Top 7 Key Insurances for a Young Family

7 Key insurance policies a young family needs for a strong financial plan and to protect against the what-ifs in life.

Life is full of surprises. Unfortunately, not all those surprises are good, and they can have lasting financial consequences. Just like a strong foundation allows a house to weather storms, the right insurance can protect you and your loved ones from unforeseen costs.

Getting insurance is a proactive decision. Having it is a key defensive part of a secure financial plan that will protect your savings, investments, and family. Remember, obtaining insurance in the US is a privilege, not a right. It often requires underwriting, and the coverage and cost will vary depending on your risk level to the insurance company who approves you.

This post will teach you what key insurance you should consider and if they are right for you.

1. Health Insurance
2. Life Insurance
3. Short Term Disability Insurance
4. Long Term Disability Insurance
5. Auto Insurance
6. Property Insurance
7. Emergency Fund/Other Insurances

Health insurance

Health insurance protects you from paying large bills when you become ill or have a medical emergency. This insurance is crucial because 46% of bankruptcy in the US is caused by medical expenses. Often, health insurance is provided, and the cost is subsidized by your employer. For young families, High Deductible Health Plans that are eligible for a Health Savings Account (HSA) are a great way to cover medical expenses from a tax-free savings account.

Tips to know:

• Health insurance is offered by employers, the Health Insurance Marketplace, COBRA (if you have recently left an employer), Medicaid, or schools.
• When evaluating the different health plans, the key factors to consider are the premium (how much the health insurance costs you), the deductible (how much you pay before insurance kicks in), and the annual or lifetime out of pocket maximum (the maximum you will pay on covered medical expenses).
• The two most common types of health insurance are PPOs (Preferred provider org) and HMOs (Health maintenance org). A PPO is the more expensive option because it let’s you choose which doctor or hospital you want to get care at without a referral. A HMO is a less expensive option because you need to stay in your network and get a referral from your doctor to see a specialist.
• If you don’t visit the hospital often, a High Deductible Health Plan is a great way to be covered in case of a medical emergency. They have lower premiums than HMOs or PPOs and it gives you access to a Health Savings Account (HSA) that allows you to put money into a tax-free account to pay for qualifying medical expenses when the arise.

Life insurance

Life insurance is important to provide for surviving loved ones by covering their living expenses, paying existing debts, and covering funeral costs. There are two primary types of life insurance: term life insurance (coverage for a specific time-period) and permanent life insurance (coverage that doesn’t expire as long as premiums are paid).

Tips to know:

• Here are some key terms that are helpful to understand the differences in life insurance policies:
  • Premium: what you pay each month or year to have the coverage
  • Death Benefit: the amount of money paid to your beneficiary when you die
  • Policyholder: the person who owns the policy
  • Beneficiary: the person who receives the death benefit when the policy holder dies
• If you are the primary provider for your family, life insurance is crucial. There are two ways to determine how much coverage you need:
  • First, have at least 15x your current annual income in coverage (death benefit)
    • Example: salary of $100,000 a year x 15 years = $1.5M of coverage
  • Second, a more precise way is to add up your liabilities (debts, estimated funeral cost, goals for your family like college) and estimate how much you want to provide for how many years for your family
    • Example: debt of $500,000 + $15,000 funeral + 2 kid’s college $200,000 ($100,000 each) + 10 years of $100,000 income = $1,715,000 of coverage
• Permanent life insurance (which lasts until you die) though more expensive than term, is a good option for those who want to leave an inheritance, charitable gift or may have a large estate tax liability. Some permanent life insurance also has something called cash value that allows you to take out what you’ve paid and potential growth in a tax advantageous manner.
• Term life insurance (which expires) is a good option for those that want a low cost option to provide for their dependents for a period of time and don’t want life insurance in later years.

Short-term and long-term disability insurance

Disability insurance can pay you part of your current income until retirement age. It’s easy to feel like disability insurance is unnecessary however, one in four of today’s 20-year-olds can expect to be out of work for at least a year because of an illness or injury before they reach the normal retirement age. The disability statistics are staggering, but disability insurance can help protect your income if you ever become disabled.

