Friday, 24 May 2019

What Types of Insurance Do You Need? – Motley Fool

The basic premise of all insurance is that you buy it before you need it. It’s best to make sure you have all the right policies in place, so when some kind of disaster strikes — and it will — you won’t be in dire financial straits. It’s the true embodiment of “better safe than sorry.” 

Read on to understand why you need different kinds of insurance and learn about nine types of policies you should consider buying to ensure you are prepared for life and all it may bring.

Couple looking at paperwork in dismay, with the man touching his forehead with his right hand.

Image source: Getty Images.

What is insurance?

Insurance is any kind of program that allows people to protect themselves from major disasters by combining their risks with other people’s and paying into a pool, which will pay out money if you experience a specific kind of adversity like illness, injury, death, or car damage.

Being insured allows you to transfer the risk of a catastrophic financial loss to the insurance company. And if you don’t have a policy when you need one, it could mean big trouble. The nature of insurance means you can’t decide to get it once the disaster occurs and you find yourself uninsured. You should get all your policies in place while things are going swell and you’re still insurable in the eyes of the insurer.

What is an insurance premium?

Usually, you pay for your insurance monthly with a pre-determined amount of money called a premium.

When you buy insurance, your money is pooled with the money of a bunch of other people who buy insurance. Insurance companies typically use a process called underwriting to decide how much money you need to put into the pool, based on the probability that you’ll require a payout.

If the underwriters do their job correctly, the insurance company pays out less in coverage than the amount of premiums coming in, allowing it to be sustainable and continue insuring new people, while paying out the appropriate amounts to the insured people it already covers.

What is an insurance deductible?

Your premiums aren’t the only costs you pay when you have insurance. Your policy likely has a deductible, which is the amount of money you must pay out of pocket before insurance begins providing coverage.

For example, if you have a $500 deductible on your auto insurance policy and you get into a crash that causes $400 of damage, your insurance won’t pay anything because your deductible has not been met, so you’re on the hook for the costs. If the damage were $1,000, you’d pay the first $500 in damages and, once your deductible is met, your insurer would pay the remaining $500. 

The lower your deductible, the higher your premium costs — and vice versa. In some cases, certain services are covered before your deductible is met. For example, your car insurance may cover windshield repairs even if you haven’t met your deductible, or your health insurance may cover preventative care appointments even if you haven’t met your deductible. 

How do I get insurance?

Insurance can be obtained from different sources. In some cases, you can get insurance coverage through an employer. Employers commonly offer health insurance, and sometimes life insurance and disability insurance, as a workplace benefit. When you obtain insurance through an employer, you may have a choice of one or more plans that your employer has pre-selected and your employer may pay some or all of the premiums for your coverage. 

You could also apply for insurance through individual insurance companies, or through insurance marketplaces or exchanges where you can compare prices from multiple insurance providers. 

When you apply for insurance, you’ll need to specify who you want the policy to cover. For example, you may decide to cover your entire family under the same health insurance policy — or you may get coverage for yourself and your kids through your workplace policy while your spouse gets coverage through his or her own employer. For some types of insurance, such as auto insurance, you may need to cover everyone in your household who will drive your vehicle to ensure comprehensive protection. 

Some kinds of insurance, such as life insurance, require you to select a beneficiary who will receive the payout in the event of your death. This is different from choosing who is covered under the policy. With a life insurance policy, your life can be the covered life, but your beneficiary will receive the death benefit payout when you die. 

Unfortunately, there are times when you may apply for insurance and find out you are not eligible for it. For example, someone with a terminal illness may not be eligible for life insurance coverage from most insurers. If you cannot get the coverage you need, try shopping around with different insurance companies, but know that it isn’t always possible to find someone who will cover you. 

Laws on who can be denied coverage — and the process for shopping for coverage — can differ dramatically depending on what kinds of insurance you’re looking for. Read on to find out more about nine common types of insurance you may want to consider buying. 

1. Health insurance

Health insurance is the single most important type of insurance you’ll ever buy. That’s because if you don’t have health insurance and something goes wrong, it’s not just your money at risk — it’s your life.

Health insurance is intended to pay for the costs of medical care. Many people get health insurance through employers who subsidize premiums, meaning the employer pays the bulk of your premium, and you chip in a little with each paycheck.

If you don’t have employer-sponsored health insurance, you’ll need to buy health insurance on the individual market. Thanks to the Affordable Care Act (or Obamacare), you may be able to buy subsidized insurance on a state or federal exchange and get tax credits that help you afford the cost of monthly premiums.

