Editorial note: This guide is for general education, not individualized financial advice. We independently research every topic and cite our sources. Our editorial standards · How we make money.
Quick answer
Most adults need health insurance, auto insurance if they drive, and renters or homeowners insurance. Add life insurance if others depend on your income, disability insurance to protect your paycheck, and umbrella liability coverage as your assets grow. Insure against losses you couldn’t afford; cover small costs from savings.
Key takeaways
- Insurance transfers the risk of large, unaffordable losses in exchange for a predictable premium.
- Liability coverage protects your savings and future income, not just your property.
- A higher deductible lowers premiums — if your emergency fund can cover it.
- Compare quotes with identical coverage limits and deductibles.
In this guide
Insurance is the part of personal finance most people think about least — until they need it. Yet a single uninsured event can undo years of saving and debt payoff. This guide explains the main types of insurance, who needs each one and how to buy the right amount without overpaying.
The principle: insure the big risks
Insurance makes the most sense for losses that are unlikely but financially devastating: a serious illness, a lawsuit, a house fire, a disability that ends your income or a death that leaves dependents without support. Smaller, predictable costs — a cracked phone screen, a minor car scrape — are usually better covered by your emergency fund than by extra insurance.
Key terms
| Term | Meaning |
|---|---|
| Premium | What you pay to keep the policy active |
| Deductible | What you pay on a claim before the insurer pays |
| Coverage limit | The maximum the insurer will pay |
| Liability coverage | Pays others for injuries or damage you cause, plus legal defense |
| Exclusion | What the policy doesn’t cover |
| Rider/endorsement | An add-on that changes coverage |
| Replacement cost | Pays to replace items with new equivalents |
| Actual cash value | Replacement cost minus depreciation |
Health insurance
Who needs it: everyone. Medical costs are one of the largest financial risks households face.
Coverage may come from an employer, the HealthCare.gov marketplace or a state marketplace, Medicaid, Medicare or a parent’s plan (generally available until age 26). When comparing plans, look beyond the premium to the deductible, copays, coinsurance and out-of-pocket maximum, and check that your doctors and prescriptions are covered.
If you have a high-deductible health plan that qualifies, a health savings account (HSA) can offer tax advantages.
Auto insurance
Who needs it: anyone who drives — nearly every state requires liability coverage.
Main coverages: bodily injury and property damage liability, collision, comprehensive, uninsured/underinsured motorist and medical payments or personal injury protection. State minimum liability limits are often low compared with the cost of a serious accident, so many drivers choose higher limits. Details are in our auto insurance section.
Homeowners insurance
Who needs it: homeowners — and your mortgage lender will require it.
A standard policy covers the dwelling, other structures, personal property, additional living expenses and personal liability. Make sure the dwelling limit reflects the cost to rebuild, not the market value. Floods and earthquakes are typically excluded; flood coverage is available through the National Flood Insurance Program and private insurers. See home insurance.
Renters insurance
Who needs it: renters. Your landlord’s policy does not cover your belongings or your liability.
Renters insurance covers personal property, liability and additional living expenses, and is typically one of the most affordable policies relative to the protection it provides. See renters insurance.
Life insurance
Who needs it: anyone whose death would create financial hardship for others — parents, spouses who rely on your income, co-signers on debts.
- Term life covers a set period (for example, 20 or 30 years) at a relatively low cost. It suits most families’ income-replacement needs.
- Permanent life (whole or universal) lasts for life and builds cash value, at a much higher premium.
Estimate your needs by adding income replacement for the years your dependents would need it, debts, future goals such as education and final expenses, then subtracting existing savings and coverage. See life insurance.
Disability insurance
Who needs it: anyone who depends on earned income.
Disability insurance replaces part of your income if illness or injury prevents you from working.
- Short-term disability covers a few months.
- Long-term disability can cover years or until retirement age.
Many employers offer group coverage; check the percentage of income replaced, the waiting period, the benefit period and whether it covers your own occupation or any occupation.
Umbrella insurance
Who needs it: people with significant assets or higher liability risks — for example, homeowners with a pool, landlords or those with teen drivers.
Umbrella policies add liability coverage above your auto and home or renters policies, typically in $1 million increments, and are often relatively inexpensive for the coverage they provide.
Other coverage to consider
- Pet insurance — for unexpected veterinary costs.
- Long-term care insurance — for extended care needs later in life.
- Identity theft coverage — sometimes included with other policies.
Be cautious with narrow policies that duplicate coverage you already have, such as some credit insurance or extended warranties.
How to compare insurance
- Decide on coverage first — limits and deductibles — then compare prices.
- Get at least three quotes with identical coverage.
- Check the insurer’s financial strength and complaint record. Your state insurance department and the NAIC provide information.
- Ask about discounts: bundling, safety features, good driving, paying in full, claims-free history.
- Read the exclusions.
- Review every year and after major life changes.
Prioritizing on a tight budget
If you can’t afford everything at once, prioritize in roughly this order:
- Health insurance
- Legally required auto liability coverage (if you drive)
- Renters or homeowners insurance
- Disability insurance (if you rely on a paycheck)
- Term life insurance (if others depend on you)
- Umbrella coverage as your assets grow
The bottom line
Buy insurance for the losses you couldn’t absorb, choose deductibles your savings can cover, and compare policies on equal terms. Insurance is what protects the financial progress you make everywhere else. Explore more in our insurance hub or see how it fits into your overall plan in financial planning for beginners.
Frequently asked questions
What insurance is legally required?
How do I lower my insurance costs?
What is umbrella insurance?
Do I need disability insurance?
Sources
- State insurance regulators directory — National Association of Insurance Commissioners
- HealthCare.gov — U.S. Centers for Medicare & Medicaid Services
- FloodSmart — National Flood Insurance Program — Federal Emergency Management Agency
This guide is part of our Insurance hub and our complete personal finance guide. Spot an error? Request a correction.