Insurance companies want you to buy every policy they offer. But here’s the truth: some coverage protects your financial future, while others just drain your wallet. The difference between the two can mean thousands of dollars each year—and potentially the difference between financial recovery and bankruptcy after a crisis.
Understanding which types of insurance you actually need starts with recognizing what truly threatens your financial stability. You need protection against catastrophic losses that could wipe out your savings or plunge you into debt. Everything else? That’s optional at best, and wasteful at worst.
The 7 Types of Insurance Worth Your Money
1. Health Insurance
Medical bills are the leading cause of bankruptcy in America. A single hospital stay can cost tens of thousands of dollars, and chronic conditions can drain your savings faster than almost anything else.
You need health insurance even if you’re young and healthy. One accident or unexpected diagnosis can change everything. If your employer offers coverage, take it. If not, explore marketplace options or high-deductible plans paired with Health Savings Accounts.
The key is having some coverage in place. You can adjust your deductible and coverage levels based on your budget, but going completely uninsured puts everything you’ve worked for at risk. Just like creating a realistic budget protects your monthly finances, health insurance protects your long-term financial foundation.
2. Auto Insurance (If You Drive)
Most states require auto insurance, but even if yours doesn’t, you need it. The financial liability from a serious accident can haunt you for decades.
Focus on liability coverage first. This protects you when you’re at fault and someone else gets hurt or their property gets damaged. Aim for at least $100,000 per person and $300,000 per accident in bodily injury coverage, plus $50,000 in property damage coverage.
Collision and comprehensive coverage matter too if your car has significant value. If it’s worth less than $3,000, you might skip these and save the premium money instead. Just remember that you’ll pay out of pocket for repairs or replacement if something happens.
3. Homeowners or Renters Insurance
Your home and belongings represent a huge financial investment. Homeowners insurance protects that investment against fire, theft, weather damage, and liability claims.
If you rent, you still need coverage. Renters insurance is incredibly affordable—often $15 to $30 monthly—and protects your personal belongings plus provides liability coverage. Your landlord’s policy covers the building, but not your stuff.
Many people underestimate how much their belongings are worth. Add up your furniture, electronics, clothing, kitchen items, and everything else. You’d probably need $20,000 to $50,000 to replace it all. That’s precisely what renters insurance covers.
4. Disability Insurance
You’re more likely to become disabled during your working years than to die. Yet most people focus on life insurance while ignoring disability coverage.
If you couldn’t work for six months, could you pay your bills? Disability insurance replaces a portion of your income when illness or injury prevents you from working. Many employers offer this benefit, sometimes even paying the full premium.
Look for coverage that replaces 60-70% of your income with benefits lasting until retirement age. The elimination period—how long you wait before benefits start—affects your premium. A 90-day waiting period costs less than 30 days, which works fine if you have emergency savings built into your budget.
5. Life Insurance (If Anyone Depends on Your Income)
Life insurance isn’t for you—it’s for the people who rely on your income. If you have a spouse, children, or anyone else who would face financial hardship if you died, you need life insurance.
Term life insurance gives you the most coverage for the lowest cost. A healthy 35-year-old might pay $30 to $50 monthly for a $500,000 policy lasting 20 years. That’s enough to replace years of income, pay off the mortgage, and fund children’s education.
How much do you need? Multiply your annual income by 10 to 15, then add any major debts. A person earning $60,000 with a $200,000 mortgage should carry at least $800,000 in coverage. If you have no dependents, you can probably skip this coverage entirely.
6. Umbrella Liability Insurance
Once you’ve built some wealth, you become a bigger target for lawsuits. Umbrella insurance kicks in when you exhaust the liability limits on your auto or homeowners policy.
For about $200 to $400 annually, you can add $1 million in additional liability coverage. This protects your assets if someone sues you for a serious car accident, an injury on your property, or even certain lawsuits unrelated to your home or car.
You need umbrella coverage once your net worth exceeds $500,000, or if you have significant income that could be garnished. It’s cheap protection against worst-case scenarios that could otherwise destroy decades of careful financial planning.
7. Long-Term Care Insurance
Healthcare in retirement extends beyond Medicare. Long-term care—whether in-home help or nursing home care—costs $50,000 to $100,000 annually and isn’t covered by regular health insurance.
The ideal time to buy long-term care insurance is your mid-50s to early 60s. You’re still healthy enough to qualify for reasonable rates, but old enough that the premiums won’t drain your budget for decades.
This coverage isn’t for everyone. If you have substantial assets (over $2 million), you might self-insure. If you have minimal assets, Medicaid will eventually cover care. But if you’re in the middle—with retirement savings you want to protect—long-term care insurance prevents a nursing home stay from depleting everything you’ve saved.
The 3 Types of Insurance You Can Skip
1. Extended Warranties
Extended warranties on electronics, appliances, and cars are almost always bad deals. The products either last longer than the warranty anyway, or the warranty includes so many exclusions that claims get denied.
Companies push extended warranties because they’re incredibly profitable—for them. You’re better off setting aside the warranty cost in savings. If the product fails, you’ll have money to repair or replace it. If it doesn’t, you keep the money.
2. Life Insurance on Children
The purpose of life insurance is income replacement. Children don’t earn income, so insuring their lives doesn’t protect your family financially. Yes, final expenses exist, but they don’t justify ongoing premiums.
Insurance companies market these policies as "investments" or "gifts," but the returns are terrible compared to actual investment accounts. Take the monthly premium and invest it instead—your child will have more money when they’re older.
3. Credit Card or Identity Theft Insurance
Credit card companies already limit your liability to $50 for unauthorized charges, and most waive even that amount. Federal law protects you, so paying for additional insurance is redundant.
Identity theft insurance sounds reassuring, but it typically covers expenses you’d rarely incur—not the actual stolen money. Your time dealing with the aftermath is the real cost, and insurance doesn’t reduce that burden. Free credit monitoring and protecting yourself from credit card theft through smart habits work better.
Making Insurance Work Within Your Budget
Essential insurance coverage should fit within your overall financial plan. The general guideline is keeping total insurance costs under 15% of your gross income, though this varies based on your circumstances.
Start with the required coverage: health and auto insurance. Then add renters or homeowners insurance. After these basics, prioritize disability and life insurance if you have dependents. Finally, consider umbrella and long-term care coverage as your wealth and age increase.
Shop around every few years. Insurance rates vary dramatically between companies, and loyalty doesn’t pay. Bundle your policies where it makes sense, but compare the bundled price against separate policies from different insurers.
Your Next Steps
Review your current insurance policies this month. Check that you have adequate coverage for the seven essential types, and calculate whether you’re overpaying for coverage you don’t need.
Missing essential coverage? Get quotes from at least three insurers. Paying for unnecessary policies? Cancel them and redirect that money toward building your emergency fund or paying down debt. Insurance should protect your financial future, not become another unnecessary expense that holds you back from your goals.
The right insurance coverage gives you peace of mind without breaking your budget. Focus on protecting against genuine financial catastrophes, skip the rest, and you’ll have both security and money left over for the life you actually want to live.