Take cover: Why insurance is necessary and which types you really need

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Financial protection amid life’s bumps and bruises.

© Robert Pernell, kaentian, Brett, Gan/stock.adobe.com; Photo illustration Encyclopædia Britannica, Inc.

If you crash your car, get sick, see a tree crush your garage, or worst of all, if you lose someone in your immediate family suddenly, insurance helps cover the financial cost. Different types of insurance address just about every contingency—including events that aren’t catastrophic. So the challenge is deciding what insurance to get and how much coverage you need.

Life is uncertain, so eat dessert first, as the saying goes. But also buy the insurance you need.

Ask most people about insurance and they’ll probably think of catastrophes like the tree taking aim at your garage, but you’re far more likely to use insurance coverage to help pay for less dramatic things like doctor visits, losses from theft, and car repairs after a fender bender. Every adult needs insurance for the protection it provides, but requirements are personal.

Before buying insurance, research how much coverage you need and if you can afford the payments. The deductible—or how much you’re responsible for out of pocket before coverage kicks in—is another thing to decide. Do you need collision coverage for that old car, or is the mandatory liability coverage—the coverage that protects you when an accident is your fault—adequate? How about life insurance—is it necessary at this point? Those are the kinds of questions to ponder.

You could argue there are two types of insurance: the types that are nice to have and the types you absolutely must have.

Mandatory types include auto insurance, if you own a car, and mortgage insurance, if you bought a home with a smaller down payment.

Other common types include:

Not all of these are mandatory, but you should consider health insurance a no-brainer.

Most mortgage lenders require you to have homeowner’s insurance, and many landlords will expect you to have renter’s insurance. Also, if you own a car, your state probably requires that you have auto insurance.

Home and auto insurance are mandatory to protect others from you. Consider why: If you damage someone’s vehicle, but don’t have auto insurance, who pays the bill?

If you guessed the other driver or their insurance company, you’re only partly right. You’ll face consequences including the possible loss or suspension of your driver’s license and the impounding of your vehicle. Driving without insurance puts others at financial risk, so expect to be punished.

At the very least, you could face a fine if you’re pulled over by police for a minor violation and can’t provide proof of insurance. In a worst-case scenario where you hurt someone and don’t have insurance, you might have to declare bankruptcy to cover the victim’s medical costs.

Mortgage insurance is mandatory because defaulting on a mortgage hurts the lender. The insurance you buy means the lender has protection in case you can’t pay. Homeowner’s insurance similarly protects your lender’s investment.

One particular type of insurance isn’t mandatory, but perhaps should be.

If you’re self-employed or unemployed, or your job doesn’t provide health insurance, you should look into your options under the Affordable Care Act (Obamacare), which might allow you to buy some basic protection. The healthcare exchange in your state may have a different name; you can find out at healthcare.gov. Without health insurance, you risk bankruptcy from a major sickness or injury.

Even regular costs like medications and doctor visits can be much pricier without health insurance. High costs might keep you from getting basic care, meaning you’re more likely to seek emergency care when you can no longer handle a health issue without help. A minor issue can become major if you’re unable to seek help early. This can hurt your quality of life and strain community health systems.

Other insurance types depend on your life situation.

Life insurance. If you’re the primary financial provider for your family, life insurance probably makes sense. It will pay a certain amount of money to your family if you die unexpectedly, helping make up for the loss of your salary and future earnings. On the other hand, if you’re single and no one depends on you, maybe you don’t need to buy a life insurance policy yet.

Dental and vision insurance. If you have dental or vision needs, it might make sense to buy insurance if you can. But these are choices, not requirements. Some policies cover just the basics, like a dental policy that pays for two cleanings a year and x-rays. Whether you need more coverage depends on how much dental care you need. If your teeth are generally healthy, it makes less sense to buy a gold-plated policy that provides services you’re unlikely to use.

Trip insurance. Some people like to know that if they can’t go on a long-planned trip due to illness or a family emergency, they’ll get some money back. Others think trip insurance isn’t worth the cost. Plus, we’ve all heard the stories of trip insurance policies that only pay a claim for one or two rare events.

Disability and long-term care insurance. There’s a long debate about whether long-term care insurance makes sense for most people, considering its steep cost. But if you’re pretty sure you’ll end up needing expensive care toward the end of your life, it’s worth checking the price of a policy.

First, decide what you need to have protected. For instance, if you’re renting an apartment, you could:

The deductible is another consideration. This is how much you’ll pay out of pocket before the insurance company starts paying. For a rental apartment, a typical deductible might be $500, meaning you’re responsible for the first $500 in costs before coverage kicks in.

Then research the cost of premiums. As of 2022, the average renter’s insurance policy is $174 per year, but it’s usually a bit higher in big cities.

Shop around. It’s relatively easy to shop for insurance online, but don’t buy the first policy you see. A cheaper policy may save you money but have a high deductible, or the provider may have a reputation for poor customer service. If you want to file claims easily and get quick responses, you may want to pay a bit more.

How risky are you to the insurance company? With some types of insurance, particularly life and auto, the insurance company will want to check you out before they provide coverage. A company selling life insurance needs to get a sense of your age, health, and habits (e.g., tobacco use or existing health conditions). All of these things go into their calculation of how much to charge you.

It may sound unfair, but that’s insurance in a nutshell. Insurance companies stay in business (and turn a profit) by understanding—and setting policy rates around—the odds of a claim and the amount they’ll pay in case one is filed.

For life insurance and some medical policies, you’ll pay more if you’re older or have documented unhealthy habits. If you have a history of banged-up cars or lots of speeding tickets, auto insurance will be expensive. If you live in hurricane alley or on the San Andreas Fault, homeowner’s insurance could be steep.

Insurance can be expensive. But not having insurance can be far more costly, and even illegal. But sometimes your insurance needs come and go. That shiny new car should have collision coverage, as totaling it would be a giant loss. But if you drive an old beater, it might be time to cancel the collision part of your policy and just pay for the part that covers injuries and damage you may cause other cars and their drivers.

During your prime working years, and particularly if you have young children, life insurance is a good idea. It might be hard for them to carry on without your income. But after the nest empties, you might dial back the coverage or eliminate it entirely.

With insurance, you’re playing the same game as the insurance company. You crunch the numbers—assess the odds and the financial ramifications of a claim—and you choose the types of insurance that make the most sense to you.