Insurance offers peace of mind against the unexpected. You can find a policy to cover almost anything, but some are more important than others. It all depends on your needs.
As you map out your future, these four types of insurance should be firmly on your radar.
1. Auto Insurance
Auto insurance is crucial if you drive. Not only is it required in most states, but car accidents are expensive. According to data from 2019, a car accident could cost you more than $12,000 even without any injuries; it cost more than $1.7 million if a crash is fatal. These costs come from medical expenses, vehicle damage, wage and productivity losses, and more.
Most states require that you have basic auto liability insurance. This covers legal fees, injury or death, and property damage to others when you are legally responsible. Some states also require you to carry personal injury protection (PIP) and/or uninsured motorist coverage. These coverages pay for medical expenses related to the incident for you and your passengers, no matter who is at fault. This also helps cover hit-and-run accidents and accidents with drivers who don’t have insurance.
If you're buying a car with a loan, you may also need to add comprehensive and collision coverage to your policy. These pay for damages to your vehicle due to car accidents, theft, vandalism, and other hazards. They’re especially vital if repairing or replacing your car would create a financial hardship for you.
2. Home Insurance
For many people, a home is their greatest asset. Home insurance protects you by giving you a financial safety net when damage occurs. If you have a mortgage, your lender probably requires a policy. But if you don’t buy your own, your lender can buy it for you and send you the bill. This may come at a higher cost and with less coverage.
Home insurance is a good idea even if you’ve paid off your mortgage. That's because it shields you against expenses for property damage. It also protects you against liability for injuries and property damage to guests caused by you, your family, or your pets.
It can also cover you if your home is uninhabitable after a covered claim. And it can pay to repair or rebuild detached structures, like your fence or shed, damaged by a covered claim.
If you rent your home, a renters policy is just as important. It may even be required. Your landlord’s insurance covers the structure itself, but your personal items can add up to a lot of money. In the event of a burglary, fire, or disaster, your renter's policy should cover most of the costs.
It may also help you pay if you have to stay elsewhere while your home is being repaired. Plus, like home insurance, renters offers liability protection.
3. Health Insurance
Health insurance is one of the most important types. Your good health is what allows you to work, earn money, and enjoy life. What if you were to develop a serious illness or have an accident without being insured? You might find yourself unable to receive treatment or forced to pay large medical bills. A study published in the American Journal of Public Health showed nearly 67% of people felt their medical expenses were part of the reason for their bankruptcy.
“Purchasing health insurance is an integral part of managing key personal financial risks,” said Harry Stout, a personal finance author, and former president and CEO of an insurance company. Stout told The Balance in an email: “Not having coverage can be financially devastating to households because of the high cost of care.”
Health plans bought through the Marketplace can even cover preventive services such as vaccines, screenings, and some checkups. That way, you can maintain your health and well-being to meet life’s demands.
If you're self-employed or a freelancer, you can deduct health plan premiums you pay out of pocket when you file your tax return. You're able to deduct expenses that exceed 7.5% of your adjusted gross income.
4. Life Insurance
Many experts say that life insurance should be a central part of your financial plan. But how crucial is it really? The answer: It depends on you.
“The need for life insurance varies, and it changes over time,” explained Stephen Caplan, CSLP™, a financial advisor at Neponset Valley Financial Partners, in an email to The Balance. “If someone is young and single, their need is minimal. If they are responsible for supporting a family, ensuring adequate protection is crucial.”
If you’re married with a family when you die, what can life insurance do? It can replace lost income, help pay debts, or pay for your children's college education. If you're single, it could pay for burial costs and pay off any debts you leave behind.
The cost depends mostly on your age and health. The younger and healthier you are, the lower the cost is likely to be. You may need to complete a medical exam, but some companies offer no-exam life policies. These may be more costly.
If you’re unsure whether a life insurance policy would be useful for you, Caplan suggests asking these questions to think about your needs:
- What immediate financial expenses would your family face when you die? Think about outstanding debts, funeral costs, etc.
- How long would your dependents need financial support if you passed away today?
- In addition to covering your family’s most urgent needs, would you want to leave money for important but less urgent expenses? Consider your children’s education or inheritance, charitable gifts, etc.
You Might Want Disability Insurance Too
“Contrary to what many people think, their home or car is not their greatest asset. Rather, it is their ability to earn an income. Yet, many professionals do not insure the chance of a disability,” said John Barnes, CFP and owner of My Family Life Insurance, in an email to The Balance.
He went on to say: “A disability happens more often than people think.” The Social Security Administration estimates that a disability occurs in one in four 20-year-olds before they reach retirement age. “Disability insurance is the only type of insurance that will pay a benefit to you if you are ill or injured and can’t do your job.”
It's true that you have disability benefits through worker’s compensation for injuries that happen while you're on the job. Still, Barnes warns that worker’s comp “does not cover off-the-job injuries or illnesses like cancer, diabetes, multiple sclerosis, or even COVID-19.”
The good news is that disability insurance isn’t likely to break the bank; it can often fit into most budgets. “Usually, the premiums of disability insurance cost two cents for every dollar you make,” said Barnes. “Certainly, the premiums vary based on age, occupation, salary, and health conditions.” If you earn $40,000 a year, that works out to $800 per year (about $67 per month).
The Bottom Line
“Insurance plays an important but simple role: It replaces economic loss in the event of a catastrophe,” said Caplan.
Auto, property, health, disability, and life are the top types of insurance that help you protect yourself and your assets. But you should also think about your needs. Talk with licensed agents to find out the best ways to make these policies work for you.
Financial planners can provide advice about other common types of insurance that should also be part of your financial plan.