Insurance is a tool for transferring tail risk — events that are too expensive to absorb out of pocket, too unpredictable to plan for, and too rare to make self-funding sense. The right framework: buy enough insurance to protect against ruin; skip the rest. The insurance industry markets aggressively against this principle because the policies that protect against ruin tend to be cheap (low commissions) and the policies that protect against minor inconveniences tend to be expensive (high commissions).
This page is the full map: what coverage exists, what it does, and where each type sits on the "essential / optional / usually skip" spectrum.
Coverage almost every household should have at adequate limits.
The single largest financial risk in the US. A serious medical event without coverage routinely produces six-figure bills; a serious event with bad coverage can still produce ruinous bills.
What to look at when choosing:
Common error: choosing the lowest-premium plan without modeling expected medical use. A high-deductible plan saves money for the healthy and costs more for the chronically-ill.
Required in most states. Covers your liability if you cause an accident that injures someone or damages their property.
Recommended minimums:
Add comprehensive and collision if the car has meaningful value; skip both on cars worth less than $5K (the deductibles often exceed the payout).
For renters: typically $15–$25/month. Covers personal property and provides liability protection. Almost universally worth it.
For homeowners: typically $1,000–$3,000/year depending on location, replacement value, and risk profile (flood, fire, hurricane zones). Required by mortgage lenders.
The replacement-cost trap: many policies cover "actual cash value" (depreciated value) by default. Pay the modest extra to upgrade to "replacement cost" — actual cash value of a 10-year-old roof is far less than a new one.
Covered in detail at LifeInsuranceTypes. Term, scaled to your obligations, is the right answer for ~95% of households.
The most under-purchased important coverage. Statistics: a 35-year-old has roughly a 1-in-4 chance of being disabled for 90+ days at some point during their working years. The financial impact of long-term disability — lost income for years or decades — often exceeds the impact of premature death.
Sources:
Key features to look at:
Coverage that depends on circumstances but should be evaluated explicitly.
A separate policy that adds $1M+ of liability coverage on top of your auto and home policies. Coverage costs roughly $200–$400/year per million.
Buy it if:
The math is asymmetric: a single serious auto accident can produce a judgment that exceeds your auto liability limit. The umbrella covers the gap. At ~$300/year per $1M of additional coverage, it is one of the most cost-effective insurance products available.
Not strictly insurance but worth mentioning. If you choose a high-deductible health plan, max your HSA contributions. The HSA is the only account that is tax-deductible going in, tax-deferred while invested, and tax-free coming out for medical expenses. After age 65, withdrawals for non-medical purposes are taxed but not penalized — effectively a backup retirement account.
Covered in detail at LongTermCareInsurance. The case is real but narrow: net worth in the $500K–$2.5M range, age 55–65, healthy.
Standard homeowners policies usually exclude both. If you live in an earthquake zone (CA, AK, parts of WA/OR) or flood zone (FEMA zones A and V), evaluate separately.
Coverage that depends heavily on circumstances and warrants explicit analysis.
If your income is highly dependent on a specific business, consider:
Required in many professions (medical, legal, accounting). Often required by clients in consulting work.
The math is mixed. For young, healthy pets, premiums roughly equal expected payouts; you are not winning by buying. For specific breeds prone to expensive conditions, the math can favor coverage. Self-funding via a dedicated savings account is a reasonable alternative.
If you owe more on a car than its current value (common in years 1–3 of a loan), gap insurance covers the difference if the car is totaled. Worth it on new-car loans where this exposure is high; not needed once equity is positive.
Coverage that is sold heavily but rarely worth buying for most households.
Marketed as investments, sold as insurance. The internal rate of return is typically 2–4% over decades. See LifeInsuranceTypes for the full analysis. For most households, term-plus-invest dominates.
If you have decent health insurance, these policies duplicate coverage you already have. The marketing exploits fear; the math is bad.
Almost universally bad value. Manufacturers know failure rates and price warranties to be profitable for them. The exception is occasional cell phone protection plans on high-end devices, where breakage rates and replacement costs make the math closer.
Pays only for very specific causes of death. Standard term life covers everything AD&D does, plus much more. If you have term life, AD&D is redundant.
Card-issuer-marketed coverage for travel cancellation, rental car damage, lost luggage. Sometimes cheap, sometimes redundant with what your card provides automatically. Read what your card already covers before paying for upgrades.
Often duplicates services you already have via free credit monitoring or your credit card. The actual financial liability of identity theft is limited by federal law on most accounts. The "service" component (helping you fix the damage) is the real value, and it is often free elsewhere.
A common framework: total liability coverage (auto + home + umbrella) should at least equal your net worth, plus a buffer for future earnings. If you have $400K of net worth and $80K of annual income, target $500K–$1M of total liability coverage.
The reasoning: a serious lawsuit can take everything you have plus garnish future earnings. Insurance limits cap your exposure.
Once a year, walk through the full insurance stack: