Key points
- The most important types of insurance are auto, home, renters, umbrella, health, long-term care, disability and life.
- Assessing your personal insurance needs and budget constraints with an insurance agent can help you determine which policies to buy and how much coverage you need.
- Insurance policies can protect you financially when unforeseen problems damage your home, car or health.
8 types of insurance you need
Insurance can be a cost-effective way to protect yourself financially from expensive issues like a house fire, car accident or serious health condition. Understanding the different types of insurance and coverage options available can help you determine what is best for your needs and budget.
Depending on your personal circ*mstances, you may want to consider:
- Car insurance
- Homeowners insurance
- Renters insurance
- Umbrella insurance
- Life insurance
- Health insurance
- Disability insurance
- Long-term care insurance
Car insurance
Almost all states require car insurance, making it illegal to drive without coverage. Your state mandates which types of coverage and the minimum amount you have to buy. But it’s wise to buy more than the required minimum to avoid being underinsured in a major accident, especially if you’re at fault.
Here are the types of car insurance you can buy to pay for injuries and property damage after an accident.
- Liability coverage. This coverage pays others for their injuries and property damage if you cause an accident. It also pays for your legal defense and any settlements or judgments if you’re sued because of the accident, up to your policy limit.
Though buying the minimum coverage required by your state can be tempting, a good rule of thumb is to buy enough liability insurance to cover what you stand to lose in a lawsuit.
Bodily injury claims nationally average around $20,000 per claim, according to Adam Pichon, spokesperson for LexisNexis Risk Solutions. If you don’t have enough liability coverage, you could face a court judgment and possibly wage garnishment to pay what your insurance doesn’t cover.
- Comprehensive and collision coverage. These coverages work together to pay for damage to your vehicle. Comprehensive insurance covers theft and damage to your vehicle from fire, hail, floods, falling objects (like tree branches) and animal collisions (like hitting a deer). Collision insurance pays for damage to your vehicle from hitting an object like a pole or building, even if you were at fault.
These optional coverages may be beneficial, especially if you have a newer car or if you can’t afford to repair or replace it. If you have a loan or lease, your lender may require you to have collision and comprehensive car insurance.
Collision claims are also rising, averaging around $6,000, with more than 20% of vehicles being totaled after an accident, according to Pichon. “The cost to replace the car you have now has gone up significantly, so you’re taking a major risk not carrying coverages on your own car.”
- Uninsured/underinsured motorist coverage. If a driver hits your car and doesn’t have insurance, or is underinsured, this coverage pays for your medical expenses as well as those of your passengers. It can also cover your lost wages and pain and suffering.
- Personal injury protection (PIP). PIP helps pay medical expenses for you and your passengers, regardless of who was at fault for an accident. It can also reimburse you for lost wages and for services you can no longer perform because of an injury, such as child care. PIP is required in some states, optional in some and unavailable in others.
- Medical payment (MedPay) coverage. MedPay can cover your medical expenses, and those of your passengers, if you’re hurt in an accident, regardless of who was at fault. MedPay is usually sold in small amounts between $1,000 and $5,000.
Car insurance companies offer necessary and optional coverages so you can customize your policy to fit your needs.
Comparing car insurance quotes can help you find the best price on the coverages you need. If budget is a concern, consider cheap car insurance companies to gather quotes.
To save, Pichon also recommends increasing your deductibles if you can afford out-of-pocket expenses but want to save on the premium for comprehensive and collision coverage.
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Homeowners insurance
If you own a house, you may only be required to carry homeowners insurance if your lender requires it. But as one of your largest assets, having home insurance can be an affordable way to protect yourself financially. If your house gets significantly damaged or destroyed by a covered problem, like in a house fire, you’ll want enough coverage to be able to repair or rebuild your house and replace your personal belongings.
A standard homeowners insurance policy includes six coverage types.
| COVERAGE TYPE | COVERS | TYPICAL COVERAGE AMOUNT |
|---|---|---|
Dwelling | Structure of your house and its attached structures if damaged by a covered problem in your policy. | Enough to rebuild your house back to its prior state. |
Other structures | Detached structures on your property, like a shed or gazebo, if damaged by a covered problem. | 10% of your dwelling coverage limit. |
Personal property | Your personal belongings if they’re damaged by a covered problem. | 50% to 70% of your dwelling coverage limit. |
Loss of use | Additional living expenses if you’re displaced while your house is being rebuilt if it’s left uninhabitable after a covered problem. | 20% of your dwelling coverage limit. |
Liability | Someone else’s medical expenses or property damage fees if you’re at fault for injury or damage. Also covers your legal expenses if you’re sued over the matter. | $100,000 to $300,000, depending on the insurance company. |
Medical payments to others | Someone else’s medical expenses if a guest is injured in your house, regardless of who was at fault. | $1,000 to $5,000. |
Having enough homeowners insurance to rebuild your house is vital. At least 20% of homes are underinsured, according to industry trends, said Cole Winans, spokesperson for LexisNexis Risk Solutions. While this may not impact minor claims, it can be devastating to find out you don’t have enough coverage after a catastrophic loss. Winans said about 95% of catastrophic claims are weather-related, mostly hail and wind damage.
