5 Types of Insurance for Personal Finance Risk Management

by TTMK on January 15, 2014 · 8 comments

types of insurance coverageThere’s a saying that applies to personal finance that I really enjoy, and it goes as follows:

Rule #1 is don’t lose money, and Rule #2 is don’t forget Rule #1.

That’s a paraphrased version of wisdom that has been popularly attributed to Warren Buffet, who we know is one of the most celebrated investors of our time.  When one does the math behind it, the logic is clear.

For example:  If you have $1,000 and you lose $200, it means you’ve lost 20% and now have $800.  In order to get that money back, you have to gain 25%.  After all, going from $800 back up to $1,000 is a bigger percentage difference.

So, losing money can be a bummer.  Along those lines, there are times when we can really lose a lot more money.   To potentially protect ourselves against many different types of big losses, it can be a good idea to take out insurance.

Here are 5 types of insurance policies that could help protect someone financially:

Home Insurance

Try getting a mortgage without insurance! Of course, why would someone want to be uninsured with a house.  Imagine a totally unforeseen natural disaster, or fire, just wiping out a home.  Who would want to be out the equity and loan balance?

Considering how much money people have invested in a home, the right home insurance policy can be vital – and what’s truly the right policy isn’t universally applicable.  For example, a small starter home might have one set of insurance needs, while a massive estate might have different considerations.

Car Insurance

If a person driving a car and gets into a collision that involves damages, things can get costly very quickly.  Even really good drivers can make a random mistake, and it just takes a short window of opportunity for an accident to occur.

Much like home insurance, there isn’t really a one size fits all approach to car insurance.  Different vehicles could command different rates, and where someone lives matters as well.  In terms of more controllable decisions, 3 that come to mind are the deductible level, types of coverage included, and actually actively shopping for the best rates.

Commercial Insurance

If someone owns a business, there’s great incentive to make sure that it isn’t impacted by certain events that could be financially crippling.  There are some aspects of a business for which it might be possible to obtain coverage.  In these cases, commercial insurance is an option that can be explored.    Having one’s business income or even viability at risk can be stressful, and the right insurance just might help alleviate certain concerns.

Health Insurance

Health care costs can be catastrophically high for many people.  Even with insurance, costs can be financially crippling for some people.  Without insurance, well, out-of-pockets could quickly drain the resources and net worth of people.

I think most of us know by now that we can’t count on being healthy forever, and that the unexpected can happen.  It doesn’t matter if we have a clean health record, rarely get sick, have grandparents that chain-smoked and lived to 100, or whatever.  Things happen that we don’t foresee, so it’s best to be prepared with the right policy.

Life Insurance

If you have a spouse and kids, would you want to leave them in a lurch if something bad happened to you?  While kind of morbid to think about, it’s important to spend time considering what life insurance brings to the table, and what type of policy might provide the best cost-to-coverage tradeoff.

There are other insurance policies to consider as well.  Disability, long-term care, liability, and many others come to mind.  What matters is to remember that we each have unique needs in the context of our own lives and financial situation.

My Questions for You

Do you pay close attention to your insurance coverage, or is this something you just deal with and forget about?

Are you missing any of the above? Alternatively, are there any other types of coverage that you have?

{ 8 comments… read them below or add one }

Nick @ Step Away from the Mall January 15, 2014 at 4:37 am

We pay attention to it and check in every year or so to adjust it. It’s definitely a feel-good moment knowing that we’re well insured while here and financially OK if anything happens to one of us with life and disability insurance.

Reply

TTMK January 16, 2014 at 10:06 am

Great way to put it, I like that. It really can provide a feel-good moment when you pay for protection that way.

Reply

Kevin H @ Growing Family Benefits January 15, 2014 at 7:34 am

Most people borrow money to pay for a house and car. They insure the possessions, but not the means to repay the loans. Your health and ability to earn an income may be your most important asset. I would add disability insurance to the list. Short term disability makes even more sense if mom is working and planning to have children.

Reply

TTMK January 16, 2014 at 10:07 am

Wise perspective, I like that. I agree, it makes sense to insure and focus on the ability to earn income as that’s the engine driving the car so to speak.

Reply

The First Million is the Hardest January 15, 2014 at 5:28 pm

I give my insurance policies a once over every year just to see if I can get a better rate or better coverage elsewhere. Other than that I don’t think about them unless I actually need to use them.

Reply

TTMK January 16, 2014 at 10:09 am

It’s good that you’re at least taking a look to see if better coverage is available. Better than just being on total autopilot.

Reply

Tushar @ Everything Finance January 16, 2014 at 10:29 pm

We have home, car and life insurance, and all are important to us. We do monitor our coverage because our needs change periodically. We have health insurance with my employer so we don’t need to pay for it privately.

Reply

Richelle @ Life, Liberty n' Property April 3, 2016 at 10:25 am

Sage advice. Even though I primarily focus on investments, having insurance to protect our income is a vital part of a personal finance strategy. Thanks for the reminder.

Reply

Leave a Comment

Previous post:

Next post: