Protecting Your Financial Well-Being

Life is full of surprises. While we may not be able to predict sudden expenses, we can take steps to soften their impact. The protection provided by insurance can offer reassurance, with certain policies designed to help prevent you from incurring significant financial losses when you need care or when the unexpected happens.

While not everything that’s unexpected is bad, many unforeseen events come with a hefty price tag. It makes sense to prepare yourself financially so you can get back on solid footing as quickly as possible.

Consider these big life changes and unforeseen events, which often necessitate the use, purchase or increase in coverage of insurance policies:

• Property: a new home purchase, home or car repairs, natural disaster damage

 

• Family: marriage, divorce, birth or adoption, death of a loved one, receipt of a large inheritance, job loss or income reduction

 

• Medical: accident or illness, emergency surgery, extended stay at a nursing home or skilled care facility

 

What Is Insurance?

An insurance policy is a financial contract between you and the insurance provider of your choice. In most cases, the policyholder is a person (you), and the insurer is the insurance company.

Generally, insurance types fall into one of these broad categories: property and casualty insurance, accident/health insurance, or life insurance. In each case, the insurer agrees to pay a certain amount if or when the policyholder experiences a type of loss specifically named in the policy. Examples of losses for which you can obtain coverage include auto damage from a car accident, home repairs needed after a natural disaster, or a medical event requiring a doctor’s care.

When you’re thinking about how insurance works, know that what qualifies as a loss can be extremely broad, but most insurance companies will only cover the specific losses identified in your policy. For this reason, it’s important to understand the fine print of any policy before trying to make a claim against it.

How Does It Work?

With insurance, you are transferring the risk of a financial loss to an insurance company for a predetermined fee—known as a premium—which you, as the policyholder, are responsible for paying monthly, quarterly or annually. If the policy is not employer-sponsored, the amount of your premium is determined by the insurer through a process called underwriting, where the insurance company uses a variety of factors (including your credit score, insurance history, age, health status, level of coverage and location) to determine the level of risk. The higher the chance that you might suffer a loss or file a claim, the higher your premium might be.

If you experience a loss covered under your policy, you may be required to pay a portion of the cost, known as the deductible, before the insurer will step in and cover some portion or all of the remaining amount.

Employer-sponsored plans typically don’t require the underwriting process, which can make them attractive. Depending on the type of policy, these plans may be offered to employees for a fixed rate, regardless of the individual’s credit score, health history or other factors. (Keep in mind, premiums for employer-sponsored life insurance plans, for example, may vary based on factors like age, sex, tobacco use, etc.)

Which Types of Insurance Do You Need?

In the U.S., one of the most critical forms of insurance to carry is health insurance. These policies are usually offered through your employer and are intended to pay for a portion of the costs you incur for routine, preventative and emergency medical care. Having health insurance could help prevent depletion of your life savings in the event of a major medical event, such as an accident or a serious illness. With even routine health care costs on the rise,¹ this type of insurance is essential for most Americans.

Other types of insurance that can play a role in your financial plan are disability and life insurance. Disability insurance replaces a portion of lost income if illness or injury prevents you from working. Disability insurance becomes especially important when you consider that one in four of today's 20 year-olds can expect to be out of work for at least one year due to a disabling condition prior to reaching retirement age.² Life insurance provides financial benefits to your named beneficiaries if you pass away. Used strategically, life insurance can also help address estate planning objectives, such as reducing the impact of estate taxes.

Insuring property, such as your automobile and home, is typically required by lenders and often by state law as well. Such policies help cover the cost of damage to the property as well as liability in the event that someone is hurt there.

There are many other types of coverage, from long-term care insurance to pet insurance and even cell phone insurance. Consider your needs and whether paying insurance premiums now may put you in a better financial position later on.

The Bottom Line

Life’s inevitable curveballs can cost you. By proactively securing insurance coverage, you can better prepare for the expenses attached to major life transitions or emergencies. An insurance professional may be a good resource for helping you determine your needs and how insurance fits into your overall financial strategy.

Footnotes

¹ Centers for Medicare & Medicaid Services, “National Health Expenditures 2022 Highlights(opens in a new tab).” December 2023.

² Social Security Administration, “Fact Sheet: Social Security(opens in a new tab).” Accessed February 21, 2024.