One of the more disconcerting aspects of becoming an adult is realizing that things don’t always work out for the best. That’s where insurance comes in. By paying a premium to an insurance company, you can protect yourself against disasters ranging from a flooded apartment to an injury that prevents you from earning a paycheck.
Unfortunately, buying insurance is something between a chore and a nightmare. Many insurance agents work on commission. It’s not surprising, then, that young people end up buying policies that either inappropriate or unnecessary.
While no one knows what the future is going to hold, actuaries–whose job is to figure out the odds of bad things happening–have a pretty good idea. With that in mind, here are the types of insurance that a 25-year-old without children should have and what he or she can probably skip.
This is the biggie. Health care costs contribute to half of all personal bankruptcies filed in the U.S., according to a study by researchers at Harvard University. Despite the risks, 18- to 29-year-olds make up about a third of the nation’s 47 million uninsured.
Cost clearly has something to do with that. But there’s also the thought among younger people that they don’t need health insurance because they won’t get sick. By passing on this type of insurance, you will always be one accident away from medical bills that could saddle you with debilitating debts for years to come.
If you have a job, your employer may offer some type of health plan. Talk with your Human Resources office to make sure that you understand exactly what your plan covers and what it doesn’t so that you won’t be stuck with an unpleasant surprise. (If your aren’t offered health benefits, please read “What to Do If Your Job Doesn’t Offer Health Insurance.”)
Somewhere along the way, the health insurance industry decided that your teeth were separate from your body and excluded them from most health plans. If your employer offers dental insurance as part of a benefits package, then it’s a smart idea to take it. But if there isn’t a dental benefit, you may want to skip it, especially if you have already had your wisdom teeth taken out. The monthly premiums may cost more than having your teeth cleaned, and may not offer that many benefits if you need extensive work done. (If you’re reading this before you graduate from college and you have dental coverage through your parents’ insurance, consult your dentist now. It’s often better to have wisdom teeth removed before problems develop anyway.)
Car insurance is required by every state except for New Hampshire and Wisconsin, so it’s likely that you already own this if you have a car. If you’re buying a car for the first time, you should be aware that the model you buy will be a large factor in determining how much you pay to insure it each month. Young people who drive Volvos are less likely to get into an accident than those who drive Hummers. As a result, Volvos are cheaper to insure.
Auto coverage is one of the more competitive and transparent forms of insurance, so it’s smart to shop around among providers like Geico, Allstate, State Farm and Progressive. Consider buying liability, collision, comprehensive and uninsured motorist coverage, especially if your job requires a long commute and more time on the road. One smart way to lower your premiums is to opt for a relatively high deductible. That means you’ll pay for minor damage yourself, but if you do incur such cost they may not set you back any more than you’ve saved through the higher deductible.
This coverage promises to replace a portion of your income if you become disabled and aren’t able to work. Some employers offer this insurance as part of their employee benefits packages.
If you employer doesn’t, then you should think about buying a policy yourself, says Michael Kay, a financial planner in New Jersey. If you become disabled, who is going to pay your bills? That’s something that many young people never really think about, he said. If you’ve been working for a year or so, you may already qualify for disability benefits through Social Security. But it may take several months to a year for your application to be approved, and it may be denied if you are not permanently disabled.
That’s where private insurance comes in. There are two types of disability insurance: short-term and long-term. Short-term disability generally covers you for between 26 weeks and a year after you become disabled. Long-term insurance generally kicks in after the first year, and the benefits of your policy may range from two years to retirement age.
Prices depend on things like your occupation, health status and how quickly the policy will start to pay after you become disabled (also known as the elimination period). You can choose to have an elimination period of anywhere between 30 days and a year. If you choose a shorter time frame, you’ll pay higher monthly premiums.
Most young workers don’t need to life insurance because no one is depending on their income. One thing to consider is whether you have a relative or family friend who cosigned on your private student loans. While federal student loans are canceled upon death, most private loans are not. That’s right: Even after you die, your cosigner may still owe money to Sallie Mae. Typically, private loans have a clause that says that the loan becomes due in full immediately upon the death of the borrower, says Mark Kantrowitz, the publisher of FinAid, a Web site that tracks the student loan industry.
Because you aren’t around to pay it, lenders will go after your cosigner to repay the remaining principal. By taking out a life insurance policy that insures up to the amount of your debt, you can spare a relative that financial shock. Just make sure to designate them as your beneficiary on your life insurance policy.
Even if you don’t own your home or apartment, you probably have some valuable things. If there is a fire in your building, your landlord’s insurance policy may cover the building itself but not anything inside it. You could then be stuck buying new television, laptop, furniture and clothing. While it’s not a necessity, renters insurance is a very cheap way to protect yourself. Some plans start at as little as $2 a month if you have other insurance policies with the same company. Stand-alone rates can be as little as $10 a month.
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