Investing in Your 20s and 30s: Secure Proper Insurance
As a financial counselor, I’ve seen that although many people lack particular types of insurance, others possess unnecessary policies. Many people also keep very low deductibles. Remember to insure against potential losses that would be financially catastrophic for you; don’t waste your money to protect against smaller losses.
You may be at risk of making a catastrophic investing mistake by not protecting your assets properly. Decisions regarding what amount of insurance you need to carry are, to some extent, a matter of your desire and ability to accept financial risk. But some risks aren’t worth taking. Don’t overestimate your ability to predict what accidents and other bad luck may befall you.
Here’s what insurance is recommended that you have to protect yourself, your loved ones, and your assets:
- Major medical health insurance: You need a policy that pays for all types of major illnesses and major medical expenditures. If your financial situation allows, consider taking a health plan with a high deductible, which can minimize your premiums. Also consider channeling extra money into a health savings account (HSA), which provides tremendous tax breaks. As with a retirement account, contributions provide an up-front tax break, and money can grow over the years in an HSA without taxation. You can also tap HSA funds without penalty or taxation for a wide range of current health expenses.
- Adequate liability insurance on your home and car to guard your assets against lawsuits: You should have at least enough liability insurance to protect your net worth (assets minus your liabilities/debts) or, ideally, twice your net worth. If you run your own business, get insurance for your business assets if they’re substantial. Also consider professional liability insurance to protect against a lawsuit. You may also want to consider incorporating your business. (See Chapter 14 for more on small-business issues.)
- Long-term disability insurance: Even if you don’t have dependents, odds are that you’re dependent on your employment income. What would you (and your family) do to replace your income if a major disability prevents you from working? Most large employers offer group plans that have good benefits and are much less expensive than coverage you’d buy on your own. Also check with your professional association for a competitive group plan.
- Life insurance, if others are dependent on your income: If you’re single or your loved ones can live without your income, skip life insurance. If you need coverage, buy term insurance that, like your auto and home insurance, is pure insurance protection. The amount of term insurance you need to buy largely depends on how much of your income you want to replace.
- Estate planning: Most folks need a simple will to delineate to whom they would like to leave all their worldly possessions. If you hold significant assets outside retirement accounts, you may also benefit from establishing a living trust, which keeps your money from filtering through the hands of probate lawyers. Living wills and medical powers of attorney are useful to have in case you’re ever in a medically incapacitated situation. If you have substantial assets, doing more involved estate planning is wise to minimize estate taxes and ensure the orderly passing of your assets to your heirs.
For all the details on the best and most effective ways to buy insurance, what to look for in policies, and where to get good policies, see Personal Finance in Your 20s & 30s For Dummies (Wiley), and visit the author’s website.