What Are the 5 Types of Insurance You Need?
Here’s Your Checklist
Insurance offers peace of mind against the unexpected. You can find an insurance policy to cover almost anything imaginable, but some are more important than others, depending on your situation and needs. As you map out your financial future, these five types of insurance should be firmly on your radar.
Auto insurance is critical if you drive. Not only is it required in most states, but car accidents are expensive—over $10,000 even without any injuries, and more than $1.5 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, which covers legal fees, bodily injury or death, and property damage to others in an incident where 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 (regardless of who is at fault), 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 be required to add comprehensive and collision coverage to your policy. These coverages pay for damages to your vehicle resulting from car accidents, theft, vandalism, and other hazards, and they’re especially important if repairing or replacing your car would create a financial hardship for you.
For many people, a home is their greatest asset. Home insurance protects you and your investment by extending a financial safety net when unpredictable damage occurs. If you have a mortgage, your lender probably requires a policy. But if you don’t buy your own policy, your lender can buy it for you—potentially at higher costs and with more limited coverage—and send you the bill.
Home insurance is a good idea even if you’ve paid off your mortgage because it shields you against expenses for property damage, and liability for injuries and property damage to guests caused by you or your family (including pets). It can also cover additional living expenses if your home is uninhabitable after a covered claim, and pay to repair or rebuild detached structures, like your fence and shed, damaged by a covered claim.
If you rent your home, a renters insurance policy is just as important, and may be required. Sure, your landlord’s insurance covers the structure itself, but your personal belongings can add up to a significant amount of money. In the event of a burglary, fire, or disaster, your renters policy should cover most of the replacement costs. It may also help pay additional living expenses if you have to stay elsewhere while your home is being repaired. Plus, like home insurance, renter’s insurance offers liability protection.
Health insurance is easily one of the most important types of insurance to have. Your good health is what allows you to work, earn money, and enjoy life. 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 recent study published in the American Journal of Public Health showed nearly 67% of respondents felt their medical expenses contributed to 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 a life and general insurance company. Stout told The Balance in an email that “not having coverage can be financially devastating to households because of the high cost of care.”
Health insurance purchased through the Health Insurance Marketplace can even cover preventive services (vaccines, screenings, and some checkups) so that 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 insurance premiums you pay out of pocket when you file your tax return.
“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 that “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 reaching 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.”
Employees are right in thinking that they have disability benefits through worker’s compensation for injuries that happen on the job. Still, Barnes warns that worker’s compensation “does not cover off-the-job injuries or illnesses like cancer, diabetes, multiple sclerosis, or even COVID-19.”
Thankfully, disability insurance isn’t likely to break the bank; this type of insurance can slide 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).
Many financial experts consider life insurance to be an integral part of your financial plan. How crucial it is to include in your planning depends on your circumstances. “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, life insurance can replace lost income, help pay lingering debts, or pay for your children's college education. If you're single, life insurance could pay for burial costs and pay off any debts you leave behind.
Your ability to buy life insurance depends primarily 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 life insurance companies offer no-exam life policies.
If you’re unsure whether a life insurance policy would be beneficial for you, Caplan suggests asking these questions to evaluate 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.
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 insurance are the top types of insurance that help you protect yourself and your assets. But it’s also important to consider your individual needs and chat with licensed agents to see how policies can be adjusted to serve you better. Financial advisors and planners can provide advice about whether other common types of insurance like umbrella and long-term care should also be part of your financial strategy.