Insurance Explained: 12 Kinds of Policies — and Which Are Worth It for You

A woman walks through in the ocean as the sun sets.
Heather Comparetto/The Penny Hoarder


Thousands of years ago, ancient Babylonian traders dreamed up the concept of insurance. Sailing merchants started insuring their shipments of goods in case they were stolen or lost at sea.

Centuries later, you were born. Yay! Then you grew up, and people tried to sell you this same concept.

Problem is there are so many different kinds of insurance now — home insurance, auto insurance, health insurance, life insurance, travel insurance, renters insurance. Not to mention policies for your pet, your phone or even your jewelry.

Things were simpler for the Babylonians.

All of this can be confusing — overwhelming, even. But if you’re going to start adulting, it’s time to think about insurance.

Here’s our beginner’s guide to several types of insurance you’ve probably heard of, how to know whether they’re worth it for you and how to find the best prices.

1. Auto Insurance

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What is it? If you get into an accident, liability insurance covers damage to the other vehicle, while collision coverage pays for damage to your vehicle. Comprehensive coverage pays out if your car is stolen or damaged by fire, road hazards or vandalism.

If you’re legally responsible for a crash, most policies pay for other drivers’ and passengers’ medical or funeral costs, although hopefully you’ll never have to find out. For more info, here’s The Penny Hoarder’s complete guide to shopping for car insurance.

Do you need it? Yes. It’s required by law if you own a car. Every state in the U.S. except New Hampshire requires you to at least carry liability insurance. If you have an auto loan, your lender will likely make you buy collision coverage and comprehensive coverage.

Our tips to save money: Online insurance companies are challenging the industry’s traditional way of doing things. Check these out:

  • The Zebra: This online car insurance search engine compares your options from 204 providers in less than 60 seconds. When you’re ready to consider your options and select a quote, you can also receive a phone call from The Zebra for additional support.
  • Gabi: It scans your existing insurance plan, compares other insurers’ rates for that same coverage and helps you switch on the spot if it finds you a better rate. Gabi says it finds an average savings of more than $460 per year for more than 60% of its customers. It's available in Arizona, California, Illinois, Nevada, North Carolina, Ohio, Pennsylvania, Texas, Washington, Colorado, Utah, Maryland, Alabama, Tennessee, Oregon, South Carolina, Connecticut, Minnesota and Wisconsin.
  • MetroMile: Don’t drive much? Car insurance companies don’t care. You’ll still get a hefty bill. But this one lets you pay by the mile. You pay a base rate, then a few cents per mile. If you drive less than about 30 miles a day or 5,000 a year, you could save around $500 a year. It’s available in California, Illinois, New Jersey, Oregon, Pennsylvania, Virginia and Washington.

2. Homeowners Insurance

A couple moves into their new home.
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What is it? It covers the cost of repairing or rebuilding your home if it gets damaged by fire or the kind of natural disaster insurers call “acts of God” — earthquakes, flooding, lightning, windstorms, etc.

Depending on where you live, you may need different policies for different threats. For example, I live on Florida’s Gulf Coast and have three policies — one each for general property damage, flooding and hurricane winds.

Do you need it? Yes. It’s mandatory if you have a mortgage. When you borrow money from a bank to buy a house, it’ll require you to insure that asset.

For most homeowners, those insurance premiums are included in their monthly mortgage payments. Even if you don’t have a mortgage, you should protect your most valuable possession — your home.

Our tip to save money: Start by getting a free quote.

We recommend the online insurance company Lemonade, where homeowners insurance starts at $25 a month. Instead of profiting extra when it doesn’t have to pay out claims, the company keeps a set 20% of your premium for itself, and 80% goes into a pool for paying claims and charity.

Lemonade offers homeowners insurance in Arizona, California, Georgia, Illinois, Iowa, Maryland, New Mexico, New York, Nevada, Pennsylvania, Texas, Ohio, Rhode Island and Washington, D.C., and it’s expanding to other states.

3. Life Insurance

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What is it? It pays your dependents a set amount of money if you die. You’ve probably heard of two options: term and universal life insurance.

Do you need it? That’s a judgment call. Life insurance is more important if you’re married or have children. In any case, you should at least consider a basic policy that would pay off your funeral, mortgage or other debt.

Our tips to save money: New competitors in the industry are updating the old model.

A company like Policygenius offers you an easy way to compare and buy life insurance. Unlike traditional providers, this online-only platform provides an easy way to apply, and it offers instant quotes from top carriers online to help you make a quicker decision.

If you’re young and mostly healthy, consider purchasing term life insurance online from Ethos. It partners with a major A-rated life insurance carrier to provide policies for a low price. For example, $30 a month could get your family $1 million of coverage.

4. Health Insurance

A woman receives a check-up from a female doctor.
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What is it? It covers the cost of your medical bills — some of them, anyway.

Do you need it? Yes! You’ll pay a lot less for health care with insurance. Most working Americans get their health insurance through employer-sponsored plans. Insurers like Cigna and United Healthcare offer private health insurance plans for the self-employed.

Since 2010, another 20 million people have gotten insured through the Affordable Care Act, although it remains to be seen what will happen with that. Also, if you can afford health insurance but choose not to buy it, you’ll have to pay a healthcare mandate penalty.

Our tips to save money: If you’re buying insurance for yourself, start with the federal health insurance marketplace to see if you qualify for any discounts or assistance.

