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I skipped renters insurance for three years to save $15/month. Then my apartment was burglarized — laptop, camera equipment, and cash totaling $4,200 gone. Renters insurance would have covered everything minus a $250 deductible. Instead, I paid the full $4,200 out of pocket. Three years of “savings” at $15/month = $540. Cost of not having insurance = $4,200. I lost $3,660 trying to save $540.
Understanding which types of insurance you actually need — and which are wastes of money — is a fundamental part of financial planning. Insurance isn’t an expense you pay hoping nothing happens. It’s a tool that prevents a single bad event from destroying years of financial progress. Here’s what you need, what you don’t, and what it actually costs.
The 6 Types of Insurance Most People Need
1. Health Insurance (Non-Negotiable)
Health insurance is the most essential type of insurance. A single ER visit can cost $2,000-$10,000+. A hospital stay averages $2,883/day. Surgery can run $50,000-$100,000+. Without insurance, one medical event can bankrupt you.
How to get it: Employer-sponsored (cheapest option — employer pays part of premium), ACA Marketplace (healthcare.gov — subsidies available based on income), Medicaid (if income qualifies), parent’s plan (until age 26), or individual plan from an insurer.
Key terms to understand: Premium (monthly cost), deductible (what you pay before insurance kicks in), copay (fixed cost per visit), coinsurance (percentage you pay after deductible), out-of-pocket maximum (most you’ll pay in a year — after this, insurance covers 100%).
2026 change: The OBBBA expanded HSA eligibility to include direct primary care arrangements. If you’re enrolled in a high-deductible health plan, maximize your HSA ($4,400 individual / $8,750 family) for triple tax advantages. See our tax planning guide for HSA strategies.
2. Auto Insurance (Required by Law in Most States)
Nearly every state requires auto liability insurance. It protects you financially if you cause an accident.
Minimum coverage (required): Liability — covers damage you cause to others (bodily injury + property damage). Minimums vary by state.
Recommended additional coverage: Collision (covers damage to YOUR car in an accident), comprehensive (covers theft, vandalism, weather, animals), uninsured/underinsured motorist (covers you if the other driver has no insurance or insufficient insurance).
How to save: Bundle with renters/homeowners insurance (10-25% discount), increase your deductible (higher deductible = lower premium), maintain a clean driving record, ask about good student discounts, compare quotes from at least 3-5 insurers annually. Most people overpay because they never shop around after their initial policy.
New for 2025-2028: Auto loan interest is now tax-deductible under the OBBBA. This doesn’t affect insurance costs, but it reduces the effective cost of owning a car.
3. Renters Insurance (Cheap and Essential)
If you rent, your landlord’s insurance covers the building — NOT your belongings. Renters insurance protects your personal property (electronics, furniture, clothing, jewelry) from theft, fire, water damage, and other covered events.
Average cost: $15-$30/month ($180-$360/year). For what you get, this is the most underpriced insurance available.
What it covers: Personal property (replacement cost or actual cash value), liability (if someone is injured in your apartment), additional living expenses (hotel and food if your apartment is uninhabitable after a covered event).
What it doesn’t cover: Floods (separate policy needed), earthquakes (separate rider), roommate’s belongings (they need their own policy), intentional damage.
4. Homeowners Insurance (Required by Lenders, Smart for Everyone)
If you have a mortgage, your lender requires homeowners insurance. Even if your home is paid off, it’s essential — your home is likely your largest asset.
What it covers: Structure (rebuilding/repair), personal property, liability, additional living expenses. Make sure your coverage amount reflects the current cost to REBUILD your home — not the market value.
How to save: Bundle with auto insurance, increase your deductible to $1,000-$2,500, install security systems and smoke detectors (discounts), review and update coverage annually, compare quotes every 2-3 years.
If you’re a first-time homebuyer: Budget for homeowners insurance as part of your monthly housing cost. It’s typically included in your mortgage escrow payment.
5. Life Insurance (If Anyone Depends on Your Income)
Life insurance pays a death benefit to your beneficiaries. If you have a spouse, children, or anyone who depends on your income, life insurance is essential. If nobody depends on you financially, you probably don’t need it yet.
Term life vs. whole life:
Term life (recommended for most people): Covers you for a specific period (10, 20, or 30 years). Much cheaper. A healthy 30-year-old can get $500,000 of 20-year term life coverage for $20-$30/month. When the term ends, coverage stops.
