out of nowhere and send your finances spiraling out of control. The average American pays $452 per month for health insurance through the marketplace.
While this may appear to be a significant sum, it pales in comparison to the many thousands of dollars that a medical emergency could cost you. To give you an idea of what this could entail, according to healthcare.gov, the average cost of a three-day hospital stay is around $30,000.
If you have access to one, a Health Savings Account (HSA) can be a great way to save money on health insurance. An HSA is a health-care-specific savings account. It allows you to contribute and withdraw money tax-free and allows you to deduct your contributions!
The funds can be used to cover any qualifying medical expense, from Band-Aids to doctor bills. If you don’t use all of your HSA funds, you can carry them over from year to year and even invest them to grow over time! Because HSAs are combined with high-deductible health plans, which typically have lower monthly premiums, they are best suited for people who are generally healthy.
Term Life Insurance for Beginners
Another basic insurance policy you should be aware of is term life insurance. The goal of life insurance is to replace your income in the event that you die. But why should you care in the first place about replacing your income? If you have a family that relies on your income, they will suffer if you die. If you are single, you will need at least a basic amount to cover your burial costs or any outstanding debts so that your family is not burdened.
After you die, life insurance protects your loved ones from financial ruin. Because the goal is to replace your income, you should obtain coverage that is 10-12 times your annual income.
Finally, never purchase whole life insurance (also known as cash value insurance). It’s a total rip-off. When you compare term life and whole life insurance, you’ll notice that whole life has a higher monthly premium for a much lower payout.
What About Warranties?
Don’t waste money on phone, tablet, or technology insurance. By following our advice and having an emergency fund, you can cover the cost of replacing or repairing smaller items that come with warranties.
What about fine jeweler and engagement rings, for example? While it is prudent to insure your engagement ring, jewelry is frequently covered by renters and homeowners insurance.