Tips to know:

• Long Term Disability insurance will typically pay around 50% of your salary, 3 months after you become disabled and will require verification of disability each year from a doctor.
• Short Term Disability insurance will typically pay 50% of your salary for up to 3 months and has a unique benefit for females that allows for some additional payments while on maternity leave.
• Your employer, if they offer disability insurance, can be the great way to get disability insurance at a discount or without normal underwriting. If your employer pays for this benefit, then it will be taxable income to you when you use it.
• You may also be eligible for long term disability insurance through social security, but it is much more difficult to qualify for than with an individual disability policy and often pays much less.

Auto insurance

If you own a vehicle in the United States and do not reside in New Hampshire, then you are legally required to have insurance for your car. Auto insurance helps protect your investment in your vehicle and ensures that you are covered if you are ever in an accident.

Tips to know:

• Most insurance companies offer ways to reduce your policy premiums such as safe driving, taking a defensive driver course, or bundling the policy with your home insurance.
• Premiums are what you pay to have auto insurance. Your deductible is how much you must pay before the insurance will cover any claims you make for damage to your or another person’s vehicle.
• The type, age and even mileage of your car can impact your auto insurance premium.
• Your auto insurance policy may also cover medical or liability expenses in the event of an accident even when you are driving someone else’s car with their consent and when someone else is driving your car with your consent.

Property insurance

For most young families, a house is their biggest asset with mortgages payments making up a large chunk of their monthly expenses. Property insurance covers you in case you experience severe damage to your house, while renter’s insurance covers you in case there is any damage to your belongings or your apartment.

Tips to know:

• If you live in a region where natural disasters like floods or tornadoes are common, you may be required to carry additional insurance to cover these events.
• If you live in an older home, it can be wise to getting a home warranty policy, which covers household appliances for a specific period. Some of these policies even allow you to take the coverage with you when you move and will cover your next home.

Umbrella policy

An umbrella insurance policy helps protect you if you are ever held liable for a claim or lose a lawsuit that is more than you can pay. You should consider having an umbrella insurance policy if your assets or lifestyle put you at risk of being sued (owning a pool, having teenage drivers, or owning a rental property).

Tips to know:

• An umbrella insurance policy covers you and members of your household and provides additional liability coverage above your normal home or auto liability limits. If you are a property owner, having an umbrella policy can be especially helpful to cover you in case of a lawsuit.
• Umbrella insurance policies are inexpensive compared to other insurance types
• Umbrella insurance policies DO NOT protect you from damages you cause to your property, when committing a felony (like bank robbery) nor do they cover damages you or a household member cause on purpose.

Emergency fund and other insurances

One of the best protections you can have to cover unexpected accidents or events is an emergency fund. An emergency fund provides the cash needed to meet the financial demands of unexpected accidents and a loss of income. There are many additional insurances out there such as pet insurance and phone insurance that are more contingent on your lifestyle and risk aversion level.

Tips to know:

• You should have at least 3-6 months of income in your emergency fund. This helps protect you in case of medical emergencies, loss of income, or other financial issues that may arise before your other insurance may kick in or deductible is met.
• A great place to store your emergency fund is a savings account and it is NOT recommended to invest your emergency fund in risky investments. You want it to be ready to use at a moment’s need.
• If you are a pet owner, pet insurance can prevent you from paying thousands of dollars when your furry friend requires care.
• Phone insurance can be helpful if you are prone to breaking your phone. However, the cost of phone insurance is usually high enough that you could use that money to buy a new phone by the time your phone needs to be replaced.

Key takeaways

When it comes to protecting yourself and your family from the what-ifs in life, insurance can help lower your stress and provide peace of mind in those scary times. The first line of defense is a strong emergency fund but then ensuring that you have the proper coverage is the key to protecting your financial security for years to come.

If you have any questions on how to best prepare your family for the future, one of our advisers would be happy to help!

Disclaimer: This post is for informational purposes only and is never to be taken as advice or a recommendation. Talk to a tax or legal professional to determine how this information best applies to your personal situation.