Most individuals go through an eye-opening period during early adulthood, where a certain financial reality sets in, and most people begin to notice how expensive everything is and start scrutinizing every purchase they make. Indulgent expenses may be cut so that limited budgets can cover the necessities.
While most individuals plan for expenses such as housing, groceries, and transportation, they often overlook insurance. And while some insurance is required by law – such as automobile insurance for those who own vehicles – other policies are optional. For those on a tight budget, it may be tempting to scale back your insurance coverage to only the minimum required policies purchased from the most cost-effective provider.
But this action can be a big mistake that can cost you far more in the long run. Understanding the role of insurance and how it can actually save you money, protect your investments, and provide stability for your family is often the first step in identifying what types of insurance coverage you need.
Benefits of Insurance
When you have the right insurance policies in place, you can save yourself a ton of money in the long run if you have to file a claim. For instance, if you were to develop a severe illness that requires hospitalization, the average cost per day is around $3,949. Very few people could financially afford a stay of more than a couple days without completely wiping out their savings or putting themselves into serious debt that could take years to pay off. If you do have health insurance, you will still have some out-of-pocket costs, but they won’t be nearly as hefty as they would be without coverage.
Insurance can also help you to protect your assets and investments. When making a significant purchase, such as a car or an automobile, most people have to finance the balance and then make monthly payments, which requires insurance. But even if you were to make the purchase outright, insurance provides some peace of mind that in a worst-case scenario, such as a fire that destroyed both, you wouldn’t suffer a total loss. Most policies would cover the majority of the value of the asset, minimizing your losses.
And some types of insurance also help to protect your loved ones, even when you are gone. In the event of an untimely death or accident, life insurance can cover the expenses of your final arrangements and even provide for the loss of income to your family. While this will never replace the loss of a loved one, it can ensure that your family doesn’t have additional financial stress.
When you’re young, it’s essential to carefully weigh all purchases and ensure that you are making smart choices with your income. And since most don’t see the immediate payoff in having insurance, it’s definitely an expense that some consider eliminating. However, the reality is that if you often don’t need insurance unless a major event has occurred that could potentially lead to a substantial financial setback, or even bankruptcy in some instances. And you never know when that might happen, so having essential policies in place is crucial, even if you don’t think you need them.
Essential Insurance Policies
Selecting the right policies and carrier can be confusing. There are so many to choose from, and while it may be tempting to purchase coverage for everything you can afford, there is such a thing as being overinsured. Given this, it’s worth taking time to understand what types of policies are offered and which ones fit your needs. The list below covers the types of insurance that are often considered essential, even for younger individuals. It’s an excellent place to start if you are evaluating your insurance needs.
- Automobile Insurance: Most states require drivers to have auto insurance, or have outlined financial responsibility for those involved in a car accident. And unfortunately, even the best drivers sometimes get into unforeseen accidents. And while you may think that automobile insurance isn’t worth it if your car has little value, you may be on the hook for the damages to the other vehicle and medical expenses of its passengers. It’s simply too risky to drive any vehicle without auto insurance.
- Health Insurance: Don’t let a serious illness bankrupt you. While some jobs offer health insurance as a benefit, it can also be purchased independently. It’s definitely worth purchasing since you never know when you may need it.
- Life Insurance: Life insurance provides peace-of-mind that your family won’t be financially burdened in the event of our death. It’s especially important to have a policy that will cover some of your lost income if you are leaving behind dependents.
While you may find that you need additional types of insurance, such as disability insurance and home insurance when you purchase a home, these three are crucial for nearly all individuals.