Between health insurance, life insurance, disability, liability, long-term, and even laptop insurance, the task of covering yourself—and thinking about the endless possibilities of what can happen in life—can feel overwhelming. But once you understand the fundamentals and make sure you’re adequately covered, insurance can boost financial confidence and well-being.
Here are the most important types of insurance you need and what they do, plus a couple tips to avoid overinsuring.
Insurances required by law: Health, home, and auto
Start with insurance coverage that is legally required where you live. Different states have different regulations, but you can expect health insurance (which many people get through their employer), auto insurance (if you own or drive a vehicle), and homeowners insurance (if you own property) to be on the list.
Mandatory types of insurance can change, so check up on the latest laws from time to time, especially before you renew your policies. If you’re not covered properly, you could be charged penalties. For instance, in 2021 there is no penalty for not having Affordable Care Act-mandated health coverage unless you live in New Jersey, Massachusetts, or other states where it is required by law.
If you’re considering opting out of health insurance because it’s not mandated, know that data shows access to health insurance coverage has a large impact on subjective well-being and increases overall life satisfaction. Research confirms that the healthier we are, the happier we feel.
One additional insurance type sits in this category but is generally only necessary if you have a high net worth. It’s called umbrella insurance and “covers anything your other insurances don’t,” says Brian Ford, Truist’s head of financial wellness.
Life insurance: Important, but sometimes oversold
If you are dependent on someone else’s income, or have someone dependent on yours, you may need life insurance. Otherwise, you could call this one nonessential. In a life insurance policy, a designated beneficiary receives a sum of money upon the death of the insured person, who has been paying a premium to maintain the plan.
“There are all different types of life insurance,” says Ford, “but you want a plain, vanilla term policy.”
A basic, middle-ground policy should provide ample coverage while being generally inexpensive. In fact, Ford recommends sticking to a basic plan for all necessary insurance, unless your unique situation calls for something specific.
Ford says to steer clear of “cash value or permanent” life insurance, which is more of an investment than an insurance. “Those are very complicated, come with high commissions, and 9 out of 10 people don’t need them. They’re oversold because insurance agents make the largest commissions on these,” he says.
Of course, keep in mind that each person has different financial plans and needs. Work with trusted, accredited professionals to obtain appropriate insurance coverage—preferably agents with CPCU, CIC, CLU, or AAI seals of approval.
Long-term disability insurance: Replaces your income if you can’t work
One of the most overlooked types of insurance is disability. Also known as disability income or simply “DI,” this insurance can protect your career income in the event something prevents you from being able to perform your job. It’s worth looking into and discussing with your family and financial planner if you have a decent income.
Disability insurance can be expensive, however. And for those who opt for long-term care insurance, this policy may make disability insurance unnecessary. Read more about long-term care insurance and whether it’s right for you in the next section.
Long-term care insurance: For expenses related to aging
Long-term care insurance can help pay for expenses associated with long-term care as we 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.
If you have a chronic health concern, this type of insurance could end up being crucial. However, don’t let it stress you or your bank account early in life—it’s generally best to take out a policy in your 50s or 60s with the anticipation that you won’t be using it until your 70s or later.
Because long-term care insurance can be complicated, it’s essential to work with a trusted professional who clearly understands your unique needs.
Business insurance: Protection for small-business owners
If you’re a small-business owner, consider protecting your livelihood by purchasing business insurance. In the event of a disaster-related closure or period of rebuilding, business insurance can cover your income loss.
Consider if a significant weather event affected your storefront or production facility—how would that impact your income? And for how long? According to a report by FEMA, between 40–60% of small businesses never reopen their doors following a disaster.
How to tell what you don’t need
Consider following this insurance philosophy to protect both you and your wallet: Transfer risk for catastrophic things only. Basically, insure only what would be catastrophic to lose. This applies to all insurance types.
“A lot of people buy product replacement insurance at electronics stores, but if your cell phone breaks, will it ruin you financially?” Ford asks. “If you keep saying yes to every insurance, 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.
Plus, using insurance could sometimes cost more than it saves in the long run. For example, if you get a chip in your windshield, you may consider covering the repair expense with your emergency savings instead of your auto insurance. Why? Because using your auto insurance can cause your monthly premium to go up.
Is your holistic insurance picture starting to look more clear? Phew! Knowing that you’re covered where you need it feels great. Share these tips to protect loved ones from being both underinsured and overinsured—and consult with a trusted professional when needed.