Splurging on a new iPad or subscription to GlossyBox might be tempting when your tax refund shows up. But before you start hitting the buy button, consider using some of the money to protect what you already have.
The average 2015 tax refund is about $3,100, according to the IRS. That’s enough to beef up insurance protection and emergency savings and perhaps still leave you with some extra cash for fun.
Here are five ways to improve your insurance protection right away.
1. Buy life insurance
You’re among the people who need life insurance if your death would hurt anyone financially. Term life insurance, which covers you for a certain time period, is sufficient for most families. Ideally, when the term runs out, you don’t need life insurance anymore — the kids are grown, the house is paid off, and you have a sizable nest egg.
When you buy term life insurance, you choose the term length, such as 10, 20 or 30 years, and the death benefit amount, which is paid to your beneficiary if you die within the term. The beneficiary, such as your spouse, can use the money for anything, such as funeral costs, paying off the mortgage or sending the kids to college.
“One of the most common objections I hear is, ‘I can’t afford it,’” says Ryan Andrew, an independent insurance agent in Richmond, Virginia. “But today, rates are at the lowest they’ve ever been.”
Term life insurance quotes for a 20-year, $500,000 policy can be as low as about $240 a year for a healthy 30-year-old man and about $210 a year for a healthy 30-year-old woman, according to NerdWallet research.
Life insurance isn’t just for breadwinners; stay-at-home parents should be covered, too, Andrew says. If a stay-at-home parent dies, the surviving parent could use the proceeds to pay for child care and other services the mom or dad provided, or take a leave of absence from work to care for children.
2. Save money for out-of-pocket health costs
Medical expenses are often a source of unexpected bills.
“When people say they don’t know if they need an emergency fund, I ask, ‘What’s your health insurance deductible?’” says Delia Fernandez, a fee-only financial planner in Los Alamitos, California.
The average deductible for a health insurance plan purchased through a workplace is $1,318 (for employee-only coverage), according to a 2015 survey of employer health benefits by Kaiser Family Foundation and the Health Research & Educational Trust. The average deductible for a 2016 “silver plan,” the most popular individual plan sold on the health insurance exchanges, is $3,117, according to HealthPocket, which analyzes and compares health plans.
Set some money aside from your tax refund for your deductible if you aren’t already contributing enough to a health savings account or flexible spending account at work to cover out-of-pocket medical expenses.
3. Save money for home and car repairs
Another good use of tax refund money is to pay for smaller home repairs when the unexpected happens and rely on your homeowners insurance to cover the bigger disasters. Even if the damage is covered under your policy, you’re better off paying for repairs yourself if you would collect only a few hundred dollars after the deductible, Andrew says. Filing a small claim can result in a home insurance rate increase for a few years, and you won’t be able to escape by switching to another company. The claim will go on your record, which other companies will review when you apply for coverage.
It’s a good idea to avoid making a lot of small claims on your car insurance, too. But get the insurance company involved when an accident involves other drivers or injuries, even if the damage is minor.
4. Buy disability insurance
Disability insurance pays you a portion of your income if you can’t work for an extended period because of an illness or injury — a risk that’s more likely than you might think. More than a quarter of 20-year-olds will experience a disability sometime before they retire, according to the Council for Disability Awareness.
“We have babies, hurt our backs, become depressed and get medical diagnoses like cancer,” says Carol Harnett, president of the council.
If you would struggle financially without a paycheck, as many Americans would, you need disability insurance, she says.
Sign up for coverage at work if your employer offers disability insurance benefits, even if you have to pay part of the premium. If coverage isn’t offered at work or you’re self-employed, shop for an individual disability insurance plan — one you buy on your own. Your tax refund can help pay the first year’s premium.
5. Buy more liability insurance
Liability insurance on your homeowners, renters or car insurance policy covers the damage and injuries you cause others, paying up to the policy’s limits. If you haven’t thought about how much liability protection you have, you might not have enough. As your savings and assets increase, you become a better target for a lawsuit. Bulking up liability protection is a smart way to use tax refund money, especially in a lawsuit-happy world.
“I’ve seen people with $1 million running around with the kind of car insurance liability protection they bought when they were 20,” Fernandez says.
Andrew recommends that homeowners buy as much liability insurance as they can on their home and auto policies and then purchase additional protection with an umbrella liability policy, especially if they own other property, have a lot of savings or have teenage drivers, who tend to cause more car accidents. The umbrella coverage kicks in when you reach the limit on your auto or home policy’s liability amount.
You can buy a $1 million umbrella policy for $150 to $300 a year, according to the Insurance Information Institute.
“It’s cheap peace of mind,” says Patricia Jennerjohn, a fee-only financial planner in Oakland, California, who recommends the extra coverage for many of her clients.
As you strengthen your financial safety net, you might need to increase your insurance budget. Instead of relying on a tax refund year to year, Jennerjohn suggests reducing your tax withholdings to free up cash every month.
A refund isn’t a windfall or a present, she says. “It means you overpaid the government.”