Buying insurance is a little like keeping a spare tire in your car. You hope you’ll never need it, but you’ll sure be glad it’s there if you ever get a flat.
Proper coverage can be an important part of staying on the road to financial wellness. But how do you know which insurance policies can protect you from unexpected expenses and bring you peace of mind—and which ones you may be able to do without? While everyone’s situation is different, it’s important to understand the basics. Here’s a look at some of the most common types of insurance and how they work.
Required insurance coverage | Optional types of insurance | Additional insurance coverage
The highlights
- Health, home, and auto/nsurance are often required by law, and going uninsured is a risk that can lead to costly fines or worse.
- Additional types of coverage, including disability and life insurance, are optional.
- Comparing rates, regularly reviewing your coverage, and bundling your policies with one insurer may help you save money amid rising costs.
Insurance coverage that may be required
If you’re reviewing your coverage, start with insurance that’s legally required where you live. Different states have different regulations, but you can likely expect health insurance, auto insurance (if you own or drive a car), and home or renters insurance to be on the list.
Health insurance
Although health insurance isn’t required at a federal level, some states will charge you a penalty if you decide to go uninsured—so be sure to check the laws where you live. Mandatory or not, keep in mind that research shows health coverage is linked to better health outcomes, and that insurance can help protect you from high medical costs.1 In other words, health insurance can be an important part of your physical and financial wellness.
Many people get health insurance through their employers, but you can also find private coverage using the federal health insurance marketplace during enrollment periods. If you’re married, you may be able to get on your spouse’s plan. If you’re under 26, your parents can enroll you (or keep you enrolled) in their health plan. Government programs including Medicaid (for some people who can’t afford private coverage) and Medicare (for people over the age of 65 and some people with disabilities) may be available to you as well.
Auto insurance
Car insurance is mandatory for almost all drivers, although the minimum coverage requirements can vary by state. Types of auto insurance coverage include:
- Liability insurance: The minimum coverage required by law in most states, this pays for property damage or injuries (including to other drivers and passengers) in a car accident where you’re at fault.
- Comprehensive and collision coverage: Usually required if you’re financing or leasing a car, this type of insurance can help pay for repairs or a replacement for your car after an accident, regardless of who’s at fault. It also covers damages from fire, theft, vandalism, and acts of nature.
- Personal injury protection (PIP): This coverage can pay for you and your passengers’ medical expenses that aren’t covered by health insurance as well as lost income if you miss time from work. It’s only required in some states, so check the laws where you live.
- Uninsured/underinsured motorist (UM) coverage: Required in about half of states, this coverage helps pay for damages and injuries if you’re hit by a driver with little or no insurance.
Auto insurance rates have skyrocketed in recent years, and many drivers have felt the impact on their budgets.2 In one survey, 40% of insured drivers said they were stressed about being able to afford rising car insurance costs, and 45% of respondents between the ages of 18 and 34 said they had thought about going without auto insurance.3 But it’s important to consider the costs of going uninsured. Even if you do avoid a costly accident, “the fines alone will add up to more than the cost of the insurance,” says Brian Ford, head of financial wellness at Truist.
You can look to save money by periodically shopping around and comparing rates. Often, you’ll find discounts by bundling multiple policies, like home and car, with one reputable company, Ford says. When it comes to auto insurance, you can also save money by driving safely. Speeding tickets and accidents can increase your insurance costs, and some insurance companies offer discounts to safe drivers.
Home insurance
Although homeowners insurance isn’t mandated by law, almost every mortgage lender will require you to have it. And even if you own your home outright, home insurance is an important part of protecting what may be your single biggest investment. Home insurance policies may include:
- Dwelling coverage: This will help pay for repairs or the replacement of any structures on your property if they’re damaged by unexpected events, like a fire, storm, theft, or vandalism.
- Personal property coverage: This helps pay for furniture, appliances, clothing, or other personal belongings that could be damaged or stolen.
- Liability coverage: If someone is injured on your property or if you accidentally damage someone else’s property, this coverage can help pay, respectively, for medical expenses or repairs. It also covers legal expenses if you’re sued for any injuries or property damage.
Ford says that working with a reputable insurance agent and taking the time to talk through your needs can help you make sure you’re properly insuring your home. It’s worth reevaluating your home insurance needs every few years. If, for example, your home value has shot up, you may want to add to your existing dwelling coverage.
The opposite can also be true. “Many people may be over-insuring,” Ford says. “You may not want to get flood or earthquake coverage if you’re not in an area where that’s needed. And if your home is worth $700,000, then you don’t need $900,000 in dwelling coverage.”
The decision to add insurance or not depends on your risk tolerance.
Private mortgage insurance (PMI), which serves a different purpose than home insurance, may be required by lenders if you’re buying a home with a down payment of 20% or less. If you’re getting a loan from the Federal Housing Administration, FHA mortgage insurance is also mandatory. This insurance covers the lender if you’re unable to make your mortgage payments and default on the loan.
