Why You Need Insurance

Insurance protects you from paying out of pocket if something bad happens. Learn about the types of coverage you need.
Robin Hartill, CFP®
By Robin Hartill, CFP® 
Edited by Lisa Green

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Nerdy takeaways
  • Without proper insurance, one unexpected event could deplete your savings.

  • Medical insurance is often necessary to pay for routine care in addition to major expenses.

  • Property and casualty insurance protects your property and shields you from legal liability.

Insurance offers a vital safety net, protecting you against financial loss if something bad happens. One unexpected event — like a car accident, an emergency room visit or a storm that damages your home — could easily wipe out your savings. Insurance helps you manage the risk of a financial disaster. Let’s look at some basic types of insurance and when you might need them.

Medical insurance

Medical insurance helps cover your expenses if you’re hit with a big health-related bill. It’s also frequently used to pay for routine preventive care. The basic types of medical insurance are:

Health insurance

Even if you’re young and healthy, you need health insurance. If you don’t have insurance and you’re not covered by a program like Medicare or Medicaid, you’ll likely have to pay 100% of your health care costs out of pocket. Hospitals typically charge uninsured patients anywhere from two to four times what they’d charge an insurance company or public program.

Often, uninsured people must pay upfront to receive care.

Many people receive health coverage through their jobs. If you don’t work for a company that offers health insurance or you’re self-employed, you can shop for a plan on the Health Insurance Marketplace using healthcare.gov.

Dental insurance

Dental insurance pays for most preventive and basic dental care, like cleanings, checkups and fillings. If you need a major procedure, like a root canal, many plans will only pay around 50%. Still, dental insurance is often worth the cost if you take advantage of preventive care.

Vision insurance

Vision insurance pays for a portion of basic eye care, including eye exams, eyeglasses and contact lenses. If you don’t wear eyeglasses or contact lenses and only require an occasional eye exam, vision insurance may not be worth the cost.

Property and casualty insurance

Property insurance protects the things you own, like your house or car. Casualty insurance protects your assets in case you’re found legally liable for an injury or property damage. These two types of insurance are frequently lumped together in a single policy.

Homeowners insurance

Homeowners insurance helps you pay for repairs and replacement costs if your home is damaged by certain disasters, like a fire, or you’re the victim of vandalism or theft.

Insurance Information Institute. Which disasters are covered by homeowners insurance?. Accessed Aug 12, 2023.
Most policies help pay for temporary housing if you’re unable to live in your home due to a covered loss. Your homeowners insurance can also help pay to defend you or cover medical bills if someone is injured on your property.

Though homeowners insurance isn’t required by law, your lender will probably require it if you have a mortgage. Even when it isn’t required, you don’t want to skip homeowners insurance due to the exorbitant costs of a major repair or rebuilding your home altogether.

Renters insurance

Your landlord probably has insurance on the property you rent, but most landlords’ policies only cover damage to the building and not your personal belongings. Renters insurance helps pay for the cost of replacing your belongings, like your furniture, clothing and electronics. It also offers liability protection and assistance with temporary housing costs if your unit becomes uninhabitable.

Some landlords require renters to have insurance. Even when it isn’t required, renters insurance is a wise choice, and it may cost less than you expect. The typical monthly premium for renters insurance ranges from $8 to $21, depending on your state.

Auto insurance

An auto insurance policy can financially protect you in the event of an accident, or if your car is stolen. Almost every state requires a minimum amount in order to drive legally. These minimum requirements include liability insurance, which pays for injuries or property damage you cause if you are at fault in an accident.

Damage to your own car is covered by two optional coverage types called comprehensive coverage and collision coverage, though they are typically required if you lease or finance your car. These coverage types, when combined with your state’s minimum requirements, are referred to as full coverage car insurance.

Most insurance companies offer optional types of car insurance coverage that can provide additional financial protection. For example, many insurers offer rental reimbursement, which pays for a rental car if yours is in the shop for a covered claim.

Pet insurance

Any pet parent who believes they wouldn’t be able to afford a major vet bill out of pocket should shop for pet insurance. Veterinary bills can add up quickly when your furry friend is sick or injured. For example, the cost of canine intestinal blockage surgery could be anywhere from $800 to $7,000, according to the Canine Journal.

Flood insurance

Most water damage caused by flooding isn’t covered by a standard homeowners insurance policy. That’s a serious concern for homeowners given recent severe weather events like Hurricane Ian in Florida, record-breaking rain in Montpelier, Vermont, and historic flash floods in Kentucky. You’ll need separate flood insurance to cover these types of damages.

Your lender will require flood insurance if you live in a FEMA-designated “special flood hazard area.”

Federal Emergency Management Agency. Understanding Flood Risk: Real Estate, Lending or Insurance Professionals. Accessed Aug 14, 2023.
But even when it’s not mandatory, homeowners should assess their flood risk to determine if a separate policy makes sense.

Umbrella insurance

An umbrella insurance policy kicks in if you’re responsible for damages or injuries that exceed the limits of your other policies, like homeowners and auto insurance. It often pays for your legal costs as well. Umbrella insurance isn’t legally required, but if you own property or have significant assets, consider an umbrella policy for additional protection.

Other types of property and casualty insurance

You may need other types of property and casualty insurance based on your situation. For example, earthquake insurance is probably necessary if you live near a fault line, as standard homeowners and renters policies don’t cover earthquake-related damage. If you own a boat, snowmobile, golf cart or all-terrain vehicle, you’ll need power sports insurance. Landlord insurance is a must if you own a property that generates rental income.

Life insurance

Would your death place a financial burden on others? If the answer is yes, then you need life insurance. If you’re not sure, ask yourself the following:

  • Does your partner or spouse rely on your income?

  • Do you have children or other dependents who rely on your income?

  • Could someone else inherit your debt, like a co-signer or joint account owner, or your spouse if you live in a community property state?

  • Would your funeral place a financial burden on loved ones?

  • Is your estate large enough that it could be subject to federal estate tax?

  • Do you own a business that employs people that would likely fail in your absence?

If you answered yes to any of these questions, life insurance is a must. In most situations, term life insurance will be sufficient to meet your needs.

Disability insurance

A 20-year-old worker has about a 1 in 4 chance of becoming disabled before reaching retirement age.

Social Security Administration. Disability Benefits. Accessed Aug 13, 2023.
Qualifying for Social Security Disability Insurance (SSDI) can be difficult, given that only 21% of initial claims were approved on average between 2010 and 2019.

Disability insurance replaces part of your income if you become unable able to work due to an illness or injury. Many employers offer disability insurance, but if you’re self-employed or your employer doesn’t offer coverage, consider buying individual short-term and long-term policies.

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