Which insurance do you actually need?
Insurance should protect you from costs you could never cover yourself. Which policies matter, which can wait and how to choose.
Insurance can feel like money spent on something you hope never to use, and with so many policies on offer it is hard to know which are worth paying for. The right insurance protects you from the costs that would be impossible to cover from savings, such as a major illness, a death in the family or the loss of your home. The wrong insurance drains your budget without protecting much. This guide explains which insurance you actually need, which can wait, and how to choose cover wisely, wherever you live.
The basic rule: insure what you cannot afford to lose
Insurance works best for events that are unlikely but financially devastating. If a cost would be painful but manageable, such as a broken phone or a small repair, it is usually cheaper to cover it from an emergency fund than to pay premiums every month. If a cost would wipe out your savings or push your family into debt, such as a long hospital stay or the loss of the main earner's income, insurance is worth considering.
Health insurance
For most people, health cover is the most important insurance. A serious illness or accident can cost far more than most families have saved. Depending on where you live, this may be a national health scheme, cover through your employer, or private medical insurance. Make sure you understand what is covered, which hospitals you can use, waiting periods, and any limits or co-payments. If you have national cover, keep your contributions up to date so you are protected when you need it.
Life insurance
If anyone depends on your income, such as children, a spouse or parents, life insurance protects them if you die. Term life insurance pays out only if you die within a set period, such as 20 years, and is usually the most affordable way to get a large amount of cover. Whole-of-life and savings-linked policies cost much more and are often less flexible. A common guide is to have cover worth several years of your income, enough to clear debts and support your dependants until they can support themselves. If no one depends on your income, you may not need life insurance yet.
Income protection and disability cover
Your ability to earn is your biggest asset. Income protection or disability insurance pays part of your income if illness or injury stops you from working. It is especially valuable for self-employed people, who have no employer sick pay. Check whether your employer already provides some cover before buying your own.
Property and vehicle insurance
If you own a vehicle, third-party insurance is compulsory in most countries, and comprehensive cover is worth considering for a valuable car or one bought on credit. If you own a home, buildings insurance is usually required by lenders and protects against fire, flood and other damage. Renters can buy contents insurance to cover belongings against theft or damage at modest cost.
Funeral cover
In many communities, funeral costs are a major financial shock. Funeral policies, burial societies and group schemes spread this cost. They can be useful, but compare what you pay over many years with the amount paid out, and avoid holding several overlapping policies.
Insurance you may not need
Extended warranties on electronics, phone insurance, payment protection sold alongside loans, and duplicate cover you already have through work or a bank account are often poor value. Before buying any policy, check whether it duplicates cover you already hold.
How to choose a policy
Buy only from insurers licensed by your country's insurance regulator. Read what is excluded as carefully as what is covered, compare quotes from several providers, and be honest on your application, because false information can lead to claims being refused. Review your cover when your life changes, such as marriage, children or a new home. Build an emergency fund alongside insurance, so small costs never need a claim; see our guide to how much emergency fund you need, and fit premiums into your plan with our guide to budgeting on a small income.
Frequently asked questions
What insurance does everyone need?
Health cover is the most important for almost everyone; life insurance matters if others depend on your income.
Is term life insurance better than whole life?
For most people seeking protection, term life gives far more cover for the money, while whole-of-life policies cost much more.
Which insurance is not worth it?
Extended warranties, gadget insurance and cover that duplicates what you already have are often poor value.
Sources
This article is general information, not financial advice.