We all know that life rarely goes perfectly our way. Luckily, when disaster strikes, insurance can help you out. With the right insurance policy, you won’t be left in dire financial straits when something bad happens.
But, there are so many different types of insurance out there, how do you know which one you need? The types of insurance you need depend on a variety of factors, including your health, lifestyle, and living situation.
Check out this guide to learn about the different types of insurance so you can figure out which ones you need and which ones you don’t.
What is Insurance?
Before we dive into the different types of insurance, we first need to answer the question, “What is insurance?”
Insurance is a program that allows you to protect yourself from life’s major disasters. With an insurance program, you combine your risks with other people’s, and you pay into a pool. The money in the pool is then paid out to individuals should they experience a specific kind of adversity, such as an accident or illness.
Essentially, being insured means that you transfer the risk of catastrophic financial loss to the insurance company. If you don’t have an insurance policy when you need one, you could land yourself in hot financial water.
The thing about insurance is that you can’t decide to get it right when disaster strikes. Instead, you need to get it beforehand. You want to get all of your insurance policies set up while things are still going well so that you’re still insurable in the eyes of the insurer.
When you hear people talk about insurance, you’ll often hear them talk about insurance premiums. A premium is the predetermined, monthly amount that you pay for your insurance.
Even if everything is going great, you still have to pay this monthly premium. Everyone’s premiums are then pooled together, and should anything go wrong, the insurance company will dip into this pool to cover part or all of the cost of your disaster.
If the insurance company is doing their job correctly, they’ll always be paying out less in coverage to their customers than the amount that’s coming in via monthly premiums.
Another term you’ll commonly hear in reference to insurance is the term deductible. The deductible refers to the amount of money you need to pay out of pocket before the insurance company starts providing coverage.
For example, let’s say you get in a car crash that causes $500 worth of damage. If you have a deductible of $600 on your auto insurance policy, your insurance won’t pay out until the deductible has been met, which means you’re on the hook for the costs.
But, let’s say there’s $1000 worth of damage. With a $600 deductible, you’ll pay the first $600, and your insurance will pay the rest. The lower your deductible, the higher your monthly premiums are and vice versa.
However, in some cases, certain services are covered before the deductible is met. With car insurance, for example, your policy may cover windshield repair even if you haven’t met your deductible.
The same often goes for health insurance. Even if you haven’t met your deductible, your insurance will likely cover routine trips to the doctor’s office and monthly prescriptions.
There are a variety of ways to obtain insurance. In a lot of cases, you get insurance through your employer. Most employers offer health insurance, and some even offer disability insurance and life insurance.
For other types of insurance, such as car insurance or homeowner’s insurance, you apply directly through an individual insurance company. Of course, there are many different companies out there for each type of insurance.
This is why it’s so important that you spend some time shopping around for the best policy for your needs. Unfortunately, some companies may deem you ineligible for their insurance. Shopping around for different policies is the best way to ensure that you get the coverage you need when you need it.
The Different Types of Insurance
Now that we’ve gone over the insurance basics, let’s talk about the different types of insurance. Here are the main types of insurance you’ll need to purchase:
1. Health Insurance
As mentioned earlier, health insurance is typically obtained through your employer. This is the single most important type of insurance that you’ll buy because if something goes wrong, your life is at risk, not just your money.
Health insurance covers your medical expenses. It helps you pay for everything from routine checkups to monthly prescriptions to surgeries to hospital stays to tests and treatments.
If you don’t get health insurance through your employer, you’ll need to buy it on the individual market. Because of the Affordable Care Act (also known as ObamaCare), you may qualify for subsidized insurance on a state or federal level. The type of coverage you get will depend on the policy you select.
Your policy options include:
Low Deductible Health Plan
These are plans that keep your out-of-pocket costs low. Because they provide more coverage, you’ll pay a higher monthly premium. But, your costs are more predictable since you know what your premium is upfront and you don’t need to worry about thousands of dollars if you find yourself in need of medical services.
High Deductible Health Plan
These plans come with low premiums, which means that you’ll pay less upfront each month to be covered. However, because your deductible is higher, you’ll end up paying more for routine basic care.
But, if you’re in generally good health, a high deductible plan can pay off, as you’ll have fewer routine basic care needs, and you likely don’t need to worry about hitting your deductible.
Health Maintenance Organization
With an HMO network, you’re only able to receive care from a specific network of participating doctors. These doctors are considered “in-network”, and they’ve agreed to work with certain insurance companies.
To see a specialist, you’ll need a referral from your primary care physician. Specialists may include anyone from dermatologists to gynecologists to chiropractors.