Winans recommends working closely with your insurance agent to ensure you have enough coverage for your dwelling, both interior and exterior. He said almost half of homeowners claims (47%) are for interior damage. You can help ensure you’re adequately covered by doing an interior self-inspection and home inventory, which includes all your belongings in the home.
If you also own a car, one of the biggest discounts available is the home and auto bundle, which you may get if you insure both with the same insurer. Comparing quotes can also help you find the cheapest home insurance without sacrificing the coverage you need to protect your assets.
Renters insurance
Renters insurance offers great value, as it is usually affordable and can provide tens of thousands of dollars in coverage for your belongings and hundreds of thousands of dollars in liability protection.
A renters insurance policy includes:
- Personal property coverage. Renters insurance covers your personal belongings in case of a covered loss, like having your rental broken into, items stolen and your furniture vandalized. Many insurers have a minimum limit for personal property coverage, such as $15,000 or $20,000. While that amount may be sufficient, it’s worth taking the time to inventory your belongings to gauge their worth and see if you need more coverage.
- Liability coverage. This coverage pays others for injuries and property damage, and your legal costs if you’re held liable for injuring someone else or causing property damage to others. Liability coverage starts at $100,000, but you could need more if you have higher assets. In general, it’s a good idea to have as much liability coverage as you stand to lose in a lawsuit.
- Additional living expenses coverage. Suppose your rental cannot be lived in while being repaired or rebuilt after a covered loss. In that case, the additional living expenses coverage will help cover extra costs you incur, like staying in a hotel or boarding a pet.
- Medical payments coverage. This pays for a guest’s injuries if they’re injured in your rental house, regardless of who was at fault. You can typically get $1,000 to $5,000 in medical payments coverage.
Even though renters insurance is not a legal requirement, the Safehome.org 2022 Renter’s Insurance Industry Report found that 75% of landlords require tenants to carry coverage.
Renters insurance costs an average of $14 a month for $15,000 in personal property coverage and $100,000 in liability coverage with a $2,000 deductible, based on our analysis of rates.
According to Safehome’s report, at least 85% of policyholders receive at least one discount, making it even more affordable for most.
Umbrella insurance
“Umbrella insurance can provide coverage for injuries, property damage, certain lawsuits, slander, libel and personal liability situations” that exceed underlying liability limits on your auto and home policies, said Quentin Coolen of Waffle Insurance.
People with assets above the maximum liability coverage on their auto, home or renters insurance policies are ideal candidates for umbrella insurance.
The cost of umbrella insurance depends on several factors, including how many cars and homes you own, the ages and driving records of insured drivers and any recreational vehicles you have, like a boat or RV.
Here is the average cost of personal umbrella insurance for a household with one house, two cars and two drivers, according to a report by ACE Private Risk Services:
- $383 annually for $1 million in coverage.
- $474 annually for $2 million in coverage.
- $608 annually for $5 million in coverage.
- $999 annually for $10 million in coverage.
Life insurance
Buying life insurance can help prevent financial hardship for your loved ones when you die. In its 2022 Insurance Barometer Study, LIMRA, an industry-funded research firm, found 44% of American households would face financial hardship within six months of the primary wage earner’s death. Twenty-five percent would struggle in the first month.
While LIMRA’s 2023 Barometer Study found that 39% of consumers intend to buy life insurance by next year, 41% feel they don’t have enough coverage, whether they already own or still need to purchase coverage.
Finding the best life insurance depends on your coverage needs, health and budget. There are two main types of life insurance: term life insurance and permanent life insurance.
Term life insurance
Term life insurance is coverage that allows you to lock in your rates for a set period of time, usually 10 to 30 years. Your coverage expires at the end of the level term period unless you renew the policy or convert to a permanent life policy, but after the level term period your coverage costs could be much higher.
Temporary financial needs, like income replacement during your working years, paying off a mortgage and student loans or funding your child’s education, can be a good fit for term life insurance. This policy is typically more affordable than buying permanent life insurance.
Permanent life insurance
Permanent life insurance offers lifetime coverage and the opportunity to build cash value. You can use the cash value while still alive by taking out a loan or withdrawing the funds. If you decide to cancel the policy, you’ll receive the cash value balance minus surrender charges.
Universal life insurance, whole life insurance, variable life insurance and final expense insurance are all types of permanent life insurance. Cash-value life insurance can help cover burial and final expenses, leave an inheritance or transfer wealth to future generations. Six in 10 Gen Z and Millennials own permanent life policies, according to the 2023 Barometer Study.
