5 Different Types of Insurance Policies & Coverage That You Need

Financial Planning 1

There are an overwhelming amount of insurance options on the market. While thorough coverage is important, it’s also possible that you can have too much coverage. Paying too much money for insurance could leave you financially vulnerable in other areas, like your emergency fund or retirement savings. How do you know what types of insurance are absolutely necessary, and what’s superfluous?

Let’s start with the 5 basic types of insurance that everyone needs:

1. Health Insurance

What does it cover?

Health insurance covers your necessary medical costs, from doctor’s appointments to surgeries.

Do you need it?

Health insurance is arguably the most important type of insurance. In 2009, over 60 percent of all personal bankruptcies were due to health insurance costs.

When you’re going to purchase health insurance, consider the following:

  • Needs: Young and healthy single persons require less coverage than those with families, the elderly, or persons with chronic health issues. If you think you’re going to be using your insurance frequently, you’ll want to find a plan that has a low deductible and copays.
  • Doctors: If you like your doctor, try and find a plan that allows you to keep your current physician.
  • Cost: Analyze your budget and determine what you can afford. Remember that plans with higher copays and deductibles also have lower premiums, while plans with high premiums usually have lower copays and deductibles.

You probably don’t need it if…

Every adult should have health insurance. Children are usually covered under one of their parents’ plans.

2. Car Insurance

What does it cover?

There are several different types of car insurance: 

  • Liability: Liability insurance comes in two forms: bodily injury and property damage liability. These do not cover the driver or passengers–only pedestrians.
  • Personal Injury Protection: This type of coverage will cover medical expenses related to driver and passenger injuries.
  • Collision: Collision insurance will cover the cost of the damage to your car if you get into an accident, whether you’re at fault or not.
  • Comprehensive: Whereas collision insurance only covers damage  to your car caused byan accident. Comprehensive insurance covers damage related to any cause (it would cover, for instance, a tree falling on your car).
  • Uninsured or Underinsured Motorist: This covers you in the event that the person who hits your car does not have enough insurance to cover the damage.

Always be on the lookout for car insurance discounts when you’re shopping for a plan.

Do you need it?

Yes! Every state requires you to have auto insurance if you’re going to drive a vehicle.

You probably don’t need it if…

If you don’t own a vehicle or have a driver’s license, you won’t need car insurance.

3. Homeowners or Renters Insurance

What does it cover?

Homeowners insurance covers your home against damage and theft. However, you may need additional insurance to cover natural disasters, like flooding, earthquakes, and wildfires.

Renters insurance covers you against damage or theft of personal items in an apartment. 

Do you need it?

Homeowners insurance is absolutely essential because a home is oftentimes one’s most valuable asset.

Renters insurance isn’t as crucial, unless you have a large apartment that has plenty of valuables. But even if you don’t, know that renter’s insurance is usually very low-cost, so it might be well worth the peace of mind it provides.

You probably don’t need it if…

You don’t need homeowners insurance if you don’t own a house. Likewise, you won’t need renters insurance if you’re not renting an apartment.

4. Life Insurance

What does it cover?

Life insurance covers costs associated with dying, such as burial and mortuary fees. If you’re the primary breadwinner of the family, life insurance will also help your family offset lost income. The latter is the main reason why people buy life insurance.

Do you need it?

Life insurance is the type of insurance that most people want to avoid thinking about. However, it’s incredibly important. If you have a family, you also have a responsibility to make sure they’re provided for in the event that you pass before your time, especially if you have children or if you have a spouse that’s not working.

You probably don’t need it if…

Single persons usually don’t need life insurance, although there are other important types of insurance for singles.

5. Disability Insurance

What does it cover?

Disability insurance is similar to life insurance because it provides financial coverage if something happens to you. If you get injured and aren’t able to work, disability insurance will reimburse you for lost income. Disability insurance can cover permanent, temporary, partial, or total disability.

Do you need it?

One-third of all Americans are disabled at some point, so this type of insurance is sensible for everyone, even if you’re young and single.

Disability insurance is relatively affordable, but it could provide tremendous financial help if you become disabled for any length of time. You can learn more at Ssa.gov.

