The most essential, "must-have" insurance policies are those that prevent financial ruin from major, unexpected events, including health insurance, automobile liability insurance (legally required in most places), and homeowners/renters insurance. For many, long-term disability insurance and term life insurance (if you have dependents) are also considered vital to protect income.
Here are the eight types of insurance coverage you need:
Six Types of Insurance Everyone Needs
There are many types of insurance available, but there are some which top the charts in terms of importance. Home or property insurance, life insurance, disability insurance, health insurance, and automobile insurance are five types that everyone should have.
Full coverage isn't worth it when the annual cost of collision/comprehensive exceeds a significant portion (e.g., 10%) of your car's low market value, you have enough savings to replace or repair it out-of-pocket, or if you have a clear title and don't need it for work/family, while it's still required for leased/financed cars. Key factors include your car's depreciated value, your emergency fund, and your risk tolerance for paying for repairs/replacement yourself.
You should consider dropping full coverage when your car's value is low (maybe 10 times your annual premium), you have a clear title (no loan), and you can afford to pay for repairs or replacement out-of-pocket if needed, especially if you're driving less or have other vehicles. Dropping it saves money but adds risk, so balance your risk tolerance and budget; if you can't afford to replace the car if it's totaled, keep full coverage.
The "50% Rule" in insurance primarily refers to a Federal Emergency Management Agency (FEMA) regulation for flood-prone areas, stating that if repairs or improvements to a damaged structure exceed 50% of its pre-damaged market value, the entire building must be brought into full compliance with current flood elevation and construction codes. This rule, also known as the Substantial Damage/Improvement (SD/SD) rule, prevents properties from remaining in high-risk zones without mitigation, potentially affecting flood insurance eligibility if not followed.
Avoid insurance that duplicates existing coverage, offers minimal benefits, or is structured with poor value. Focus on essential protection—like auto liability, health, home/renter, life for dependents, and disability coverage—tailored to your actual risks.
You need comprehensive and collision if you have a car loan or lease, as lenders require it; otherwise, it's optional, but recommended if your car is valuable, you can't afford major repairs, or live in an area with high theft/weather risk, though you might drop it if the car's value is low and the cost of coverage outweighs potential repair costs. Collision covers accidents with objects/other cars, while comprehensive covers theft, vandalism, animals, and natural disasters.
Dave Ramsey's insurance advice centers on protecting assets with high liability/deductibles, avoiding whole life insurance for affordable term life, getting comprehensive coverage (auto/home), using HDHPs with HSAs for health, and considering umbrella/long-term care policies as wealth grows. Key strategies include using independent agents to shop around, maximizing deductibles to free up cash for debt/investing, and getting rid of collision on older, paid-off cars.
The 80/20 rule in insurance refers to two main concepts: the Medical Loss Ratio (MLR) under the Affordable Care Act (ACA), requiring insurers to spend 80% (85% for large groups) of premiums on care or refund the rest, and a common home insurance clause where you must insure your home for at least 80% of its replacement cost to receive full coverage for partial losses, preventing underinsurance. In health insurance, it limits administrative costs and profits, while in homeowners insurance, it ensures adequate dwelling coverage to avoid penalties on claims.
Life insurance for children is generally unnecessary; funds are better allocated to education or retirement savings. Rental car damage insurance is usually redundant if you have adequate auto insurance coverage. Flood insurance is unnecessary unless you live in a flood-prone area.
Union Mutual Insurance is the No. 1 cheapest car insurance for most drivers, according to our research. The company offers minimum coverage at an average monthly cost of $16. The cheapest full-coverage car insurance is Union Mutual, with average premiums of $73 per month.
Here are five commonly overlooked coverage gaps that could leave you exposed:
8 Red Flags That Insurance Companies Aren't Going to Cover Your Bills
Understanding the Right Amount of Car Liability Coverage
Minimum: At least your state's required minimum (typically 25/50/25) Standard Recommendation: 100/300/100 ($100,000 per person/$300,000 per accident for injuries/$100,000 for property damage) Optimal Protection: Coverage equal to or greater than your net worth.