A FULL BREAKDOWN OF LOANS AND INSURANCE POLICIES IN THE US ACCORDING TO EXPERTS
We can’t prevent the unexpected from happening, but sometimes we can protect ourselves and our families from the worst of the financial fallout.
Four types of insurance that most financial experts recommend include life, health, auto, and long-term disability.
4 Types Of Insurance Everyone Needs
- Life Insurance
The two basic types
- Whole life can be used as an income tool as well as an insurance instrument. It includes a death benefit and also a cash value component. As the value grows, you can access the money by taking a loan or withdrawing funds and you can end the policy by taking the cash value of the policy.
- Term life covers you for a set amount of time like 10, 20, or 30 years and your premiums remain stable. Commonly the most affordable type of life insurance, a term policy can work to cover the years during which a mortgage loan is outstanding or throughout your children’s college years.
Life insurance is especially important if your family is dependent on your salary. Industry experts suggest a policy that pays out 10 times your yearly income.
When estimating the amount of life insurance you need, factor in funeral expenses. Then calculate your family’s daily living expenses. These may include mortgage payments, outstanding loans, credit card debt, taxes, child care, and future college costs.
According to a 2021 study by LIMRA, formerly known as the Life Insurance and Market Research Association, more than half of U.S. households rely on dual incomes. The study also found that a quarter of families would experience financial hardship within one month of a wage earner’s death.2
- Health Insurance
Health insurance can be obtained through your employer, the federal health insurance marketplace, or private insurance you buy for yourself and your family by contacting health insurance companies directly or going through a health insurance agent.
Only about 9.2% of the American population was without insurance coverage in 2021, the Centers for Disease Control (CDC) reported in its National Center for Health Statistics. More than 60% got their coverage through an employer or in the private insurance marketplace while the rest were covered by government-subsidized programs including Medicare and Medicaid, veterans’ benefits programs, and the federal marketplace established under the Affordable Care Act.
If you’re on a very tight budget, even a minimal policy is better than none. If your income is low, you may be one of the 80 million Americans who are eligible for Medicaid.
If your income is moderate but doesn’t stretch to insurance coverage, you may be eligible for subsidized coverage under the federal Affordable Care Act.
The best and least expensive option for salaried employees is usually participating in your employer’s insurance program if your employer has one. The average annual premium cost to the employee in an employer-sponsored healthcare program was $7,739 for single coverage and $22,221 for a family plan in 2021, according to research published by the Kaiser Family Foundation.
- Long-Term Disability Coverage
Long-term disability insurance supports those who become unable to work. According to the Social Security Administration, one in four workers entering the workforce will become disabled before they reach the age of retirement.
While health insurance pays for hospitalization and medical bills, you are often burdened with all of the expenses that your paycheck had covered. Many employers offer both short- and long-term disability insurance as part of their benefits package. This would be the best option for securing affordable disability coverage.
If your employer doesn’t offer long-term coverage, here are some things to consider before purchasing insurance on your own:
- A policy that guarantees income replacement is optimal. Many policies pay 40% to 70% of your income.
- The cost of disability insurance is based on many factors, including age, lifestyle, and health. The average cost is 1% to 3% of your annual salary.7
- Before you buy, read the fine print. Many plans require a three-month waiting period before the coverage kicks in, provide a maximum of three years’ worth of coverage, and have significant policy exclusions.
- Auto Insurance
Despite years of improvements in auto safety, an estimated 31,720 people died in traffic accidents on U.S. roads and highways in the first nine months of 2021, according to the National Highway Traffic Safety Administration.8
Almost all states require drivers to have auto insurance and the few that don’t still hold drivers financially responsible for any damage or injuries they cause. Here are your options when purchasing car insurance:
- Liability coverage: Pays for property damage and injuries you cause to others if you’re at fault for an accident and also covers litigation costs and judgments or settlements if you’re sued because of a car accident.
- Comprehensive and collision coverage: Collision insurance pays to repair or replace your car after an accident, regardless of fault. Comprehensive insurance covers theft and damage to your car due to floods, hail, fire, vandalism, falling objects, and animal strikes. When you finance your car or lease a car, this type of insurance is mandatory.
- Uninsured/underinsured motorist (UM) coverage: If an uninsured or underinsured driver strikes your vehicle, this coverage pays for you and your passenger’s medical expenses and may also account for lost income or compensate for pain and suffering.
- Personal injury protection (PIP): PIP insurance helps reimburse you and your passengers for costs such as rehabilitation and lost wages.
- Medical payment coverage: MedPay coverage helps pay for medical expenses, typically between $1,000 and $5,000 for you and your passengers if you’re injured in an accident.
The common types of loans
Loan types range from a credit card to a home mortgage and everything in between:
- Credit cards: When you use your credit card, the issuer is essentially extending you a short-term loan. If you carry a balance month to month, you’ll pay interest on your balance. Credit cards often also have fees for a variety of services. Make sure you understand what these are before you agree to a new card.
- Student loans: Federal student loans have a fixed interest rate, while private loans may have fixed or variable rates. The standard repayment period with federal loans is 10 years. When thinking about how to get a student loan, remember that you may qualify for grants and scholarships instead.
- Auto loans: Auto loans are generally only for a few years with a maximum term of 84 months. The car itself is used as collateral, so the lender may repossess it (take it back) if you can’t make your payments.
- Home mortgage: Mortgages may have a fixed or variable interest rate, with the home used as collateral. Failure to make mortgage payments may result in foreclosure.
- Home equity loan: You borrow against the equity you have in your home, usually a fixed amount of money repayable over a fixed period. Many people take out home equity loans for specific purchases or projects, like an addition to the existing home. Your home is used as collateral.
- Home equity line of credit: You borrow against the equity you have in your home in a form of revolving credit. You use the credit extended to you like you would with a credit card, but your home is used as collateral. The advantage of credit cards is that the rates are usually far lower.
What is your credit score?
Your credit score, or FICO score, ranges between 300 and 850. It gives lenders an idea of what kind of credit risk you might be. The higher your score, the more likely lenders will lend to you.
How your credit score is determined:
- Past payment history: By paying your bills consistently on time, you can greatly improve your overall score.
- Amounts owed: How much debt are you taking on compared with the amount you’re allowed? Your score will be higher if you aren’t close to being maxed out.
- Length of credit history: The longer you’ve been using credit, the better. Opening multiple new accounts in the hopes of building credit quickly may reduce your “average account age” and therefore reduce your score. Instead, open one account and build upon that credit over time.
- Applications for new credit: Every time you apply for new credit (cards or loans), that inquiry makes its way onto your credit report. If there have been too many inquiries on your report in a short period, it can lower your score. Some credit score models will allow for shopping around for a loan within a certain period and count those inquiries as just one.
- Credit mix: Credit cards and installment loans (like car loans or your mortgage) are examples of different types of credit. Your FICO score will be higher if you have more than one type of credit in your history — and lower if you have only one type or none.