What about renters? Renters insurance isn’t required by law, but your landlord or property management company may make it a mandatory part of your rental agreement. It often includes personal property and liability coverage and may help pay for additional living expenses, like a hotel, if your rental property is ever damaged and undergoing renovations.
Additional Insurance coverage that you might consider
“If you have people who depend on your income, you should have life insurance.”—Brian Ford, Truist head of financial wellness
Once your most important insurance needs are met, you can start considering additional policies like umbrella coverage, life insurance, disability insurance, and business insurance.
Life insurance
With a life insurance policy, a designated beneficiary receives a sum of money upon the death of the insured person. “If you have people who depend on your income, you should have life insurance,” Ford says.
For most people, a basic term life insurance policy should provide ample coverage while being generally inexpensive. Whole life insurance (which accumulates a cash value and pays the beneficiary upon death of the policy holder) is another option, but is usually more costly.
Long-term disability insurance
If you get hurt or sick or have a physical or mental disability that prevents you from working, disability insurance can help protect against a loss of income. Government-sponsored disability coverage may be available if your condition is so severe that you can’t do basic work-related activities such as lifting, walking, or remembering for at least a year or more.4 You can also buy disability coverage from private insurers, which may have different standards to qualify.
Disability insurance can help compensate you for a portion of the income you’re unable to earn. “If you have an $80,000 salary, you may only need $40,000 a year if you become disabled, because your expenses may drop,” Ford says.
Speak to a financial expert about whether disability insurance is right for you, especially
If your family depends on your income and you have recurring health issues or work in a physically demanding role like construction or nursing.
Umbrella insurance
This personal liability insurance “covers anything your other coverage doesn’t,” Ford says, and may be worthwhile if you have a lot of assets or you’re worried about potential lawsuits. Umbrella insurance provides additional liability coverage and legal defense costs on top of your auto, home, or other policies. If your existing policies don’t cover the full extent of damages in the event of a liability claim, umbrella insurance would kick in.
Long-term care insurance
This can help pay for expenses associated with long-term care as you age. This type of care can include in-home care, nursing home care, or adult daycare services—none of which are generally covered by health insurance or Medicare.
Many people who get long-term care insurance do so in their 50s or 60s with the anticipation that they won’t be using it until their 70s or later. Long-term care insurance can be complex, so if you’re considering it, it’s essential to work with a trusted professional who understands your unique needs and can help assess your situation.
Business insurance
Specific regulations may vary by state, but many businesses are required by law to have workers’ compensation insurance, which pays for an employee’s benefits if they get hurt or become ill while on the job, as well as unemployment and disability insurance.5
Other types of insurance aren’t required but can protect your business from financial challenges or even bankruptcy if something unexpected happens. If you’re a small business owner, you may consider speaking to a qualified agent about these common types of business insurance:
- Business owners policy: This offers a bundle of important coverage options for your business, including protection against property damage from fire or flooding, theft, and bodily injury. Many packages also include business interruption insurance, which can help replace income you might lose if you temporarily have to close your business.
- Product liability insurance: If your business manufactures, designs, or sells a product that could potentially harm someone, this provides liability coverage for injuries.
- Professional liability insurance: Commonly bought by dentists, lawyers, accountants, and other small business owners offering services or counseling, this can protect you in case you’re ever sued.
Optional types of insurance that you may not need
A good rule of thumb to follow: insure only what would be catastrophic to lose. This can be especially true for policies that include:
- Cellphone insurance
- Pet insurance
- Flight insurance
- Life insurance for children
- Rental car insurance
“A lot of people buy product replacement insurance at electronics stores, but if your cellphone breaks, will it ruin you financially?” Ford asks. “If you keep saying yes to every policy, it adds up and you’ll have less income monthly.”
Before adding another insurance payment to your monthly expenses, question if the thing you’re insuring would take a significant toll on your finances if you had to replace it. “You don’t want to insure for small bumps and scratches. That’s what an emergency account is for,” says Ford.
There may also be times when you can save money by paying out of pocket instead of using insurance. For example, if you get a chip in your car’s windshield, you may cover the repair with your emergency savings instead of your auto insurance. Why? Because using your auto insurance can cause your monthly premiums to go up.
Is your holistic insurance picture starting to look clearer? Getting the right coverage can help you protect your finances in the long term and even bring you immediate confidence. “Knowing that you can be reimbursed if the worst-case scenario does happen can give you some peace of mind,” says Bright Dickson, positive psychology specialist at Truist.
Next step suggestions:
- Shop around and compare rates to your current auto policy to see whether you could be saving any money.
- Review all the insurance policies you have now to make sure your coverage matches your current needs.
- Unsure about what your current policies cover? Find an agent you trust and review your coverage together.