In the vigor of youth, I broke my hand playing football. My father put it succinctly: “You’re invincible — until you’re not.”
That’s precisely why we all need insurance. Sure, today, you might feel like nothing can ever go wrong. Then when you least expect it, something does go wrong, and suddenly you find yourself in dire need.
Not everyone needs every type of insurance. There are hundreds of types of insurance out there, and some are extremely obscure. Celebrity sommeliers sometimes insure their noses and palates. Nervous fiancées can buy wedding insurance. The truly paranoid can buy kidnapping insurance, and even alien abduction insurance.
Still, everyone should have at least two types of insurance, and many others should have one or more specialized policy types. Before you go on an insurance binge or decide you can just skip insurance entirely, make sure you understand all of the following insurance types.
The day may just come when you need it, despite feeling invincible today.
Insurance That Everyone Needs at All Times
Everyone, from the cradle to the grave, should have health insurance and property insurance.
That doesn’t mean everyone needs the exact same types of each, however. Your insurance needs vary based on your circumstances.
Regardless of your employment benefits, you must have health insurance.
By the time a health emergency strikes, it’s too late to get affordable coverage. You don’t want to find yourself gravely injured or facing a life-threatening illness with no way to pay for treatment.
Your coverage could be as simple as an affordable high-deductible policy combined with a health savings account (HSA) that you get through Lively. Or it could be a fully comprehensive policy with all the bells and whistles.
Don’t have a health insurance option through your job? No sweat — there’s a long list of health insurance options for those without employer benefits. A few options include:
- Affordable Care Act health insurance marketplaces
- Private insurance marketplaces
- Association health plans
- Combining a low-cost, high-deductible policy with an HSA
I’ve even known high-skill employees to take an extra part-time job just for the health coverage.
If you take a break between jobs, buy a gap coverage policy. They don’t cost an arm and a leg, but they help you sleep at night and keep you protected. Accidents can happen at any time, not just when it’s convenient for you and your insurance coverage.
Property Insurance (Homeowners or Renters Insurance)
Most homeowners have homeowners insurance. They have no choice if they have a mortgage; it’s required by the terms of their loan.
Homeowners insurance covers both your house itself and the personal property within it. If a storm sends a tree branch through your roof, you’re (usually) covered. If that branch lands on your prized 70-inch ultra-HD TV, your homeowners insurance policy typically covers that too.
And fire, of course. As a landlord, I’ve seen rental properties burn nearly to the ground. As a child, my childhood home burned. The average home fire costs $12,653 to repair, according to HomeAdvisor, but when an entire structure burns down with everything in it, that total can rise to six or even seven figures.
While homeowners nearly always carry insurance, renters often forego it, to their peril. Renters insurance tends to be cheap because it covers so much less total property than homeowners insurance. You can often buy renters insurance for under $100 per year through a company like Lemonade. Your premium depends on how much renters insurance coverage you need.
Ask yourself a simple question as a renter: If my house or apartment building burned to the ground and I lost everything, would it strap me financially? It’s hard to imagine the person who could just shrug that off with a “No biggie.”
By all means, research ways to save money on homeowners insurance or renters insurance. Buy as much or as little as you like. But buy it.
Pro tip: If you’ve had the same homeowner’s policy in place for two or more years, it’s a good idea to do some price shopping. This will ensure you’re receiving the best price for your desired coverage. PolicyGenius will provide you with rates from 10+ insurers in just minutes.
Insurance That Some People Need, Some of the Time
Although you probably don’t need nose and palate insurance like an expert sommelier, you do probably need at least a few of the following insurance types.
Don’t dismiss any of these out of hand. Before deciding you don’t need an insurance type, make sure you truly understand exactly what it protects against and your own vulnerability.
Anyone who owns or leases a car needs auto insurance by law. At a minimum, you must maintain liability coverage — coverage for the other driver’s car if you hit them.
You can choose to also buy collision coverage, which protects your own car in a crash. Otherwise, you pay out of pocket to fix your car in a fender bender.
Fortunately, you have a range of other options (besides skimping on coverage) to save money on auto insurance. For example, insurers often offer discounts for drivers with strong credit scores. Students also get a break for maintaining good grades. Some insurers even offer a discount if you put a tracker on your car.
You can reduce your need for auto insurance by reducing the number of cars you insure, or even living without a car entirely. This not only means no car payment, but also no auto insurance, gas, maintenance, parking, speeding tickets, or any of the other car ownership costs, which average $9,282 per year according to AAA.
Pro tip: If you’re looking for new auto insurance, make sure you check out our best car insurance companies.
While most Americans keep some form of health insurance, far fewer have disability coverage. And many don’t understand the difference.
Health insurance covers health care costs. Disability insurance covers your income if you become unable to work due to disability.
Disability is more likely than any of us want to admit. According to Simply Insurance, a 35-year-old has a 50% chance of becoming disabled for a 90-day period or longer before reaching age 65. Each year, around 5% of working Americans will suffer a non-work-related short-term disability.
An unexpected disability can have dire consequences. Nearly half (46%) of foreclosures are caused by disability, per the Simply Insurance report.
