own occupation insurance

Types of Insurance We All Need (in addition to health insurance)

Many of us are young and healthy with our entire lives ahead of us. As we continue to progress in life, we need to make sure we are doing so with the right protection. In other words, we need insurance. I don’t just mean medical coverage and car insurance though. Let me explain.

 

1.     Almost everyone needs long-term disability insurance. Unless you have a huge trust fund, enough passive income to completely cover your monthly expenses, or enough retirement savings to deem yourself financially independent, you need disability insurance. Why? Because if some unfortunate event were to occur that prevented you from working, you’d still need a way to support yourself. Disability insurance guarantees you a certain monthly income if you were to get fully or partly disabled, suffer from some medical illness, or get into an accident that prevented you from working your job. Since you can’t predict whether you’ll be disabled in the future, you need to insure against that risk right now. The younger, healthier, and earlier in your career you are, the more important it is to have disability insurance.

Although long-term disability insurance may be provided through your employer, group policies from your employer may not offer sufficient coverage. The payout from your employer is usually capped at a certain amount and may not fully replace your income. Plus, group policies may be less likely to pay out if you do become disabled because their definition of disability may be too broad. In other words, it may be harder to meet their definition of “disabled” and thus you may be less likely to receive the benefit when you need it. My point? Most high-income young professionals should purchase an individual, long-term disability insurance policy outside of their employer.

 

2.     You may also need life insurance. Life insurance guarantees a portion of your salary to your spouse or dependents should you pass away sooner than expected. This is critical if someone else depends on the money you make. I will be honest and say that as a single female with no kids, I don’t have an individual life insurance policy. However, if I get married to someone who is dependent on my income or have kids, it will be one of the first things I purchase.

There are two types of life insurance: whole life insurance and term life insurance. Term life insurance provides a benefit to your family if you die during the term of the policy (usually 30 years). Whole life insurance provides a benefit to your dependents regardless of when you die. Whole insurance may sound more appealing, but you may want to think twice before purchasing it. Unlike term life insurance, whole life insurance is insanely expensive (about 10x more than term insurance), has a lot of hidden fees, and is unnecessary for many high-income earners who can provide money to their families in a more efficient manner.

My point? Most people need term life insurance to make sure their families don’t struggle financially if they were to die sooner than expected (within the next 20-30 years). If you were to die after that time, then you should hopefully have enough money saved (via retirement accounts and other high-yield investments) to take care of your family.

 

3.     Some professionals need malpractice/liability insurance. Most physicians are familiar with this type of insurance and most non-physicians don’t have to worry about it, but even still, I think it deserves a quick blurb. Malpractice insurance protects you in case you make a mistake at work that severely impacts someone else’s quality of life. You want to ensure that the patients or clients you work with can’t sue you and take everything you own. The ideal amount of liability insurance depends on your career specialty and other risk factors that put you at increased or decreased risk of being sued.

There are two main types of malpractice policies you can purchase: a “claims” policy and an “occurrence” policy. Claims policies cover you if someone files a claim against you during a certain period of time or while you work for a certain organization. The downside is that if someone waits to file a claim against you when you no longer work for that company, then a claims policy will not cover you. On the other hand, an occurrence policy covers you for any event that “occurred” during the time frame you were at the organization or under the policy. With an occurrence policy, if someone waits years to sue you then you are still covered because the action in the suit “occurred” during the time you were covered under the policy. As you can imagine, occurrence policies are more expensive but offer much better coverage. If you are working a job that only offers a claims policy, then you need to make sure you have what’s called a “tail” (added protection that will cover you in case someone sues you after you’ve changed jobs).

My point? Consider getting malpractice or liability insurance. The best kind is an occurrence policy, however, that is also the most expensive. If your job already covers the cost of a “claims” liability insurance policy, be sure to purchase “tail” coverage so that you have liability insurance after you change jobs.

 

4.     Consider adding an umbrella insurance policy to supplement your car and home insurance . While liability insurance covers you if someone sues you for something you did at work, umbrella insurance covers you in case you’re sued for something you did outside of work (i.e. civil disputes, business deals, etc.). For example, umbrella insurance can pay for your legal fees if your dog bites someone in the neighborhood, you accidentally injure someone at a social function, or some toddler gets injured at your child’s birthday party. It also acts as additional automobile and homeowner’s insurance. Although umbrella insurance doesn’t cover your own injuries or damages to your own property, it does protect you and cover your legal fees from harm you may cause to someone else.

Since umbrella insurance is added insurance, you can only purchase it after you have already purchased a certain amount of automobile or homeowner’s insurance. As a rule of thumb, umbrella insurance is purchased in benefit increments of a million dollars and it is usually best to purchase enough to fully cover your net worth (including the value of all your assets and potential future income). A policy with a benefit coverage of $1 million usually costs $100-$300 a year.  

 

To summarize, get insurance and enough of it. In addition to medical coverage, car insurance and homeowner’s insurance, most high-income professionals need disability insurance if they themselves are dependent on the income they receive from their jobs. They also need term life insurance if someone else, like a spouse or kids, is dependent on their income. Malpractice/liability insurance is useful in case someone tries to sue you for something you did at work and an umbrella insurance policy protects your net worth from unforeseen lawsuits outside of work. As [future] high-income young professionals, it is imperative that you get the insurance you need to protect yourself and your net worth.