The Essential Types of Insurance Policies You Need and When

Insurance provides financial protection in the case of unforeseen and unfortunate events, such as illness, loss, damage, or death. 

These costs can be so high that they may empty all your savings. With insurance, we pay a premium for the peace of mind that, if something happens, the costs may be covered.

There are many different types of insurance, and so much to consider — like how much to get, when to get it, and whether it’s even necessary. It can be hard to balance the financial risks of tomorrow’s unforeseen incidents versus the cost of purchasing insurance today.

Personally, I regret not having bought disability insurance earlier in life because now, in my 40s, I am paying the price with a higher premium and having to jump through more hoops to get it.

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Home Insurance

Home insurance protects your home and belongings from unexpected damages or loss, such as from a fire or burglary. It also covers liability in case someone is injured on your property.

“Without insurance, a homeowner would have to pay for all the costs of rebuilding out of pocket,” explains Melanie Musson, an insurance expert with InsuranceProviders.com

When to get home insurance

A bank will generally require you to have home insurance upon purchasing your property.

If you’re a renter, you can consider renters insurance, which protects your personal belongings.

Health Insurance

Health insurance covers certain medical expenses, such as medication, treatment, and hospital stays. Without it, one injury or hospital stay could easily wipe out your savings.

When to get health insurance

You should obtain health insurance as soon as the coverage from your parent's or guardian’s plan stops.

If you’re starting a new job, check if your employer offers health coverage. Otherwise, you’ll need to get it externally. 

You can shop around and purchase directly from a health insurance company or search for a plan on the U.S. government’s online Health Insurance Marketplace. If you’re self-employed, you’ll need to do this. 

If you have a low income, you may qualify for low-cost coverage through Medicaid.

RELATED: What Is an HSA and How Does It Work?

Life Insurance

“Life insurance ensures your loved ones are financially secure if something happens to you, providing for debts, living expenses, and future needs like education,” explains Jack Elder, SVP of Advanced Markets at CBS Brokerage.

You can also use life insurance as an investment if you opt for a permanent life insurance policy.

“One of the valuable features of permanent life insurance policies is the ability to build cash value over time,” says Elder. 

“As you make premium payments, a portion of that money goes into the policy’s cash value account, where it grows on a tax-deferred basis. Over the years, this cash value can become a flexible financial resource you can tap into, such as when unexpected needs arise.”

READ MORE: Life Insurance vs. 401(k): Which Is Better for Retirement?

When to get life insurance

You’ll want to get life insurance if you have any dependents or are carrying debt that you don’t want passed down to your family.

Consider life insurance if you’re getting married, have children, are supporting a family member, or taking out a mortgage.

Disability Insurance

Disability insurance (DI) protects your income if you’re unable to work due to illness or injury, usually in the form of monthly benefits.

While many employers offer life and DI coverage, Elder says these are often insufficient — coverage amounts may be too low, and policies may not be portable if you change jobs.

In this case, you can obtain personally owned disability insurance through an insurance agent or broker, financial advisor, or insurance company directly.

When to get disability insurance

Musson says anyone with a job should get disability income. 

“If you depend on your income, you need a way to maintain your lifestyle if you’re unable to work. Disability insurance will help you pay for life’s expenses if a disability keeps you from work.”

Car Insurance

Car insurance covers the cost of repairs for damage to your vehicle. It also covers liability if you’re at fault in an accident.

There are different levels of car insurance to choose from. In addition to liability, you’ll want to consider collision coverage, which covers your vehicle, and comprehensive coverage, which covers non-collision incidents like vandalism and theft. 

When to get car insurance

Car insurance is mandatory in most states, so you’ll likely need to get it once you own or lease a vehicle.

READ MORE: Here’s the Best Way to Shop for Car Insurance

Travel Insurance

Travel insurance protects you if things go wrong on a trip, such as if your flight is delayed or canceled, your luggage is lost, or you have a medical emergency. 

If you’ve ever bought a flight, you’ve likely been prompted at checkout to add on optional cancellation insurance.

When to get travel insurance

If you’re taking a trip, it’s a smart move to get travel insurance. Some countries and tour operators even require it. 

How much insurance you get depends on the trip. If you’ll be doing high-risk activities, you’ll want a policy that includes injuries from those things. If you’ve prepaid a lot of pricey, nonrefundable costs, you may want cancellation insurance in case your flight is changed. 

Many credit cards have travel insurance already included, provided you book the trip with that card. Check before you book whether your card has an insurance benefit.

COMPARE: Best Credit Cards With Travel Insurance

FAQs

What types of insurance are not recommended?

There are certain types of insurance where the ongoing premium costs likely outweigh the risks they mitigate. Or you may have broader coverage through other insurance policies.

For example, credit card insurance, pet insurance, and extended warranties for electronics may be easily covered by savings or home insurance add-ons.

Should you get life insurance in your 20s?

Elder says getting life insurance in your 20s is a smart financial decision, since “premiums are lower at this age and purchasing a policy early locks in affordable coverage.”

Even life insurance offered by your employer might not be enough.  

“Employer-provided life insurance might not offer enough coverage, and it's often tied to your job, meaning it might not go with you if you leave,” says Elder. “In this case, you would obtain it externally, through an insurance agent, broker, or financial advisor.”

Which type of insurance is required by law?

Most states require auto insurance. Some states apply a tax penalty for those who don’t have health insurance. Mortgage lenders often require home insurance.

Some states require specific forms of health insurance under the Affordable Care Act (ACA).

How much insurance do I need?

The amount of protection you should have depends on your unique financial situation, life stage, and personal needs.

“For instance, it can be beneficial to secure a small life insurance policy for young children, particularly if they have health concerns,” says Zhaneta Gechev founder of One Stop Life Insurance.

“In your 20s, it’s advantageous if you can secure a higher coverage amount to lock in your insurability, especially if you plan to start a family later. However, it’s essential to strike a balance, as over-insuring can lead to unnecessary expenses.” 

For some insurances such as life insurance, seeking professional advice is ideal to evaluate the right level of protection.

TL;DR: Why You Need Insurance

Insurance acts as a safeguard for your finances, allowing you to recover financially from unforeseen losses, damage, or illness such as medical emergencies, accidents, or untimely deaths.

As Musson explains, “Insurance requires a premium, but it’s something you can budget for. In return, you won’t lose everything you’ve worked to build if disaster strikes.”

For more tips on managing your money and preparing for the future, check out these episodes of the Erika Taught Me podcast:

• 10 Steps Towards Financial Wholeness
• Get Past Your Money Mistakes
• How To Set Your Kids Up Financially

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