You probably don’t need it if:

Children don’t need disability insurance because they have no income.

5 Unnecessary Insurance Policies

There’s lots of insurance you might not need, such as:

  • Flight Insurance: Flying is one of the safest modes of travel.
  • Life Insurance for Kids: Life insurance exists to replace lost income. Children have no income.
  • Accidental Death Insurance: Even the accident-prone should skip this type of insurance. It generally contains so many restrictions, that it’s nearly impossible to collect.
  • Disease Insurance: A good health insurance policy is probably a far better investment than trying to cover yourself for every type of ailment that’s out there.
  • Mortgage Life Insurance: Here’s another redundant form of insurance. A good life insurance policy with a long term will cover your mortgage in the event of your death.

Should I get pet insurance?

The problem with pet insurance is that it typically doesn’t cover annual vaccinations, spaying, and neutering. Thus, it only becomes valuable if your pet has a serious injury or chronic illness.

However, if your pet is an ingrained part of your family and you’re willing to pay high veterinary costs to treat major illnesses and injuries, pet insurance might be worth the money.

Be Secure, Not Paranoid

Humans have a pretty strong sense of self-preservation, so it’s natural to feel an urge to protect yourself against any and every calamity. Most people would rather pay a little bit of money each month than struggle to come up with a larger amount of money in a time of crisis.

On the flip side, there are lots of people who think they have nothing to worry about, that they probably won’t ever need insurance coverage.

It’s best to take a stance somewhere in between these two mentalities. You should definitely consider buying all or most of the 5 necessary types of insurance mentioned above. These are the most important insurance types that provide huge financial relief for very realistic scenarios.

Outside of the 5 main types of insurance, you should think carefully before buying any additional insurance. If you pay too much money for insurance, you could significantly restrict your budget, and thus, your quality of life.

Only buy additional insurance policies when there’s a reasonable chance you’ll collect. For instance, if you live in earthquake-prone areas of California, earthquake insurance would be a smart investment. Likewise, flood insurance is recommended if you live somewhere that’s prone to flooding. But even if you’re a frequent flyer, you still probably won’t need flight insurance.

Finally, when buying insurance, always make sure you can afford it. Remember, insurance is meant to protect you and your finances, not hurt them. If you need assistance with budgeting, try using a bill payment tracker which can help you maintain all of your insurance payments so you’ll have a better grip on your personal finances.


Comments (10) Leave your comment

  1. The big reason to pick up a transferable juvenile life policy is to insure the child’s insurability should the child develop some kind of sickness or injury that would knock them out of being able to get life insurance in the future. It’s cheep and it’s about looking out for your child’s financial well being in the future.

  2. […] Insurance is incredibly important, and don’t be like all the people who didn’t think twice about insurance until something bad happened. It’s always better to be prepared than be stuck in a situation where you wish you would have looked into proper insurance. Accidents happen and there really is no way of preventing them, so being prepared for them can be critical. […]

  3. Singles don’t need Life insurance? I did not know they were immortal, and only gain mortality when they get married. Life Insurance is a gift of love. Given out of concern for the financial wellbeing of a loved one left behind. The fact is, everyone dies, and dying is expensive. Someone will have the financial burden and stress of planning and taking care of the final arrangements and disposition of the remains. Obviously, if you don’t have the maturity, foresight and love your parents enough to provide for this untimely event, insurance won’t be paying for it. Your parents will. They will have to pay for it while suffering the grief of the greatest loss a parent can ever feel. Congratulations.

  4. Thanks for explaining the types of car insurance coverage. My husband wants to start looking at auto insurance quotes soon. Your article should help him choose the right insurance coverage for his needs!

  5. It was helpful when you explained that having personal injury protection in our insurance coverage means that the driver and passengers will be covered for medical expenses in the case of injury. My sister will be buying her first car next month and asked for my help choosing a good auto insurance policy. I’m glad I read your article so I can more accurately advise her about which types of coverage to get!

  6. I loved that you mentioned you need to consider buying insurance that allows you to keep your doctor. My sister is thinking about buying a life insurance plan, and we are looking for advice. I will let her know about the importance of buying a policy that allows her to keep her doctor.

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