The nuances of insurance can seem daunting, but understanding the basic concepts is vital to securing different aspects of your life. When you purchase any type of insurance – life, health, pet, auto, disability, home, and more – you make payments to the insurance company called premiums. By making these payments, you are covered from specific risks, should a loss or expense arise. The basic principle of insurance is that by spreading the risk of loss amongst all clients, the risk is lowered for all.
Types of Insurance: The Big Four
- Auto: Having auto insurance is required by law in most states. If you’re in an accident, your insurance policy, depending on your coverage, helps pay for covered losses, such as your vehicle, the other vehicle’s damage, and other driver/passenger medical bills. You’ve probably heard of comprehensive vs. collision, bodily injury liability, and personal injury protection, and uninsured motorist protection, but what do they all mean? Check out their definitions to help you determine which coverages work best for you.
- Homeowners/Renters: Regardless of whether your rent or own, the property and its contents need to be insured. When securing a mortgage, most lenders will require you to have homeowners insurance. If you’re renting, your landlord should insure the property, and your renters’ insurance can cover your belongings and liability.
- Health: Your health insurance policy typically covers all, or a portion of, medical, surgical, prescription drug, and sometimes dental expenses. While healthcare (and sometimes dental and vision) insurance is often included in an employer’s benefits package, many need to figure out what policy is best for you and, if applicable, your family. For resources and information, visit healthcare.gov.
- Life: Life insurance benefits typically include coverage for funeral expenses, as well as funds for those you leave behind. A general rule of thumb is to pick an insurance policy that covers 10 times your yearly income. According to a 2018 study by LIMRA, formerly known as the Life Insurance and Market Research Association, one in three families might not be able to meet their day-to-day expenses within a month of the primary breadwinner's death.
For a detailed look at different types of insurance, check out Investopedia’s “4 Types of Insurance Everyone Needs.”