Disability insurance comes in two varieties: short-term and long-term disability coverage. As the names suggest, short-term disability replaces a portion of your income for a limited time period, often up to 26 weeks. Long-term disability insurance covers you against the prospect of being unable to work for years. Some disability policies cover you for a fixed time period, such as up to 10 years. Others insure you until you reach retirement age.
The longer the policy coverage and the greater the income included, the more the policy tends to cost. Premiums also vary based on the risk inherent in your career.
Although the name “life insurance” makes for easier marketing than “untimely death insurance,” the latter proves a more accurate description.
Not everyone needs life insurance — but many people do. The primary reason to buy life insurance is the risk that your family would face financial trouble if you shuffled off this mortal coil. The most obvious example is a household with one breadwinner, but even families with two earners usually face hardship if they suddenly drop to one income.
When you buy term life insurance through a company like Ladder, you insure against death for a specific period of time (the “term”). If you meet your maker during that term, the life insurance pays your family the promised claim. If you live through the term, the policy expires, and the insurance company keeps your premium.
In contrast, whole life insurance includes a savings component. A portion of your premium goes toward some form of savings or investment account, which your family receives upon your death, no matter what age you are when you die. Some policies also release the money if you reach a certain advanced age, such as 100.
As a general rule, young single people with no dependents don’t need life insurance. Married couples and families dependent on one or both partner’s income to survive do need life insurance.
Most homes don’t sit in a flood plain, but those that do should have flood insurance.
This fact is not lost on mortgage lenders, who require flood insurance for all homes in flood plains according to nationwide databases.
But even properties not in a “registered” flood plain sometimes suffer a higher risk of flooding than most. My father’s house isn’t in a flood plain, but it sits on a hillside, and the basement floods whenever storms or rainfall reach a certain critical mass.
Many New Orleans homeowners didn’t own flood insurance, as their homes didn’t technically sit in a flood plain. When the levees broke during Hurricane Katrina, those homeowners discovered the hard way that their homeowners insurance didn’t cover flood damage.
If your home sits low on the local water table, or you have other reasons to suspect it’s vulnerable to flooding in unusually terrible storms, price out flood insurance policies. You may find them extremely reasonable since your home doesn’t fall within a flood plain.
When you buy a home, the mortgage lender requires you to buy title insurance. This insurance covers their losses, not yours.
If you don’t buy title insurance for yourself as well, you might answer the door one day to find a stranger claiming they own your house, asking you to kindly get the heck out. Title disputes typically involve legal battles over who technically owns the property, duked out in court by expensive attorneys representing both sides.
Luckily, title insurance policies don’t cost very much. For a one-time fee, you insure against any claims against your legal ownership of your home.
Annuities are a strange hybrid of insurance and investments. They create an income floor in retirement, serving as insurance against you outliving your nest egg.
They work like this: While still working, you buy an annuity, either in a lump-sum payment or a series of regular payments. The insurance company holds the money and invests it while you continue working. After you retire, you contact the insurance company and tell them you want to start receiving payments, triggering “annuitization.” Based on the terms of your agreement, they start sending you monthly payments.
Straight life annuities keep sending you money until you die. Even if you live to the ripe age of 120 and long outlive the money you originally paid in, the annuity continues to pay out.
Other annuities pay for a certain period of time, regardless of when you die, while others pay as long as either your or your spouse continue living.
In today’s world of disappearing pensions, where responsibility for your retirement planning has shifted to you, many people find comfort in the idea of guaranteed lifetime payments. Annuities don’t make sense for everyone, and of course the insurance company usually comes out ahead in the end. But for many, annuities can provide the peace of mind needed to retire.
Insurance for Specific Valuables
My wife and I own almost no physical objects with any value. I bought our 46-inch LED TV used for $200. Our furniture came with our apartment, courtesy of my wife’s employer. My laptop is by far my most expensive possession, and even that will lose nearly all its value within three years.
But my wife’s engagement ring is a family heirloom, worth many times the collected value of all of our other possessions combined. So we insure it individually.
Ordinarily, you can add specific valuables to your homeowners or renters insurance coverage, with a special inclusion listed for it. It adds a little cost to your annual premium, but nothing to lose sleep over.
In our exceptional case, living overseas in employer-provided furnished housing, we don’t have homeowners or renters insurance. (We’re that rare exception to the renters insurance rule above.) That means we need a specific policy for our one valuable possession.
Most insurance policies cover a specific need, up to a specific limit. Your auto insurance, for example, covers your liability in a car crash up to a certain dollar amount.
Umbrella insurance covers every liability in your life beyond the point where your specific insurance coverage stops.
For example, say you got into a car accident in which you left the road and caused $500,000 in damage to a streetfront office building. Your auto insurance only covers liability of $200,000, leaving you on the hook for the other $300,000.
Without umbrella insurance, the building owner could sue you and secure a judgement against you for $300,000, which they could pull from your assets and income.
With umbrella insurance, your provider picks up the tab.
Although many pet owners pay the occasional veterinary bill out of pocket, others take the stance that if they insure their own health, they should insure their pet’s health as well.
