Listener Question: What Kinds of Insurance Do I Actually Need?

Agents for every type of insurance will probably tell you that their package is one of the most critical bills you'll pay every month. But is it, really?

We all need insurance, but some insurance protects against extremely unlikely scenarios, and while it may offer peace of mind, it can be a bad deal at the price.

In this clip from the Motley Fool Answers podcast, Alison Southwick, Robert Brokamp, and Brian Richards lay down the basics of which types of insurance are essential, which are great for very specific circumstances, and which ones you're probably best off without. Also, they explain how life insurance agents calculate how much your policy will be, and what kind of range is reasonable to expect.

A full transcript follows the video.

This podcast was recorded on Feb. 16, 2016.

Alison Southwick: Alright, it's time for Answers Answers! This week's question comes from Rich: His question is about insurance. Simply put, he writes: "How much do I need to have, and what kind?" Go!

Robert Brokamp: Exciting world of insurance. OK, No. 1, you need property insurance for your automobiles and homes, or if you're a renter. The principle of all of that is to get the biggest deductible policy as you can, because you want to use insurance for the big, catastrophic expenses.

You don't want to be using it to pay off little things, a cracked window and things like that, because the more claims you make, the more you're going to pay in premiums later on. So, homeowners insurance: If you're a renter, you should also have it, because part of that is liability insurance. So, that can pay off if someone tries to sue you -- they're at your house and they trip over something, so you want to make sure you have that.

The other is life insurance. You only need life insurance if someone relies on your income, or if you provide services that would cost someone else money to replace. So, if you're a parent, that's the obvious example. You're raising kids, you need life insurance. Even if you're a stay-at-home parent, you're doing something, providing lots of services, you should also have life insurance. People who don't have kids, people whose kids are out of the house, you probably actually no longer need any kind of life insurance.

A lot of people actually have life insurance for their kids. Gerber sells this. It's probably actually not necessary. Simply put, the best type of life insurance is term life insurance, pure life insurance, and you just need it for as long as you are paying.

For me, I think generally, in terms of once the kids are out of the house and out of college. At that point, I don't think we need any more life insurance. You can buy something called "whole life" or "cash value" insurance, which is sometimes called "permanent insurance," which has an investment component to it. Unfortunately, those are usually more expensive, the investments aren't so great. What you can do if you have one of those policies is called a 1035 exchange, to move it to something like an annuity, which makes it a better investment prospect.

And the last type of insurance that you may or may not need is disability. And you only need to do that if A, people are relying on your income, and B, you are in a job that you being in good physical shape is important. So, for me, as a writer, I spend 90% of my time sitting at a desk reading and writing, I personally don't have disability insurance, other than what we all get through Social Security. But the more your income relies on you being able to move around and do certain things, you should consider disability insurance. The problem is, it's very expensive. So, shop around.

Southwick: We once went to a financial advisor, my husband and I, and the guy was like, "OK, you guys need ... " I don't want to say he pretended to do some calculations, but he was like tap-tap-tappity-tap, and he was like, "You each need a million-dollar life insurance policy!" And I was like, "Really?! Really?! We need that much?!" And that just seemed like too much. Not to be like, "If Ron dies, I'm going to be getting married a few years after that, so I don't need that income ... " But I was like, "A million seems like a lot."

Brokamp: The rule of thumb here is,10 times your salary as a base. Now, everyone who is covered by Social Security, their survivors will get some money if they pass away, so you can use a calculator to do that tappity-tap thing, and you factor in all those benefits and all that to figure out how much. So, a million actually doesn't sound that high to me.

Southwick: OK.

Brokamp: Especially when you're talking about term life insurance, and you're in your 20s or 30s, getting an extra $100,000, $200,000, $300,000 of insurance is actually pretty cheap. And you don't want to err on being too cheap with your life insurance. So, I don't think, actually, that's a bad amount in terms of how much life insurance to have.

Southwick: Alright, so, homeowners or renters, life, term life insurance, and then, disability insurance. Boom.

Brokamp: You got it.

Brian Richards: Could I interject?

Brokamp: Please do.

Southwick: Oh, hey! There's Brian Richards!

Richards: Hey! Wow, where did I come from? What is one type of insurance that you probably don't need? What's an overrated insurance product?

Brokamp: Well, there is the one for kids. Another one is, people get mortgage insurance, a certain type of life insurance that'll pay off your mortgage if you die. The thing is, as you pay off your mortgage with your monthly payments, the value of your mortgage goes down, so it's a benefit that eventually won't pay off as much, if that makes sense, if the debt goes down. You should factor in the fact that you have a mortgage in determining how much life insurance you need, but you don't need specifically mortgage insurance.

A very controversial one is long-term care insurance, which a lot of people think about, and they should consider how they're going to pay for any care they may need in their older years. The problem is, long-term care insurance is expensive and it is not efficiently priced. What has happened to a lot of people who started paying on these policies, they were told later in life, "Well, I'm sorry, you were told that your premiums weren't going to go up, but we're going to have to increase them by 30%, 40%, 50%." So, that's a situation where's a good idea to consider it, but it is not cheap, and most people end up not getting much of a benefit from it.

Southwick: Alright, insurance, there you go. And if you have a question just like Rich, you can reach us at [email protected]. You can also reach us on Twitter, we are @AnswersPodcast.