Insurance may not be the most exciting of topics, but it is fundamental to your overall financial plan. At its core, insurance planning is about risk management. You may want to retain certain risks (e.g., exclude certain items from your coverage, not purchase a policy altogether, or avoid the risk entirely), you may want to completely transfer certain risks to an insurance company (e.g., if you have to cancel your vacation, your travel insurance will cover 100% of your non-refundable, pre-paid expenses), or you may want to share certain risks with an insurance company (e.g., your health insurance may cover 80% of your medical costs and you cover the other 20%). Whether you are a Generation X, Millennial, or Generation Z, below are some of the most important insurance coverages for you to consider as a young professional.
Health Insurance
Health insurance is likely the most essential type of insurance you will have. Everyone, no matter what age, should have health insurance. Without it, you are self-insuring yourself against health risks, and if a major health issue arises, this could leave all of your assets at risk. Today, most employers offer health insurance as a benefit to their full-time employees and may even cover a significant portion of the costs of premiums. With that in mind, there are a couple key terms to be aware of when choosing your health insurance:
Deductible: Your insurance plan will have a stated dollar amount that requires you (the insured) to bear the first set of covered charges before the insurance company starts paying for any benefits.
Coinsurance: After you meet your deductible, your policy's coinsurance provision initiates. This specifies the percentage of costs you and the insurance company are each responsible for. For example, let us say you have a $1,000 medical bill with a $500 deductible and 80/20 coinsurance. In this case, you are responsible for the first $500 of costs, then you split the last $500 with the insurance company – your insurance will pay 80% ($400), and you pay 20% ($100).
Maximum-Out-of-Pocket Limit: Health insurance plans cap the amount you (the insured) will have to pay during one calendar year. Your insurance may call this a stop-loss or an out-of-pocket maximum.
Premiums: The monthly cost you pay for your medical insurance.
Copayments: The amount you pay out-of-pocket for doctor visits and prescriptions.
Similarly, it is worth opting into a dental insurance plan that your employer may provide or purchasing one yourself if your company does not. These plans are usually cost-effective and pay for most of the costs of routine cleanings and emergency dental needs up to a limit.
Disability Insurance
Young professionals typically overlook disability insurance and it is often a major risk in financial plans. However, one of the most significant financial risks you face is being unable to work during your earning years. If you rely on income from your employment to meet your current and future financial needs and goals, it is worth it to look into what disability coverage you have or should have.
Your coverage should generally protect at least 60 to 70% of your gross income protected through disability insurance. Your work may have a group disability insurance policy that covers approximately 50 to 60% of your income, and additional coverage can be obtained through an individual disability policy that you purchase from an insurance company. This extra coverage may be prudent if you and your family cannot sustain a 40 to 50% decrease in your income due to a disability. This is especially true if you are the breadwinner in your household, have a highly specialized job, and/or have young children.
Disability can get quite complicated and raise many questions, including:
Does the policy kick in if you cannot perform any occupation or just your own occupation?
Does the policy cover a partial disability?
What is the elimination period (the period of time beginning when your disability occurs and ending when you can collect benefits from the insurance company)?
What is the benefit period (short-term or long-term)?
Does the policy have a cost of living adjustment (COLA)?
Understanding all of your policy's intricacies is important to ensure adequate coverage. A financial advisor or insurance agent can help you navigate these topics.
Homeowners or Renters Insurance
Your home likely represents the single biggest purchase you will make in your lifetime. Therefore, it is one of the largest (if not the largest) component of your net worth. Protecting the value of your home against loss is undoubtedly a primary concern for most people and is generally required by mortgage lenders when you finance your home purchase. Homeowners insurance not only protects against the loss of the value of your home due to damage but also provides liability protection for events that may occur at your home for which you may be responsible.
Each homeowners policy typically has six categories of coverage:
Coverage A – Dwelling. This insures the main house and any attached structures.
Coverage B – Other Structures. This covers any small, detached structures on the property, including detached garages, greenhouses, storage buildings, etc.
Coverage C – Personal Property. This insures your personal belongs.
Coverage D – Loss of Use. If damage to your property is so substantial that you cannot stay there any longer while repairs are being done, you may incur significant expenses before you can use it again. This part of your policy will cover that.
Coverage E – Personal Liability. This protects you and your resident family in case of bodily injuries and property damage to others or their residence.