Make no mistake: It’s a profitable market for insurers, worth about $1.2 billion according to the North American Pet Health Insurance Association. Should you choose to buy pet insurance, shop around carefully, and beware of sleazy sales tactics that frame insurance options in terms of how much you love your pet.
Insurance for Entrepreneurs & The Self-Employed
People who work for themselves need more types of insurance than most.
Most need errors and omissions (E&O) insurance, also known as professional liability insurance, in the event they get sued over a mistake. These policies vary widely by industry.
If you have employees, you may need workers’ compensation insurance. Even in low-risk office jobs, employees could slip and fall, develop carpal tunnel syndrome, or suffer some other work-related injury and sue you.
If you sell physical products, you might need product liability insurance in case someone injures themselves using your product.
You need property insurance for your business space, unless you operate a home-based virtual business.
The list goes on. You could need data breach insurance, commercial vehicles insurance, possibly even directors and officers insurance.
Because many small businesses revolve around a few irreplaceable people, many buy key person life insurance. It pays out the surviving business owners if they lose one of those key people.
You need certain core insurance policies depending on your profession, family status, and other circumstances.
But in some cases, insurance provides one of several solutions to the same problem. There are types of insurance you can forego as long as you have an alternative plan in place.
Deep Cash Reserves
Many of the insurance policies above protect against some sort of temporary, relatively low-cost setback.
For example, short-term disability insurance often covers some of your living expenses for six months. But if you kept an emergency fund with six months of living expenses in it, would you really need short-term disability insurance? Not only would your emergency fund cover that period, but it can bail you out of any other emergency, not just a temporary disability.
In fact, many financial experts recommend treating your emergency fund like an insurance policy.
Your emergency fund won’t cover $250,000 in damages from totaling someone’s Lamborghini. But it can take the place of some other types of insurance meant to protect against a sudden expense or loss of income.
Pro tip: If you don’t currently have an emergency fund, start one today by opening a high yield savings account.
Layers of Liquid Assets for a Deeper Emergency Fund
I keep some money in cash as part of my emergency fund. But as a relatively aggressive investor, I can’t stand the idea of leaving tens of thousands of dollars sitting around collecting dust and losing money to inflation.
So I keep my emergency fund in several layers. In addition to some cash, I also keep some in a money market account. I also own some US Treasury bonds that are easily liquidated in the form of a Treasury bond ETF. I keep a few other low-risk, short-term investments where I can access money relatively quickly if needed.
But I don’t stop with investments. I also come at the problem of emergency money access from the other side: credit.
Unused Credit Lines
By keeping rotating forms of credit such as low-APR credit cards, home equity loans, and other lines of credit, you give yourself yet another layer of protection against the unexpected. In many cases, these cards or credit lines cost nothing to open and only charge interest if you keep a balance.
Which, of course, you shouldn’t do.
Rather than paying premiums for insurance year after year and hoping you never have to use it, consider layering on multiple sources of funds you can access in an emergency.
Some tax-sheltered accounts offer more flexibility than others. Some work in perfect concert with insurance savings.
As touched on above, you can combine a low-cost, high-deductible health insurance plan with an HSA through Lively. You save money on your insurance policy, which you can then funnel into your HSA and keep for yourself, with triple tax benefits: You can deduct contributions from your income tax bill, they grow tax-free, and you pay no taxes on the withdrawals.
The money won’t go to waste, because you’d better believe you’ll have medical bills come retirement. HSAs can serve as an extra retirement account.
Speaking of retirement accounts, your Roth IRA also comes with plenty of flexibility. You can withdraw contributions to a Roth IRA tax-free at any time.
Consider investing your money in these tax-sheltered accounts rather than lining insurance companies’ pockets with it.
Pursue Financial Independence Earlier
People tend to either love or hate the FIRE movement (financial independence, retire early). But few people fully grasp all of its implications on their finances.
In this context, financial independence refers to the ability to cover your living expenses with passive income streams alone. People who have reached it no longer need to work to pay their bills.
I know a couple who reached financial independence in their early 30s. As a result, they don’t need many of the insurance types listed above that their peers still need.
For example, they don’t need life insurance. If one partner dies, the other will continue earning just as much income because it comes from their joint investments rather than employment income.
They don’t need disability insurance for the same reason. Sure, both partners currently work, but neither needs to work for the money; they do so out of passion.
The couple doesn’t need annuities either. They already have plenty of dividend and rental income to live on indefinitely.
All of this means they can skip those insurance premiums and funnel their money into investments to grow even wealthier.
Everyone needs health insurance and property insurance, all the time.
Most people also need at least one of the other types of insurance on the list above. Drivers need auto insurance. Parents of young children typically need life insurance.
Know when to spend more on a comprehensive policy and when to save and invest your hard-earned money elsewhere. In some cases, it makes more sense to put money toward an emergency fund or income-producing assets instead of paying an insurance company for coverage.
But always have a plan in place for emergencies, from health problems to car accidents to lawsuits and beyond. You don’t need every type of insurance, but you do need a plan for every type of emergency.
What types of insurance do you keep? What types of insurance do you skip, and why?