Life insurance

When it comes to life insurance, there’s a variety of metrics used to determine how much you will need. And which metrics will be used can depend largely on who’s asking the question.

For example, a life insurance agent—who may be looking to sell you the largest policy possible—may base the death benefit on a multiple of your annual income. He or she may say that you need a policy that is equal to 10 or 20 times your annual income. The theory here is that you will need an amount of life insurance that will replace your income completely for a specified number of years. This may be defined by the number of years that will take for your youngest child to finish college, or for your spouse to retire.

You can also use very specific financial objectives. For example, you can tie the amount of life insurance to the amount of debt that you and your spouse owe. If this includes your mortgage, student loans, car loans, and credit cards, it could result in a very large reduction in the family’s monthly expenses, that will come close to replacing your income.

We discuss how much life insurance you should have specifically in this post, and we’ve also put together a simple life insurance needs calculator to help you crunch the numbers yourself.

Regardless of how much you need, the good news is that term life insurance is very inexpensive, especially when you’re young.

Policygenius is the best place to look for life insurance. They let you shop around for multiple quotes from a variety of lenders. They also now offer term life insurance with no medical exam needed.

They’ve partnered up with Brighthouse SimplySelect℠ to offer up to $2 million in coverage – and they promise low premiums. After you answer an over-the-phone questionnaire with a Policygenius agent, you can get your policy all squared away in just three to four days!

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Health insurance

This question is actually no longer relevant, since the Affordable Care Act (ACA) effectively removed annual and lifetime limits on benefits from health insurance policies purchased on the health insurance exchanges and provided by employers.

The bigger question in regard to health insurance is how much your out-of-pocket limits will be based on a specific policy. Most people are very familiar with deductibles, but those are not the only expense you need to be concerned with.

Most policies also have in out-of-pocket maximum, which can be more important. This is the combination of the deductible plus coinsurance provision. Coinsurance is your responsibility to contribute toward health care expenses that exceed your deductible. For example, if the plan has a $5,000 deductible, but it also requires that you pay 20 percent of the expenses that exceed the deductible—up to $10,000—you will be on the hook for an additional $2,000 ($10,000 * .2).

That means that your total out-of-pocket costs will be $7,000 ($5,000 + $2,000) in any one year.

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Auto insurance

The necessary amount of auto insurance that you need is easier to determine. That is at least partially because there are required minimum amounts of coverage in each state. Those requirements determine the least amount of coverage that you should have.

Auto insurance coverage amounts are usually expressed by a sequence of three numbers. For example, the state minimum requirement of 50/100/25 means that you are required to have a minimum of $50,000 in coverage for each person injured in accident (bodily injury), up to a maximum of $100,000 per accident (two people), and $25,000 coverage for property damage.

From a standpoint of legal compliance, you are covered if you meet your state mandated minimum amounts. And that is a sufficient amount of coverage if you are young and have little or no assets.

On the other hand, if you have home equity and/or investments worth more than your state’s minimum required liability amounts, you want to increase your coverage. One of the major purposes of any type of insurance is to protect your assets. In the case of auto insurance, you should have sufficient coverage to protect your assets if you are sued as a result of an accident where you were at fault.

The more coverage that you have, the less likely it is that a plaintiff will go after your personal assets. If possible, you should want your coverage to be equivalent to your personal assets.

Finally, keep in mind that comprehensive and collision insurance is optional. If you have an older car that’s not worth much, you can knock a bit off your car insurance bill by removing this coverage, but then you won’t be reimbursed if your car is totaled or stolen.

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Homeowners insurance

There are a lot of factors that go into a homeowners insurance policy, and determining how much coverage you need is a highly mathematical process. It will also be based on the specific numbers associated with your property and with its contents.

To begin with, you have to insure the physical structure of the property. The best way to do this is through a guaranteed replacement cost policy. Under such a policy, the insurance company will pay the full cost to rebuild your home in the case of a total loss. This will require that you get an accurate estimate of what it costs to replace the home, in order to determine how much coverage you will need. This can be very different from the property’s appraised value. For example, replacement cost does not include the value of the land, since that cannot be replaced.

Your homeowners insurance policy should also include contents coverage. This will include everything is inside your home that is not affixed to the physical structure of the home. You can do a detailed inventory of the contents of your home, but more commonly the insurance company will assign an estimated value, generally 50 percent or more of the replacement cost of the home, to cover the contents.

If the guaranteed replacement cost of your home is $300,000, $150,000 would be added to cover the contents of the home.

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Renters Insurance

Renters insurance covers your property in the event it is damaged or stolen. (Many people don’t realize that if your apartment were to burn down, your landlord’s insurance won’t cover your stuff!) Renters insurance is so cheap, everyone should have it.

Renters insurance is less complicated than homeowners insurance because your only concern is with the contents of your home. You don’t have to worry about four walls, the exterior of the building or anything else that has to do with the physical structure of the property. That means that you need a lot less renters insurance than if you are a homeowner and need homeowners insurance.

You can do a rough estimate of how much insurance you will need, simply by using a per room estimate, and then making adjustments for certain high-cost items. For example, if you live in a six room home, you can assign $5,000 per room, for a total of $30,000, but then add extra to cover jewelry, computers, personal heirlooms and the like.

It can be easy to go a little bit high on renters insurance because it’s relatively inexpensive. But just keep in mind that you have to have an inventory—complete with photos—of everything you’re insuring, in order to have a claim fully paid.