Coverage F – Medical Payments to Others. This pays for any necessary medical expenses for others arising from unfortunate events on your property.
If you are a renter, your landlord will have coverage for the building's structure, and they may require that you have coverage of your own. Even if they do not, it is worth considering getting a renters policy to insure your belongings in case anything happens, as well as to provide liability coverage and coverage for medical payments to others if something happens at your place. Renters policies are usually cost-effective and can provide peace of mind, knowing you are covered if something happens.
Life Insurance
If others depend on you financially, you need life insurance coverage. It is easy to ignore the realities of life and death, especially if you do your own financial planning without the help of a professional financial advisor. Life insurance can provide many benefits, including income replacement for dependents, paying off debts, goal funding (e.g., education), estate liquidity and taxes, family wealth maintenance, paying medical (and potentially long term care) expenses prior to death, and much more.
Your employer may provide you with coverage as a multiple of your income. Check your work's employee handbook to see if you have adequate coverage. If you need help measuring how much life insurance you need, talk with your financial advisor or an insurance agent.
Automobile Insurance
Unless you live in a major city and only use public transportation, you likely rely on your car to get you from place to place. Most states require vehicle owners to purchase and maintain, in addition to collision protection, a minimum amount of car insurance coverage to protect themselves and others on the road.
Coverage is usually presented as three numbers separated by two forward slashes (e.g., 100/300/100). The first number represents the liability coverage for bodily injury per person. The second number indicates the total coverage for bodily injury per accident. The last number is the liability coverage limit for property damage. For example, using the 100/300/100 coverages above, your limits will include:
Up to $100,000 per person for bodily injuries,
Up to $300,000 total for bodily injuries per occurrence, and
Up to $100,000 for any property damage caused.
Personal Liability Umbrella Policy (PLUP)
Most individuals will have some liability coverage through their auto and homeowners policies, but these coverages may not be enough. A PLUP provides protection for higher claims and supplements the underlying coverages of home and auto. PLUP policies are inexpensive and protect your assets and earning power from being held liable for damages to others and to property.
Pet Insurance
With medical insurance, the health care provider invoices your insurance company first, and then if there are costs left over, they send you a bill. With medical care for your pet, you generally have to pay all vet bills upfront and then submit the receipts to the pet insurance company for reimbursement. However, do not let this deter you. Everyone who owns a pet will tell you that they are expensive. Moreover, you want to avoid getting stuck in a situation where a major medical expense for your pet causes you significant financial hardship. You will thank yourself for having a policy that covers a substantial percentage of the costs of accidents and illnesses to ensure your pet is covered.
Travel Insurance
This type of insurance is often overlooked as it can be seen as an unnecessary added expense to an already expensive trip. However, if you travel internationally or you are taking that once-in-a-lifetime trip that you have been saving up for, having some added protection is usually a good idea.
The primary coverages for you to look for are:
Emergency Medical Insurance helps pay medical bills while you are traveling internationally.
Trip Cancellation Insurance covers any non-refundable upfront expenses for your trip up to a certain dollar amount. Your policy may also have trip interruption coverage if you have to leave your trip abruptly and trip delay coverage if your travel is delayed over a certain number of hours.
Medical Evacuation Insurance covers the costs of transportation when you need medical attention. For example, if you fall and need an ambulance, the cost will be covered under this provision of the plan. This also includes if you are in a more remote area and must be medically evacuated.
Baggage Loss will cover a certain amount if your luggage is lost, stolen, or damaged. There may be sublimits for certain high-value items, including electronics.
Before you travel, check to see if your medical insurance provider covers any healthcare costs you incur internationally. Also, some credit cards include travel protection as part of their overall benefits. If you decide to insure your trip, pay attention to the exclusions listed in the policy – these are the named events covered and not covered under the policy.
This should give you a basic sense of some important insurances for you to consider as a young professional. If you are looking for a financial advisor to help you craft a plan, check us out! You can schedule a complimentary, no-obligation call with us here.
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About the Author
Holzberg Wealth Management is a family-owned and operated financial planning and investment management firm based in Marin County, CA. As your financial advisors, we serve you as a fiduciary and are fee-only, so we never receive commissions of any kind. We help individuals and families like you in the greater San Francisco Bay Area and virtually nationwide with the financial decision-making process to organize, grow, and protect your assets.
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