Insurance can play a key role in promoting and maintaining financial wellness. Namely, it offers a defense against the uncertainties that can catch people by surprise at every stage of their lives. Whether you're concerned about paying your mortgage, covering unexpected medical bills or providing for loved ones if you die or become incapacitated, you can look to insurance as a tool that promotes wealth protection, reduces risk and may even offer tax benefits.1
Here's an overview of some of the most common forms of insurance, and key considerations to know before you buy.
1. Life Insurance
Life insurance can provide for a spouse, children or other loved ones upon your death.2 When considering the amount of life insurance coverage to purchase, you will want to factor in your annual income and the number of years you plan to continue working, as well as future expenses like college tuition and funeral costs. Life insurance payments are not typically subject to federal taxes.3
There are two major types of life insurance:4
- • Term insurance: A term policy provides coverage for a set number of years (the term) and includes options to purchase with or without a health screening. If you're healthy and depending on your age, you may pay a lower premium if you have a health screening.
- •Whole-life or permanent insurance: This type of life insurance offers a death benefit, but it is also an investment vehicle through which the insured can receive payments during their lifetime. Whole-life premiums are usually more costly than term life insurance.
2. Health Insurance
Given that a simple trip to the emergency room can cost thousands of dollars, health insurance is an important tool to promote your own wellness and avoid catastrophic bills. Many people receive some type of health insurance through their employer. Depending on the plan, health insurance may cover doctor visits, hospitalization and emergency treatment, as well as dental and vision. The major types of health insurance include:5
- • Health maintenance organization (HMO): Provides services from an approved network of providers, with approval typically needed from a primary care provider (PCP) for specialist visits.
- • Preferred provider organization (PPO): Offers the largest cost savings from in-network providers but also covers out-of-network providers; may not require a referral for a specialist.
- • Point-of-service (POS): Combines elements of an HMO and PPO, including having a PCP, but allows out-of-network visits.
- • Exclusive provider organization (EPO): Managed care option that only covers in-network providers but typically doesn't require a PCP or a referral for a specialist.
Additionally, Americans ages 65 and older are eligible for Medicare, and people with disabilities or low incomes may qualify for Medicaid.5 Another option is to purchase individual coverage through the federal Health Insurance Marketplace, an insurance broker or directly from an insurer.6
3. Homeowner's/renter's Insurance
For most people, buying a home will be their biggest investment over their lifetime. So it's especially important to carry appropriate homeowner's insurance in case of fire, storm damage, burglary or vandalism. Typically, coverage will include the replacement cost to rebuild a home and replace its contents, reimbursement for the cost of living elsewhere if you become displaced and liability protections should someone get injured in your home. Similar to homeowner's insurance, renter's insurance covers the cost of replacing the contents of your rental apartment or home, but it's less expensive because the building itself must be insured by the landlord.2
4. Auto Insurance
Almost every state requires a vehicle owner to purchase auto insurance coverage. The minimum required policy typically covers liability for any property damage or personal injury caused by an accident in which you are at fault. Policies also typically provide protection if you're in an accident with an underinsured or uninsured motorist, personal injury protection and some type of medical payment if you're in an accident. Collision (which pays for repairing or replacing your damaged vehicle) and comprehensive (which covers theft) are optional in most states, unless you lease or finance your vehicle, in which case they're likely required.6
5. Long-term Disability/Long-term Care Insurance
Could you pay for living expenses if you were permanently unable to work? For most people, the answer is probably no. Long-term disability coverage can provide replacement income set at a certain percentage of your salary or wages should you become permanently disabled. Similarly, long-term care insurance provides a cash benefit for people who are no longer able to care for themselves on a regular basis and can be used for services at home or in a nursing home or other senior facility.6 Typically, disability and long-term care payments are not subject to federal taxes.3
How to Shop for Insurance Coverage
Like most services today, you can purchase insurance online with little or no human contact. This type of automated customer service might work well for insuring a personal vehicle or deciding whether you need coverage for a rental car for a vacation.7
For other types of insurance, especially life, homeowner's and health insurance, you may want to consult an agent or broker to discuss your needs and compare options. You can choose an independent agent or broker who will handle multiple providers, or a "captive" agent who works for one company. You may have to pay a commission to an independent broker, or it may be included with your rate.7
To find an agent, you can ask friends, family and colleagues for referrals; review testimonials on LinkedIn, Facebook, TikTok and other social media sites; and/or consult your state insurance commission or agency's website.
Picking Your Insurance Beneficiaries
A beneficiary is the person named in your life insurance policy who will receive the benefit upon your death. You will need to decide on a primary beneficiary or beneficiaries if you want your policy to benefit your children or more than one person. You also will need to choose contingent beneficiaries who would receive the benefit if the primary beneficiary passes away or can't be located.8
Keep in mind that the details matter. In most cases, you will want to provide the names and Social Security numbers of your beneficiaries. If a policy benefits a "spouse" who is not named and you have been married previously, an ex-husband or ex-wife could make a claim.8
If you list your children by name and fail to update the list of beneficiaries after the birth of an additional child, the new offspring will not be protected unless listed by name. That's why it's key to review your beneficiaries anytime you experience a major life change and/or on an annual basis.8
Insurance Can Provide Peace of Mind
It can take a lifetime to build personal wealth, so it's important to take proactive steps to preserve it for you and your loved ones. Through careful planning, you can use insurance as a financial tool and gain peace of mind that you have protected your legacy.1
Robert DiGiacomo is a Philadelphia-based writer specializing in personal finance, arts and entertainment, LGBTQIA+ topics, technology, travel, food and books.
READ MORE: Personal Finance 301: Life Insurance
Sources/references
1. Protect Your Wealth. Federal Reserve Bank of Dallas.
2. Smith, Lisa. 5 Insurance Policies Everyone Should Have. Investopedia. June 21, 2022.
3. Life Insurance & Disability Insurance Proceeds. Internal Revenue Service. June 15, 2023.
4. Kurt, Daniel. Term vs. Whole Life Insurance: What's the Difference? Investopedia. April 27, 2023.
5. Lake, Rebecca. Types of Health Insurance Plans. Investopedia. May 3, 2023.
6. Kilroy, Ashley. 8 Different Types Of Insurance Policies And Coverage You Need. Forbes. May 24, 2022.
7. Picking a good insurance agent or broker. United Policyholders. October 14, 2020.
8. What is a beneficiary? Insurance Information Institute. 2023.