Health insurance
Health insurance helps people pay for health care costs, like doctor visits, surgeries, medications, therapies and hospital stays. Census Bureau data shows only 8.3% of Americans, or 27.2 million, didn’t have health insurance in 2021. With the average three-day hospital stay costing around $30,000, according to Healthcare.gov, many Americans cannot afford to go without coverage.
Many Americans can get health insurance through their employer or purchase private health insurance through the federal health insurance marketplace. The average cost of health insurance varies significantly by age, plan type, metal tier and insurance company.
For a 30-year-old, the average monthly price for an Affordable Care Act (ACA) plan is:
- $928 for a Bronze plan.
- $1,217 for a Silver plan.
- $1,336 for a Gold plan.
Those who qualify for premium tax credits or subsidies may be eligible for lower rates, depending on their total household income. Purchasing a high deductible health plan can make premiums more affordable, with the added tax-free savings of a health savings account.
Health insurance is usually only available during open enrollment periods, which varies by insurance company. For marketplace plans, open enrollment is from November 1 to January 15 unless you have a qualifying life event, like having a baby or getting married.
Disability insurance
Disability is an often overlooked type of insurance, according to Matt Schmidt, co-founder of Diabetes Life Solutions. Long-term disability insurance is especially important, as almost 1 in 5 Americans will have a disability lasting at least a year before they reach 65.
Although nearly 25% of 20-year-olds today will become disabled before age 67, 65% of workers in the private sector don’t have long-term disability insurance coverage, according to the Social Security Administration (SSA).
While work-related injuries and illnesses occur, they are usually not the most common reasons people become disabled. The Council for Disability Awareness lists the top five disability causes as:
- Musculoskeletal: Arthritis, chronic joint pain and other disorders of the muscles, joints and back.
- Cancer: The most common in young adults are lymphoma, leukemia, testicular, melanoma and breast cancer.
- Injuries and poisoning.
- Heart disease.
- Mental disorders.
Disability insurance can provide between 40% and 70% of income replacement once you pass the waiting period. Group disability insurance or individual coverage outside of work may offer more coverage than Social Security benefits, which average $1,483 a month for disabled workers. And SSA disability insurance is notoriously difficult to qualify for.
Without disability insurance as part of your financial planning strategy, if you get a long-term disability, Schmidt said you would “most likely exhaust savings, possibly dip into retirement accounts for living expenses or possibly become bankrupt.”
Long-term care insurance
The Department of Health & Human Services estimates adults turning 65 have a 70% chance of long-term care needs during the rest of their lifetime, with the average U.S. male needing 2.5 years of long-term care (LTC) services and U.S. women needing an average of 3.6 years of services. The average cost in today’s dollars for a 65-year-old needing long-term care in the future is $120,900.
While Americans can purchase individual long-term care, less than 8% have coverage. A traditional long-term care policy for a single 55-year-old female and male with 3% inflation growth coverage is $3,700 and $2,220 per year, respectively, according to the American Association for Long-term Care Insurance. The best time to apply for long-term care insurance is between ages 55 and 65. As you age, the cost of long-term care insurance will increase.
Although long-term care insurance can be costly, so can the cost of care. The average monthly median cost in 2021 nationwide for in-home care was around $5,000, whereas a semi-private room in a nursing home costs almost $8,000, according to Genworth data. You can use Genworth’s free online calculator to estimate your future cost of care by location to help you determine how much long-term care coverage you need.
“I often stress to clients that Long Term Care insurance isn’t about paying the nursing home,” said Herman Thompson, Jr., a certified financial planner at Innovative Financial Group. “It’s about making sure that you can afford the type of care you want, where you want it. LTC insurance provides the means to make it voluntary instead of compulsory.”
Frequently asked questions (FAQs)
The main types of insurance include:
- Car insurance.
- Home insurance.
- Renters insurance.
- Umbrella insurance.
- Life insurance.
- Health insurance.
- Disability insurance.
- Long-term care insurance.
Evaluate each insurance type to determine which coverage you need and how much is enough to protect yourself financially.
The most important insurance to have depends on your individual needs. For example, if you own a car, you need car insurance to drive legally.
If you own a home, homeowners insurance provides financial protection against claimable losses and might be a lender requirement if you have a mortgage.
Life insurance is a need for anyone who has financial dependents.
If you can’t afford to pay for your health care costs in full, health insurance can help.
Working with a knowledgeable insurance agent can help you determine your insurance needs and which policy types are most important.
The first step to choosing an insurance policy is determining the type of insurance you need. For instance, if you own a newer car, you may need a full coverage auto insurance policy. But, if your vehicle is older with little value, you may only need liability-only car insurance.
For health insurance, determine how often you use health care services and what you can afford to pay out of pocket for coverage and premiums.
Consider disability insurance to replace a portion of your income if you become disabled and life insurance if someone would experience financial hardship if you were to pass away.
An insurance agent can help you understand your insurance needs and help you choose an insurance policy to meet those needs best.
