Getting bombarded by insurance advertisements can be considered a right of passage.
Newborns, seniors, cars, houses, vacations, weddings, cell phones, rings, watches and so many more items give you the option of buying insurance to protect against a loss of value.
But which policies should you buy, which should you ignore and which should you consider in the right circumstances?
Money expert Clark Howard isn’t a fan of most insurance offerings. He says most people could save money if they were more judicious about the things they insure.
“People always worry about insurance on narrow things instead of the big things in life they really need it on,” Clark says. “You should never insure something that is a consumer item.”
Table of Contents
- 4 Insurance Policies Clark Says You Need
- 6 Insurance Policies You Don’t Need
- Insurance Policies That May Make Sense Based on Circumstance
4 Insurance Policies Clark Says You Need
Clark says you need four primary insurance policies: health, life, homeowners (or renters) and auto insurance. Let’s discuss each one.
1. Health Insurance
No matter your age or financial status, sickness and injuries are a fact of life. If you live in the United States, you need health insurance.
The first question is whether you get health insurance through your employer, through the federal marketplace or through a private insurance company. If it’s part of your employee benefits package, great. Otherwise, it can be tempting to forego health insurance because it’s so expensive to buy on your own.
However, it’s one of those items in life where you need to wince, shake your head and pay for it anyway.
There are ways to save money on health care, fortunately.
You may also need to determine whether to open a health savings account (HSA) or a flexible spending account (FSA).
What’s the Difference Between an HSA and an FSA?
Both HSAs and FSAs allow you to spend tax-free dollars on your healthcare needs.
With an HSA, your money rolls over and accumulates year after year. You can also invest it and get a triple tax benefit, stockpiling money to pay for your healthcare in retirement.
If you don’t use them by year’s end, you lose your FSA funds, although some companies let you roll over up to $550. You also can’t take your FSA with you if you change jobs.
All employees are eligible to participate in FSA plans, if one is available through their employer, whether or not they have health insurance.
2. Life Insurance
You need life insurance if you have people who depend on your income, Clark says. You generally want coverage long enough to cover your working life — or at least for the years that someone will depend on your income to live.
If you don’t have dependents, you don’t need life insurance nor should you buy life insurance for a child.
There are a lot of life insurance options. Some good, some bad.
Clark strongly recommends that you buy term life insurance from one of the best term life insurance companies. With level term life insurance, you pay the same monthly premium. Policies often last 20-30 years. If you die during the term, the policy pays out to your beneficiary.
“There’s no more efficient way that exists to replace income than with a level term life insurance policy,” Clark says. “They’re cheap, they’re simple and the amount of coverage you can buy for a very small monthly amount is fantastic.”
Clark thinks that most life insurance options outside of term life are garbage. They serve to line the pockets of the insurance agent through high commissions and fees. That includes whole life insurance and accidental death insurance.
We’ve done the homework of breaking down term life versus whole life insurance.
3. Homeowners or Renters Insurance
Homeowners insurance is for catastrophic situations. You want to self-insure for minor things. But you don’t want to be left with nothing if a natural disaster destroys your home, for example.
The key to homeowners insurance is to avoid shopping based on the premium. In fact, the best way to keep your homeowners insurance premiums low is to raise your deductible and avoid filing small claims (with dollar amounts near your deductible) if at all possible.
Since the purpose of your coverage is to insure against a catastrophic situation, it’s crucial to buy from the best home insurance companies.
Renters insurance is cheap, but landlords aren’t responsible for your belongings. Often, apartments and other landlords require renters insurance. If you have a choice, just know that it’s the best way to protect the value of your possessions if they’re stolen, dmaanged or destroyed.
Here are the best and worst renters insurance companies.
4. Auto Insurance
All 50 states require auto insurance coverage. So if you own a car, you need it.
The first step to figuring out your car insurance is finding a good company. There are cheap options out there. But you need to pay attention to a company’s record with customer satisfaction and complaint resolution. Don’t get sucked into a bad company based on a cheap premium.
“Sometimes you’re better off paying a little more to be a quality insurer who will be there when the chips are down,” Clark says.
Here are six tips to get better and cheaper auto insurance and Clark’s opinion on the best auto insurance companies.
It’s important to avoid coverage you don’t need. You can save money on car insurance by increasing your credit score, raising your deductible, buying used instead of new and more.
6 Insurance Policies You Don’t Need
It may seem like common sense can help you identify the types of insurance you need and don’t need. But if you’re not an insurance expert, it can be harder than you imagine.
Pay attention to this list of insurance policies you don’t need so that you can make informed choices (especially if you’re getting pressure from a salesperson).
1. Life Insurance for Kids
Losing a child is awful under any circumstances.
If they’re young and not yet an adult, though, they’re more likely dependent on you financially rather than the other way around. (Hey, maybe your child is a YouTube or TikTok millionaire!)
Remember, life insurance is designed to protect against a loss of income due to death.
It’s possible you’re a rare exception. Maybe there’s a genetic problem and you want to buy a small policy to account for final costs if a death could wreck your finances. Or maybe you want to buy it if for some reason your child will be uninsurable as an adult.
Generally speaking, though, you should invest in a 529 plan or otherwise save money for your children’s education rather than buying life insurance for them.
