Insurance in Your Financial Plan: What You Need and What You Can Skip

Insurance is the part of financial planning that nobody wants to think about until they desperately need it. Then they either find out they’re underinsured, overinsured in the wrong places, or paying for coverage they don’t understand and couldn’t explain if asked.

Here’s the practical reality: insurance is risk transfer. You’re paying a premium to shift a potential large financial loss onto someone else. Whether any given policy makes sense depends on whether the risk you’re transferring is one you actually face and whether you could absorb the loss yourself if you didn’t buy coverage.

The Insurance You Almost Certainly Need

Some categories of insurance are non-negotiable for most people. These are the ones where a single incident without coverage is financially catastrophic.

Health Insurance

A serious illness or injury without health insurance can generate six-figure bills. This is the clearest case for insurance in American life — the downside risk is unlimited and the average person cannot self-insure against it.

If you have access to employer coverage, take it. If you don’t, explore the ACA marketplace. Depending on your income, you may qualify for significant subsidies that make coverage affordable. The math on going uninsured is almost never favorable.

On plan selection: higher-deductible plans paired with an HSA are often the right call if you’re healthy and don’t have ongoing prescriptions or regular specialist visits. The premium savings plus HSA contribution add up — but this only works if you actually fund the HSA and don’t carry high ongoing medical costs.

Auto Insurance

Required by law in most states. But the state minimum is almost never the right amount of coverage. State minimums are set at levels that haven’t kept pace with the actual cost of vehicles and medical care.

Liability coverage is what protects you when you’re at fault. If your liability limits are $25,000 per person and you cause an accident with $150,000 in medical bills, you’re personally on the hook for the difference. That can mean wage garnishment and asset liens.

Recommended minimums for most people: 100/300/100 — $100,000 per person, $300,000 per accident for bodily injury, $100,000 for property damage. The premium difference from minimum coverage to 100/300 is often modest.

Homeowner’s or Renter’s Insurance

If you own a home, homeowner’s insurance is almost always required by your mortgage lender and is essential regardless. Make sure your dwelling coverage reflects the actual replacement cost of rebuilding, not the market value — these are different numbers.

If you rent, renter’s insurance is one of the best values in personal finance. It covers your personal property against theft, fire, and other losses, and includes liability protection if someone is injured in your apartment. The average policy costs $15–$25/month. There’s almost no reason not to have it.

Life Insurance (If People Depend on Your Income)

If you have dependents — children, a spouse who doesn’t work, aging parents — life insurance is essential. If you die, your income disappears and people who counted on it need to adjust.

Term life insurance is almost always the right product for most people. You buy coverage for a specific term — 20 or 30 years is common — and pay a fixed premium. If you die during the term, the policy pays out. If you don’t, the policy expires.

The coverage amount depends on your income, debts, and how long your dependents need support. A common starting point is 10x your annual income, but run the actual numbers based on your situation.

Term is cheap when you’re young and healthy. A 35-year-old in good health can often get a 20-year, $500,000 term policy for under $30/month.

Disability Insurance

This one is chronically underrated. Your ability to earn income is your most valuable financial asset, and disability is more common than most people realize. According to Social Security Administration data, roughly one in four 20-year-olds will experience a disability lasting 90+ days before reaching retirement age.

If your employer offers long-term disability coverage, take it. If not, individual policies are available — they’re more expensive than group coverage but still worth having for anyone whose income isn’t replaceable through other means.

Insurance That’s Situational

These types make sense for some people but aren’t universal necessities.

Long-Term Care Insurance

Covers the cost of nursing home care, assisted living, or in-home care if you become unable to care for yourself. These costs are staggering — $50,000–$100,000+ per year depending on location and level of care — and Medicare does not cover most of it.

Whether you need this depends on your assets, your family situation, and your age. If you have significant assets to protect and no family who can provide care, it’s worth evaluating in your 50s. Premiums rise sharply with age, and waiting too long may make it unaffordable or disqualify you based on health.

Umbrella Insurance

Provides additional liability coverage above the limits of your auto and homeowner’s policies. If you’re sued for a car accident and the judgment exceeds your auto policy limits, umbrella coverage kicks in.

Usually costs $150–$300/year for $1 million in additional coverage. If you have significant assets — a home with equity, investments, savings — umbrella insurance makes sense. Without assets to protect, it’s less urgent.

Comprehensive and Collision on Your Car

Required by lenders if you finance or lease. But if you own your car outright and it’s old enough that its value is low, you may be paying more in premiums than the car is worth. A general guideline: if your annual premium for comp and collision exceeds 10% of the car’s value, it’s worth questioning.

Insurance You Probably Don’t Need

A lot of insurance products are sold hard because they’re profitable, not because they provide good value to buyers.

• Extended warranties on electronics and appliances: These are pure profit for the retailer. Self-insure by putting that money in savings instead. Most electronics die outside the warranty window anyway.
• Credit card payment protection insurance: Sold to cover your minimum payment if you lose your job. Expensive relative to the benefit, and the terms often exclude the scenarios you’d actually use it for.
• Mortgage life insurance: Pays off your mortgage if you die. Term life insurance accomplishes the same thing more flexibly and usually for less. There’s almost no reason to have both.
• Pet insurance: This one varies. Do the math based on your pet’s age, breed, and likely health trajectory. For some pets, it makes sense. For most healthy pets, you’re likely better off putting the monthly premium in a dedicated pet emergency fund.
• Whole life and universal life insurance as investments: These products combine insurance with a savings/investment component. The fees are high, the returns are mediocre, and the complexity makes comparison difficult. Buy term and invest the difference elsewhere.

How to Review What You Have

Once a year, go through your policies. Ask for each one:

• What does this cover?
• What’s the deductible and premium?
• Have my circumstances changed in a way that affects what I need?
• Am I getting competitive pricing, or is it time to get quotes elsewhere?

Insurance companies reward new customers more than loyal ones. Shopping your policies every two to three years is a legitimate way to lower your premiums without reducing coverage.

How Insurance Fits Into the Financial Plan

Think of insurance as the foundation that protects everything else you’re building. You can have excellent savings and investment habits, but one uninsured catastrophe — a serious injury, a lawsuit, a house fire — can wipe out years of progress.

Insurance doesn’t make you wealthy. But it prevents bad events from making you poor. In financial planning, that’s the point — not to win the game, but to not get knocked out of it.

Get the coverage you need, skip what you don’t, and review it annually. That’s all there is to a solid insurance strategy.