When you go to the doctor for a routine checkup, your doctor checks your vital health signs by taking your blood pressure and checking your heart rate and respiratory rate. Unfortunately, we don't have such widely available diagnostic tools to check your financial health. But that doesn't mean you can't give yourself a financial health checkup.

In our prior post, What Is Financial Health?, we provided an overview of the six vital signs of financial health. Today, we're taking a deeper dive into the sixth vital sign: insurance.

What is insurance?

Insurance is essentially a contract between you and an insurance company, where the insurance company agrees to protect or reimburse you against loss in exchange for a fee, also known as a premium. The insurance company pools the risks of thousands of customers to make your payments more affordable.

You can purchase many different kinds of insurance policies, including car insurance, health insurance, disability insurance and more.

Why is insurance important to your financial health?

Insurance is crucial for protecting you against unexpected financial shocks. Imagine this: you have an excellent job that brings a good salary, a healthy emergency fund, and an excellent credit score. One day, you're driving home from work, skid on a patch of ice and crash into your neighbor's house, doing $30,000 worth of damage to their home, totaling your car, and injuring yourself in the process.

Without car insurance, you're responsible for covering the damage to your neighbor's house and replacing your car, which completely wipes out your emergency savings and puts you in debt. Without health insurance, you have to pay out-of-pocket for your medical costs. Your injuries prevent you from working for a few months, and with no disability insurance, that loss of income makes it tough to pay your bills. Several missed payments destroy your credit score. Without insurance, you're one accident away from destroying the financial health you've worked hard to build.

How much insurance do you need?

Deciding on the types and amounts of insurance you need to be adequately protected is complicated. The answer is different for every individual. However, here are a few types you should consider.

Auto insurance

If you own a vehicle, you need to have auto insurance. In most states, auto insurance follows the car – not the driver. So whether you're the one driving or you let someone else borrow your car, and they get in an accident, your insurance company is responsible for paying the claim.

You'll need to select limits and deductibles for the following coverage options.

• Bodily injury and property damage liability cover injuries or damages to someone else or their property. Your policy specifies a maximum per person, a maximum for all injuries in one accident, and a maximum for damage to property. For example, it may cover $50,000 per person, $100,000 per accident, and $25,000 of property damage. Each state sets its minimum liability limits, but the minimum may not be enough. If you are involved in a serious accident, you could be sued for much more than the minimum limits, so consider buying more.
• Medical payments coverage pays medical expenses for injuries to the passenger and drivers in your car, regardless of who is at fault. This can include the cost of an ambulance ride, hospital or doctor visits, and even funeral expenses. 
• Collision coverage pays for damage to your car in a crash. Comprehensive coverage reimburses you for losses caused by something other than a collision, such as damage from hail or falling tree branches, theft or vandalism. You select a deductible for these coverages ranging from $250 to $1,000. 
• Uninsured & Underinsured Motorists reimburse you if you are hit by an uninsured driver, a hit-and-run driver, or a driver whose limits aren't enough to cover your loss.  

In addition to these basic coverages, your insurance company may offer additional options that extend coverage to rental cars, pay for towing expenses, provide other roadside assistance and more.

Homeowners or renters insurance

Whether you rent or own a home, you need insurance to protect yourself and your property. 

Both types of coverage offer liability insurance, which covers injuries or damage to someone else while they're in your home. They also cover damage to your property due to theft, water damage, some natural disasters, and more.

The higher the value of your home and personal property, the more coverage you need. Keep in mind, most policies don't cover damage due to flood or earthquake. Depending on where you live, you may need to purchase separate coverage for these types of events.

Life insurance

If you were to pass away unexpectedly, would your spouse or loved ones be able to pay their living expenses without your income? If nobody depends on your income, life insurance may not be important to you. However, if your family would struggle financially in your absence, make purchasing life insurance a priority.

Health insurance

Without health insurance, one major medical emergency or diagnosis can put you in hundreds or thousands of dollars in debt.

According to the Kaiser Family Foundation, 28.9 million Americans were uninsured in 2019, and most uninsured people cite the high cost of health insurance for going without. If you're relatively healthy and want to keep costs low, consider a high-deductible health plan (HDHP) combined with a Health Savings Account (HSA). With an HDHP, you're responsible for more of your up-front healthcare costs, so you pay a lower monthly premium. An HSA provides tax breaks for saving for medical expenses. 

Disability insurance

Disability insurance protects you from loss of income if you cannot work due to illness or injury. There are two primary types of disability insurance coverage you should consider:

• Short-term disability insurance. Short-term policies pay benefits for a short time – usually three to 12 months after a brief waiting period. Short-term disability insurance can be expensive to purchase on your own, but many employers offer less expensive group plans.
• Long-term disability insurance. Long-term disability insurance pays benefits for anywhere from two to 10 years, until you reach age 65 or for life. Most policies don't pay benefits until after a 90-day waiting period.

Long-term care insurance

Long-term care insurance covers things like nursing home or assisted living expenses and in-home help for people who are elderly or have a chronic illness or injury. 

According to the U.S. Department of Health & Human Services, most Americans age 65 or older will need some type of long-term care during their lives. This coverage protects your retirement savings from being depleted by long-term care expenses.

Bottom line

Paying for insurance can seem like a waste of money when you don't need it, but the cost can be low compared to the protection the policy offers when you need to file a claim. The key is to balance the amount of coverage you need with the premiums you can afford. Be sure to talk to an insurance agent to help you find the right insurance and limits to fit your needs.