For further help, check out Joany, a health care concierge service. It helps people find and compare plans, seek out doctors and navigate complicated medical bills.

5. Travel Insurance

A woman walks through in the ocean as the sun sets.
Heather Comparetto/The Penny Hoarder

What is it? You’ll find several kinds of travel insurance — protection against canceled trips, interrupted trips, emergency medical expenses abroad, losing your luggage and other risks. Here’s our complete guide to travel insurance.

Do I need it? It’s a waste of money if your policy is full of loopholes and exclusions, or if it doesn’t cover the risks you’re most likely to encounter. On the other hand, it might make sense if your itinerary involves a lot of flights and stopovers, or if you’re headed somewhere with civil or political unrest.

Our tips to save money: The New York Times and Consumer Reports both recommend the online broker InsureMyTrip for detailed information about what different policies cover.

6. Renters Insurance

A man plays the guitar inside his apartment.
Carmen Mandato/ The Penny Hoarder

What is it? If you rent instead of own a home, this insurance covers the cost of replacing your possessions if they’re stolen or damaged by fire or vandalism. Most don’t cover flooding. Exactly what it covers depends on the policy.

Do you need it? Your landlord might require you to have renters insurance. If not, it’s your call. It depends on how much you value your possessions. A basic policy often costs about $15 a month, according to Policygenius.

Our tips to save money: As with homeowners insurance, we recommend the online insurance company Lemonade, where renters policies start at $5 a month. It currently offers renters insurance in California, Illinois, New Jersey, New York, Nevada, Ohio, Rhode Island, Texas and Georgia.

7. Pet Insurance

A woman interacts with her German Shepard.
Carmen Mandato/ The Penny Hoarder

What is it? It covers the cost of veterinary treatment for your pet.

Do you need it? Many consumers would consider pet insurance a luxury compared with other types of insurance.

It can be useful if you own a breed of dog or cat that’s likely to cost you a lot in vet care. For instance, large dogs are more likely to have medical problems with their hearts, hips and elbows, while a number of purebred cat breeds are prone to health problems.

Our tips to save money: The American Veterinary Medical Association suggests you talk to your veterinarian about your pet’s age and general health. Here’s our full guide to buying pet insurance.

8. Phone Insurance

Kristina Macys waits for water to boil in her home in Tampa Florida, on January 6th, 2018.
Carmen Mandato/ The Penny Hoarder

What is it? It pays out if your beloved smartphone is lost, stolen or damaged. (“My BABY!”)

Do you need it? Are you a butterfingers? If you’re a klutz like me, all it takes is one really good drop to make you wish you had bought phone insurance.

Our tip to save money: It’s confusing to sort through all the insurance plans offered by phone manufacturers, wireless carriers and third parties. Ask yourself, “Am I more likely to lose my phone or drop my phone?”

If you’re more likely to drop it, consider a third-party insurer like SquareTrade, which costs less than most other plans we’ve found. It covers accidental damage but not loss or theft. Here’s what to do if you’re more likely to lose your phone.

9. Jewelry Insurance

An engagement ring rests on table.
Carmen Mandato/ The Penny Hoarder

What is it? It pays out when your jewelry is damaged or stolen. Some policies also pay for lost jewelry.

Do you need it? It’s kind of a luxury. NerdWallet asks, “If your favorite piece of jewelry disappeared or was badly damaged, would you feel devastated because of its sentimental value? Crushed because you couldn’t afford to replace it?”

Our tips to save money: Jewelry insurance typically costs 1% to 2% of the item’s value. Ultimately, whether or not you buy it comes down to how worried you are about replacing your jewelry.

10. Disability Insurance

An elderly man gets assistance walking by a nurse.
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What is it? Long-term disability insurance usually replaces up to about two-thirds of your income if you can no longer do your job. Premiums tend to cost 1% to 3% of your salary.

Do you need it? Do you depend on your salary for your living expenses? Then long-term disability insurance will help you feel financially secure. Still, compared to life insurance, relatively few people buy private disability insurance, largely because they don’t feel they need it in their jobs. Some employers offer it as part of a benefits package.

Our tips to save money:  Shop around online through a marketplace like Policygenius.

11. Rental Car Insurance

A woman drives a rental vehicle
Heather Comparetto/The Penny Hoarder

What is it? It pays for damage to your rental car.

Do you need it? If you have car insurance, you probably don’t need to pay for additional coverage at the rental car counter. Your regular auto insurance policy will typically cover your rental car as long as you’re driving it for personal use, not for business.

Our tips to save money: Read your policy closely or call your insurance company to make sure you’re covered under your own auto policy. Your credit card may also offer some coverage if you use the card to pay for your rental car.

12. Mortgage Insurance

The painting room inside a woman's home.
Carmen Mandato/ The Penny Hoarder

What is it? It covers your mortgage lender in case you’re no longer able to make your mortgage payments.

Do you need it? It’s not up to you. Your lender might require it.

If your down payment was less than 20% of the value of your home, you’re likely paying for mortgage insurance in addition to the cost of your mortgage. When you’ve paid back enough money to get the mortgage value to less than 80% of your home’s value, the mortgage insurance premium should disappear from your monthly bill.

Our tips to save money: Our full article on mortgage insurance sounds a warning. Even after you no longer need mortgage insurance, your lender may just keep charging you premiums unless you contact it and make the payments stop. Not even kidding.

Mike Brassfield ([email protected]) is a senior writer at The Penny Hoarder. He has four different kinds of insurance but probably needs more.

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