The specific coverage you get when you buy health insurance depends which policy you select. Your options include:

  • Low-deductible health plans: Low deductible health insurance plans are plans that keep your out-of-pocket costs for care low. You will pay higher premiums for these plans, since they provide more coverage. Your costs are more predictable since you’ll know what your premiums are up front and you never have to worry about paying thousands of dollars if you end up needing medical services. 
  • High-deductible health plans: High-deductible health plans (HDHPs) have low premiums, meaning you pay less up front each month just to be covered. But the trade-off is that you’re responsible for covering routine basic care, because your deductible — or the amount you pay with your own money before insurance kicks in to pay the rest– is typically several thousand dollars. With many high-deductible health plans, you can open a Health Savings Account (HSA) and contribute pre-tax funds to it that can be used to pay for medical costs as you incur them.
  • Catastrophic health plans: Catastrophic health plans are the cheapest in terms of premiums, but provide virtually no coverage for care unless you incur many thousands of dollars in medical costs. The deductibles are even higher than that of a typical high-deductible plan. 
  • Health maintenance organizations (HMOs): With an HMO network, you are restricted to receiving care from a specific network of participating doctors. These doctors are referred to as being in-network and they have agreed to accept rates for care set by your insurance company. You will need a referral from a primary care physician to see a specialist. Most HMOs define “specialist” to include anyone other than your primary care physician. This could include obstetricians, dermatologists, psychologists, chiropractors, and more.  
  • Preferred provider organizations (PPOs): With PPOs, you don’t have to get a referral to see a specialist. And while care will be cheaper if you pick a doctor who is in network, you’ll have better coverage for out-of-network care than with an HMO. 
  • Exclusive provider organizations (EPOs): EPOs don’t require that you get a referral to see a specialist, but will pay nothing for out-of-network care except in emergencies.
  • Point-of-service plan: A point-of-service plan pays for in-network and out-of-network care, although you’ll pay more if you see a doctor out-of-network. A primary care doctor will need to make referrals to specialists when needed. 

Try to match your policy to your care needs out of what’s available and offered to you. If you’re someone who doesn’t incur a lot of health expenses, a high-deductible health policy may be the most affordable solution. But if you see the doctor often for any number of reasons, get a policy with higher premiums but more comprehensive coverage and a lower deductible, so you don’t go broke paying for all your services.

Under Obamacare, every health insurance plan is required to cover certain basic services before your deductible is met, like preventative care. The law also mandates insurance companies cannot charge more for a health insurance policy if the person has a pre-existing condition. The price of health insurance is based upon your age, geographic area, and whether you’re a smoker. Insurers are prohibited by Obamacare from considering your gender, race, or past medical history.  

Without exception, absolutely everyone needs health insurance because even a minor medical issue can become extremely expensive. Major medical issues can come with astronomical costs, as a single hospital stay or surgical procedure could cost many thousands of dollars. 

You can sign up for health insurance only at certain times of the year during “open enrollment” — which is a designated period when anyone can buy coverage — unless you have a qualifying event, such as losing coverage because of a divorce or job change. Visit to find out when open enrollment is on the Obamacare exchanges, or check with your employer to see when you can sign up if your employer provides insurance as a job benefit. 

2. Dental insurance 

Dental insurance is typically separate from medical insurance, but it’s not any less mandatory. Anyone can suffer a toothache, gum disease, cavity or even a broken tooth, all of which are very expensive to treat. Secondly, everyone should be visiting a dentist twice a year for cleaning and checkups.

You can get dental insurance through an employer if your company offers this as a benefit. Otherwise, you can independently buy dental insurance from providers. Unfortunately, there are no subsidies to help you afford dental insurance premiums, like Obamacare does for medical insurance.

You’ll need to shop around for a policy that provides appropriate coverage. Dental insurance options include:

  • Discount plans: With a dental discount plan, your plan doesn’t pay for a portion of your care. Instead you get discounted services by seeing a dentist within a participating network. You pay a smaller cost to be covered under a discount plan than for other types of dental insurance, but you’ll also typically pay more out of pocket. 
  • HMO: You must pick a dentist who will be your primary care provider and there’s no coverage for out-of-network dentists. 
  • Dental PPO (DPPO): You can visit in or out-of-network dentists, but in-network dentists will be cheaper.
  • Fee-for-service: Like with a DPPO, you can visit any dentist and your insurance will pay a percentage of coverage. However, fee-for-service dentists typically aren’t reimbursed as much from the insurance as dentists participating in a PPO plan so you may incur more out-of-pocket costs. 

Like with health insurance, the more your insurance pays toward your care, the higher the premium costs. And if you want to see a particular dentist, you should try to find an insurer that lists your dentist as an in-network provider. You can ask your dentist which insurance carriers they work with and try to buy a policy from that insurer. 

3. Disability insurance

Disability insurance is intended to replace your income if something happens that makes you unable to work. There are both long- and short-term disability policies, with short-term disability coverage typically replacing a larger portion of your income.

Disability policies have a specific definition of what it means to be disabled, and they pay only a percentage of the salary you were