Whole life: Covers your entire life with a cash value component that grows over time. Significantly more expensive (often 5-10x the cost of term). The cash value growth is usually poor compared to simply buying term and investing the difference.
How much coverage: A common guideline is 10-12x your annual income. If you earn $60,000, aim for $600,000-$720,000 in coverage. Consider your mortgage balance, children’s education costs, and years until your dependents are self-sufficient.
6. Disability Insurance (Protects Your Earning Power)
Your ability to earn income is your most valuable financial asset. Disability insurance replaces a portion of your income (typically 60-70%) if illness or injury prevents you from working.
Short-term disability: Covers 3-6 months. Many employers offer this.
Long-term disability: Covers months to years (or until retirement age). This is the critical one — the average long-term disability claim lasts 2.5 years.
Check your employer benefits first. Many employers provide basic disability coverage. Supplement with an individual policy if the employer coverage is insufficient (most employer policies cap at 60% of base salary, excluding bonuses).
Types of Insurance You Probably DON’T Need
Not every insurance policy is worth your money. Here are the types of insurance you need to avoid — products that sound protective but usually aren’t worth the premium.
Extended warranties on electronics. The markup is enormous, and most electronics either fail early (covered by manufacturer warranty) or last well beyond the warranty period.
Credit card payment protection insurance. Expensive for what it covers. Build an emergency fund instead.
Flight insurance. Your credit card likely already covers trip interruption. And life insurance covers accidental death — you don’t need a separate policy for flying.
Identity theft insurance. Most credit cards already offer fraud protection, and credit monitoring is available free from Credit Karma. A separate policy is usually redundant.
Pet insurance (maybe). This one is debatable. It can be worthwhile for breed-prone health issues, but many pet owners pay more in premiums than they ever receive in claims. Self-insuring (saving $50/month in a dedicated pet fund) often makes more financial sense.
Insurance and Your Credit Score
Your credit score affects your insurance premiums in most states. Insurers use credit-based insurance scores to price policies — better credit = lower premiums.
Understanding how credit scores work isn’t just about qualifying for credit cards and loans — it directly affects what you pay for auto and homeowners insurance. Improving your credit score can save you hundreds per year on insurance premiums.
A strong budget accounts for insurance as a non-negotiable expense — just like rent, utilities, and debt payments. Skipping insurance to save money is one of the money mistakes that costs far more in the long run.
Once you’ve locked in the types of insurance you need, focus on maintaining strong credit to keep those premiums low.
Disclaimer: BrokeMeNot provides financial information for educational purposes only. We are not insurance agents or licensed advisors. Insurance needs, costs, and regulations vary by state and individual circumstances. Consult a licensed insurance professional. Some links may be affiliate links. Read our full disclaimer.
FAQ Section
What types of insurance do I need?
Most people need health insurance (non-negotiable), auto insurance (legally required), and either renters or homeowners insurance. If anyone depends on your income, add term life insurance. If your employer doesn’t provide adequate disability coverage, add that too. These 5-6 types cover the major financial risks.
How much does renters insurance cost?
Renters insurance averages $15-$30/month ($180-$360/year). It covers your personal belongings, liability, and temporary living expenses if your rental becomes uninhabitable. For the cost of a streaming subscription, it protects thousands of dollars in possessions.
Do I need life insurance if I’m single?
Generally no — life insurance is primarily for people whose income supports others (spouse, children, aging parents). If nobody depends on your income financially, term life insurance isn’t necessary yet. Get it when you have dependents, and lock in low rates while you’re young and healthy.
Does my credit score affect insurance rates?
Yes, in most states. Insurers use credit-based insurance scores to set premiums. Better credit generally means lower insurance costs for auto and homeowners policies. Improving your credit score can save hundreds per year on insurance premiums.
Is whole life insurance worth it?
For most people, no. Term life insurance provides the same death benefit protection at 5-10x lower cost. The cash value component of whole life insurance grows slowly and has high fees. Most financial experts recommend buying term life insurance and investing the premium difference separately for better long-term returns.
Toyin Onagoruwa is the founding editor of BrokeMeNot. He works as a software engineer in banking and has over 5 years of experience writing about personal finance, credit cards, and frugal living. He combines his fintech engineering background with real-world money management experience to create financial content you can actually use. Connect with him on LinkedIn.