2. Extended Warranties
Have you ever wondered why stores are so predictable when it comes to offering you extended warranties?
Buying an extended warranty for your car is often a complete waste of money. But it’s not just car dealerships that will ask if you want to pay for an extended warranty. Retail stores offer it on items that may cost only a few hundred dollars.
The worst part? Once a company sells you an extended warranty, depending on the terms, it may not even cover you when you need it. Usually coverage applies to problems that are due to defective materials under normal operation.
As an alternative, especially for electronics, you can buy the items with a credit card that offers to double the life of the manufacturer’s warranty. You can get some free peace of mind that way. Here are the best credit cards for extended warranties.
3. Whole Life Insurance
Whole life insurance is permanent, as are variable universal life insurance and many annuities. However, the premiums for whole life insurance (and other types of permanent life insurance) are exponentially more costly than term life insurance.
These types of life insurance that don’t expire offer an investment component. Of course, they’re needlessly complicated and give a lot of advantages (and profits) to your insurer.
If you’re wealthy, it could make sense to get a whole life policy due to the tax consequences. Otherwise, the premiums can be prohibitively expensive. Worse, you could be investing every dollar that you’d otherwise pay toward a whole life premium and having it grow over decades.
4. Accidental Death Insurance
Accidental death insurance is one of the biggest rip-offs. Designed to separate you from your money, the coverage is extremely limited.
“If you have life insurance, you don’t need accidental death insurance and that other stuff,” Clark says. “What does it really matter how you die when you’re dead?”
5. Umbrella Policies
An umbrella policy is designed to pick up where your basic coverage leaves off.
For example, let’s say your renters insurance policy covers you for up to $100,000 in liability. If someone gets hurt on your property and sues you for $250,000, your umbrella coverage would cover the difference.
Umbrella insurance premiums are low. They come with high deductibles and potentially seven figures of coverage. However, in many cases, your basic coverage — health insurance, life insurance, homeowners (or renters) insurance and auto insurance — is more than enough.
If you don’t feel like that’s the case, increasing your coverage on those necessary policies can be cheaper than buying a separate umbrella policy.
Also, if your assets are sparse or you’re on a fixed income in retirement, you probably won’t need umbrella insurance, as you’re not the most likely target for a high-dollar lawsuit.
6. Fake Insurance Policies
Unfortunately, industries that involve huge some of money often attract scams. Insurance is no different.
That includes criminals who may try to sell you bogus policies.
If you have any doubt about an insurance agent, contact your state’s insurance department and check their license. The National Association of Insurance Commissioners (NAIC) maintains a state-by-state listing to help connect you with the right department.
In addition, the NAIC recommends you familiarize yourself with these hallmarks of fake insurance policies:
- Agents who pressure you for a same-day sale and threaten you that the price will go up if you don’t sign then and there
- Premiums that are much, much lower than what you can find for comparable coverage
- No listed phone number or difficulty reaching the company by phone for a routine question
- A demand for a cash payment or a money order
- An agent who’s willing to backdate your policy
Insurance Policies That May Make Sense Based on Circumstances
So far in this article, I’ve split the insurance policies into clear “good” and “bad” buckets. Even then, there are many circumstances that may alter those labels.
There are a number of insurance policy types that are neither good nor bad. These are based even more on circumstances than the ones we’ve already discussed.
Here’s a partial list of these types of insurance policies:
- Travel Insurance: The onset of COVID-19 and the logistical nightmares that we’ve encountered with travel over the last few years has brought a renewed focus on travel insurance. There are times when you may want to have it.
- Disability Insurance: These policies will pay you part of your current income if you become unable to work for a period of time due to injury, illness or an accident. Clark thinks more people should consider buying disability insurance if all of their other insurance needs are met.
- Longevity Insurance: One of the biggest risks of retirement is outliving your money. The older you get, the less likely you’ll be able to work and the more likely you are to incur medical expenses. Plus, inflation can be tough to fight the more that you de-risk your retirement stash. Longevity insurance actually isn’t insurance at all. It’s an annuity that starts paying out at a certain age (typically 85) and then continues for as long as you live.
- Long-Term Care Insurance: If you have the four types of insurance Clark recommends, and you’re on track financially for your retirement, you can consider buying long-term care insurance in your late 50s or early 60s. According to 2021 data from the Administration for Community Living, a federal agency, about 60% of people eventually need some type of long-term care (LTC).
- Dental Insurance: You may get dental insurance from your employer, or you may be able to get free dental coverage for your child in certain states. Either way, it’s not a necessity. If you feel like you want it, there’s a smart way to buy dental insurance.
- Vision Insurance: You can buy really cheap frames for eyeglasses online. You also need to pay attention to what is and isn’t covered if you even consider buying vision insurance. Clark says it’s not insurance at all, but “what you’re really getting is a discount.”
It’s hard enough to stay healthy financially with historic inflation, rising rent and other current-day challenges.
I don’t know about you, but I’d much rather go to the beach than pay an insurance company. However, just like you were told when you were a child, sometimes you just have to eat your vegetables.
That’s the case with health, life, homeowners and auto insurance.
However, don’t blindly buy any insurance policy you can find. There are a lot of financial traps even among the types of insurance you need. And there’s a long list of insurance types that you don’t need at all.