Preferred Provider Organization
With a preferred provider organization, you don’t need to get a referral to see a specialist. While care is more affordable if you pick an in-network doctor, you’ll receive better coverage for out-of-network care than you would with a health maintenance organization.
Catastrophic Health Plan
These plans are the cheapest in terms of monthly premiums. But, they don’t offer any coverage for care unless you rack up thousands of dollars in medical costs. They also come with higher deductibles than a high deductible plan.
Exclusive Provider Organization
These policies don’t require that you get a referral to see a specialist. However, they don’t offer any out-of-network care unless there’s an emergency.
Point of Service Plan
These pay for both out-of-network and in-network care. Your primary doctor will need to make a referral to a specialist if necessary.
As you can see, there’s a lot to consider in terms of policies and care plans. If you don’t incur a lot of health expenses each year, then a high deductible plan is likely best for you. If you do visit the doctor a lot, then a plan with high premiums but a low deductible may be best for you.
2. Dental Insurance
One of the biggest mistakes people make is assuming that dental insurance is apart of health insurance. However, this is not the case.
While dental insurance is also sometimes covered by your employer, it’s completely separate from medical insurance. Broken teeth, gum disease, and cavities are all very expensive to treat. Not to mention, bi-annual checkups and x-rays can also be very expensive if you pay out of pocket.
If you don’t get dental insurance through your employer, you can buy it through an individual insurance company. Here are some of your dental insurance options:
- HMO: With this plan, you must choose a dentist who is in your network
- Discount Plan: Instead of paying for a portion of your care, this plan offers discounts with certain dentists in participating networks
- Dental PPO: This allows you to visit out-of-network dentists, but in-network ones will be the most affordable
- Fee-for-Service: With this plan, you can visit any dentist and your insurer will pay a portion of the coverage
If you already have a particular dentist you like to see, you can ask them what insurance companies they work with.
3. Car Insurance
If you’re like most Americans, you either own a car or you’re at least able to drive. In the US, you need to have car insurance to drive legally. Driving without insurance can result in fines and criminal charges.
Each state has its own rules in regards to the type of car insurance you need. Typically, you need car insurance that comes with a liability policy, which will pay out should you injure someone else, their car, or their property with your vehicle.
If you’re at fault for an accident, the liability insurance will pay for the cost of defending you against a lawsuit. But, when you cause damage to your own vehicle, liability insurance does not cover these costs. It only pays for the cost of damage to other vehicles.
Currently, 15 states require you to purchase personal injury protection. These are known as no-fault states, and should you get in an accident when driving in one of these states, you aren’t required to file a claim with the other driver’s insurer to receive compensation for minor injuries.
Rather, your insurance pays you if you get hurt unless the injury was severe. PIP also covers for loss of wages up to a certain amount.
Some states also require you to purchase uninsured or underinsured motorist coverage. This type of coverage pays for losses caused by an underinsured or uninsured driver.
Even if your state doesn’t require this type of insurance, you can still buy it through a car insurance agency as it will protect your finances should you get in an accident with an uninsured driver.
To figure out what type of car insurance you need, you should first look into your state’s requirements. Keep in mind that the minimum insurance requirement is often not enough unless you’re driving a very inexpensive vehicle that could easily be replaced. Oftentimes, you’ll want a more comprehensive insurance package.
4. Life Insurance
Another type of insurance you need to look into is life insurance. When you die, your life insurance policy pays out money to a designated beneficiary.
You can choose to have more than one beneficiary, and should you pass, your money will be split amongst your beneficiaries accordingly. Essentially, if anyone in your family relies on you for income, you’ll need to purchase a life insurance policy.
Additionally, if you have business partners who will need to buy out your share of the business should you pass, you’ll also need life insurance. Life insurance can also help cover funeral costs (the average funeral cost is $7,640) without sending your family into debt.
5. Homeowner’s/Renter’s Insurance
Whether you rent or own, you need to purchase some type of insurance to protect your living situation. Unless you can afford to pay out of pocket should everything you own gets damaged or destroyed, you need this type of insurance.
These insurance policies have two different components: property coverage and liability coverage. Property coverage pays you out should something happen to your home or the possessions in your home.
Liability coverage pays for costs associated with someone getting injured on your property. For example, if a roofing contractor falls and breaks their leg on the job, your liability coverage will kick in.
Are You Ready to Purchase Insurance?
As you can see, there are many different types of insurance you need to consider purchasing. And, these are only the basic types. Depending on your lifestyle, you may also need to purchase motorcycle insurance, boater’s insurance, long-term care insurance, disability insurance, and more.
For more insurance tips and tricks, be sure to check back in with our blog.