Insurance 101: The 5 Policies You Actually Need (and 3 You Don’t)

Insurance is one of those topics everyone thinks they understand—until they’re staring at a 30-page policy document after a crisis, wondering what’s actually covered. Ads bombard us with life insurance, pet insurance, phone insurance, flood insurance… but which policies truly protect your family’s financial future, and which are just cleverly marketed extras that drain your budget?

Here’s the truth: Insurance isn’t about predicting disaster—it’s about preventing financial ruin. Done right, it’s a safety net that lets you sleep at night. Done wrong, it’s a monthly bill for coverage you’ll never use or don’t need.

After years of helping families navigate real-world risks (and reviewing hundreds of policies), we’ve boiled it down to the essentials. Below are the 5 insurance policies most households genuinely need, plus 3 commonly pushed policies you can safely skip—along with clear, practical guidance on how much coverage to get and how to avoid overpaying.

The Core Principle: Insure Against Catastrophe, Not Inconvenience

Before diving in, remember this rule: Only insure what you couldn’t easily afford to replace or recover from on your own.

Worth insuring: A $300,000 home, your ability to earn income, a $25,000 car, a $100,000 medical bill.
Not worth insuring: A $300 smartphone, a $500 laptop, or routine car maintenance.

Insurance companies profit by selling policies for small, frequent losses. Your goal? Use insurance only for rare but devastating events that could wipe out your savings or saddle you with debt.

✅ The 5 Policies You Actually Need

1. Health Insurance

Why it’s essential: One hospital stay can cost tens of thousands. Without insurance, a serious illness or accident can lead to bankruptcy—even for people with “good” jobs.
What to look for:

Employer-sponsored plans: Compare premiums, deductibles, and out-of-pocket maximums. Lower premium ≠ better if the deductible is $8,000.
Marketplace plans (Healthcare.gov): Subsidies can make coverage surprisingly affordable. Don’t assume you “make too much.”
Minimum coverage: Ensure it includes hospitalization, emergency care, prescription drugs, and preventive services.
Family tip: If you have kids, confirm pediatric services (well visits, vaccines) are covered at 100%.

2. Auto Insurance (Liability + Physical Damage)

Why it’s essential: It’s legally required in almost every state—and for good reason. If you cause an accident that injures someone or totals their car, you could be sued for hundreds of thousands.
What you need:

Liability coverage: Covers damage/injuries you cause to others. Minimum state limits are often dangerously low. Get at least 100/300/100 (i.e., $100K per person/$300K per accident for bodily injury, $100K for property damage).
Collision & Comprehensive: Covers damage to your own car from crashes (collision) or theft/fire/natural disasters (comprehensive). Keep these if your car is worth more than $4,000. If it’s older and paid off, you might drop them to save money—but only if you could afford to replace it out of pocket.
Pro tip: Raise your deductible to $500 or $1,000 to lower premiums significantly. Just make sure you have that amount in your emergency fund.

3. Homeowners or Renters Insurance

Why it’s essential: Your landlord’s insurance doesn’t cover your stuff. A fire, burglary, or even a guest slipping on your porch could cost far more than your savings.
What you need:

Homeowners: Covers your dwelling, personal property, liability, and additional living expenses (e.g., hotel if your house burns down).
Renters: Covers your personal property and liability (e.g., if your dog bites someone). Typically costs $15–$30/month—far less than replacing all your belongings.
Key detail: Standard policies don’t cover floods or earthquakes. If you live in a high-risk zone, buy separate flood insurance through the National Flood Insurance Program (NFIP).
Family tip: Document your belongings with photos/video and store the list off-site (e.g., cloud storage). It speeds up claims dramatically.

4. Term Life Insurance

Why it’s essential: If someone depends on your income (spouse, kids, aging parents), life insurance replaces that income if you die unexpectedly. It’s not an investment—it’s a safety net.
Who needs it?

Parents with young children
Breadwinners in dual-income households
Anyone with significant co-signed debt (e.g., mortgage)
How much? 10–12 times your annual income is a solid starting point.
What type? Term life only. It’s pure coverage for a set period (e.g., 20 or 30 years) at a low, fixed cost. Avoid whole life, universal life, or “cash value” policies—they’re expensive and often underperform as investments.
Cost example: A healthy 35-year-old might pay $25–$35/month for $500,000 of 20-year term coverage.

5. Disability Insurance

Why it’s essential: Your ability to earn income is your most valuable financial asset—yet it’s rarely protected. 1 in 4 workers will be disabled for 90+ days during their career.
Types:

Short-term disability (STD): Covers 60–70% of income for 3–6 months. Often offered by employers (sometimes paid by you).
Long-term disability (LTD): Kicks in after STD ends and can cover you until retirement age. This is the critical one.
What to aim for:
Coverage should replace 60–70% of your take-home pay.
“Own-occupation” definition is best—it pays if you can’t do your specific job, not just any job.
If your employer offers LTD, supplement it with a private policy if the coverage is less than 60% of your income.
Don’t skip this: Social Security Disability is extremely hard to qualify for and pays very little.

❌ The 3 Policies You (Probably) Don’t Need

1. Credit Insurance

What it is: Sold when you take out a loan (car, credit card). Pays your debt if you die, become disabled, or lose your job.
Why skip it:

Extremely expensive relative to the benefit.
You already have better, cheaper coverage: Term life insurance (for death) and disability insurance (for income loss).
Often has strict exclusions (e.g., doesn’t cover pre-existing conditions).
Red flag: If a lender requires this, walk away—it’s predatory.

2. Extended Warranties / Service Contracts

What it is: Extra coverage for electronics, appliances, or new cars beyond the manufacturer’s warranty.
Why skip it:

Most products don’t break during the extended period.
If they do, your homeowners/renters insurance may cover it (for theft or fire-related damage).
Repair costs are often less than the warranty price.
Exception: Consider only for very expensive, mission-critical items (e.g., a $5,000 home medical device)—but read the fine print first.

3. Mortgage Life Insurance

What it is: Pays off your mortgage if you die. Sold by lenders or mortgage brokers.
Why skip it:

The payout goes directly to the lender, not your family. They get a paid-off house—but no cash for other expenses (food, childcare, college).
Term life insurance is far better: Your family gets a lump sum they can use to pay the mortgage or cover other urgent needs. Plus, term life is usually cheaper and coverage stays level (mortgage insurance decreases as your loan balance drops).

How to Save Money on the Insurance You Do Need

Bundle policies: Most insurers (State Farm, Allstate, etc.) offer 10–25% discounts for bundling home + auto.
Shop around every 2–3 years: Rates change. Use independent agents or sites like Policygenius to compare.
Raise deductibles: A higher deductible = lower premiums. Just ensure you have the cash in your emergency fund.
Ask about discounts: Good driver? Non-smoker? Home security system? Student with good grades? You might qualify.
Review coverage annually: Life changes (new baby, paid-off car, home renovation) mean your needs change too.

The Bottom Line: Protect What Matters—Ignore the Noise

Insurance shouldn’t be a source of stress or confusion. Focus on the five core policies that shield you from true financial catastrophe: health, auto, home/renters, term life (if others depend on you), and disability. Skip the flashy add-ons that benefit salespeople more than your family.

Remember: The goal of insurance isn’t to avoid all loss—it’s to ensure one bad day doesn’t become a lifetime of debt. By prioritizing wisely, you protect your family’s future without wasting a single dollar on coverage you don’t need.

Start today:

Check your auto liability limits—are they at least 100/300?
Confirm you have disability coverage through work (or consider a private policy).
If you have dependents, get a term life quote—it takes 10 minutes online.