Insurance

Where do I start with insurance? Understanding different types of insurance

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If the thought of selecting insurance gets a nervous sweat going, you’re not alone. From car insurance to home insurance and from health insurance to life insurance, there’s plenty to consider. And with so much insurance industry jargon, it can feel overwhelming.

Welcome to “Where do I start with insurance?” series, where we’re breaking down key insurance topics, terms and knowledge to help you make the best decision for you. For the first installment of our insurance series, here’s a primer on the different types of insurance.

Car insurance

If you have a vehicle in the United States, you need to get car insurance for it. It doesn’t matter if you own, rent or lease — if you’re behind the wheel, you legally have to have some kind of auto insurance policy.

There are several different types of car insurance coverage, but they can generally be broken down into two main categories: liability and physical protection. Almost every state requires you to have insurance; only Virginia and New Hampshire don’t. However, in both of those states, you’re still responsible for damages if you cause an accident, so it’s good to have auto insurance anyway.

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Liability coverage

Liability insurance protects anyone or anything else from damage you cause.That includes harm to other drivers, their vehicles and their physical property. Liability requirements differ from state to state, though most states require you to carry bodily injury and property damage liability coverage at a minimum.

Some states are “no-fault” with their insurance. These states require each driver to cover their own bodily injury damages after an accident, no matter which party was at fault. If you live in one of those states, you’ll also need personal injury protection (PIP), which covers things like medical costs or any other injuries sustained.

Physical coverage

Physical coverage protects your vehicle from damage, whether it’s inflicted by you or someone else. This includes events like crashing into another vehicle, as well as hit and runs, uninsured motorists and break-ins.

This type of coverage is broken down into collision and comprehensive coverage.

  • Collision coverage

Collision coverage is just what it sounds like — it protects your vehicle if you collide with something else, be it another vehicle or other obstacle. That protection extends to any repairs needed on your vehicle after a collision (such as a damaged bumper or car door) and will also kick in if your vehicle is totaled and needs to be replaced entirely.

Most collision coverage comes with a deductible, which means you pay a set amount to your insurance company before they’ll compensate you for additional damages. The deductible can vary based on a number of factors and preferences.

  • Comprehensive car insurance

Your car can also be damaged or stolen in other ways besides colliding with another vehicle or obstruction. In these situations, you’ll need comprehensive insurance.

For example, a robber might be in need of a car, and yours just so happens to be the lucky one they choose. Or a hail storm comes through town and golf ball-sized hail crashes through your windshield or dents your roof. 

Comprehensive car insurance covers situations involving theft, animals, vandalism and weather. Note that the “animals” bucket includes both colliding with a deer or other animal and damage caused by insects or rodents, such as a squirrel chewing through your transmission line.

Full coverage auto insurance

If you have a full coverage policy, you’ll be covered for liability, collision and comprehensive car insurance. However, there may be spots within your policy that aren’t covered, such as roadside assistance — when you need to call for a tow, flat tire replacement, or other quick repair — or property damage, which helps pay for repairs to other people’s cars or property in a collision. Be sure to ask your insurance company if you have any questions on what is covered. 

Full coverage is a good idea if you own a vehicle you plan on reselling or your vehicle is worth more than $4,000. It’s also mandatory if you lease or finance your vehicle.

Interested in learning more about insurance coverages outside of liability, collision and comprehensive coverages? Check out our full list of auto insurance coverage resources.

Property insurance

Property insurance protects you, your home and your personal property against loss or damage. If you have coverage and your home is destroyed during a fire or a valuable collection of jewelry is stolen from your bedroom, your insurance provider would pay for necessary repairs and replace items damaged or stolen.

The most common types of property insurance are:

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Home insurance 

Home insurance consists of five different primary coverage types: dwelling, other structures, personal property, personal liability and loss of use. Insurance can be defined by your type of property — a house vs. a condo — and whether you rent or own. There are additional elements to consider, as well, but here’s an overview of the main coverage types for homeowners.

  • Dwelling 

Covers the replacement cost of your home. Typically, any part of your entire house or condo is covered, but only if it’s a part of the main building on the land. For example, a fire damaging part of the home or hail creating a hole in your roof would fall under dwelling coverage. If your home is fully destroyed, this coverage doesn’t necessarily replace the full value of the home, only what it costs to rebuild.

  • Other structures 

Coverage includes things like fencing, detached garages and sheds.

  • Personal property 

Covers personal belongings within the home itself, such as clothing, electronics and artwork.

  • Personal liability 

Covers any injuries that occur to other people on your property, such as a fall or a faulty appliance causing a cut.

  • Loss of use 

Pays for you to live elsewhere during the period of repair or rebuilding if your home experiences a covered loss and is considered unlivable. For example, if your house floods during a hurricane and is unfit to live, you could stay at a hotel for a set period of time.

Renters insurance 

If you don’t own your home, renter’s insurance is an option for you. Renters insurance only covers your personal property and your liability for any damage you cause to other people or their property. For example, a dog biting your friend or a pipe bursting and damaging your downstairs neighbor’s ceiling would both be covered under your liability, which typically starts at $100,000. Many apartment complexes require renters insurance before allowing you to move in, and higher is typically better as far as the total coverage you get.

Condo insurance 

Condo insurance is like a hybrid of homeowners and renters insurance. It’s a bit more extensive than renters insurance, particularly if you own your appliances or other elements within the home. Like renters insurance, condo insurance policies include personal property and liability coverage, as well as additional living expense insurance. Though it covers the parts of your home that you own, it typically doesn’t extend to the exteriors or shared living spaces that you don’t own.

Special circumstances

Depending on where you live, you may experience more major potentially damaging natural events. Insurance companies offer the ability to add on extra coverage for those situations.

  • Earthquake insurance 

Many home, renters and condo policies don’t include earthquake damage. But if you’re in an area that’s prone to a lot of earthquakes — even if you can’t feel them — it’s a good idea to add earthquake insurance, which will cover damage to your home, personal belongings and any additional expenses you may incur as a result of an earthquake.

  • Flood insurance 

While earthquake insurance is optional, most homes in flood-prone areas require flood insurance. Flood insurance, which is also not included in home, renters and condo insurance policies, will cover costs to rebuild a home or replace personal property in the event of a flood. You can see if you’re in a high-risk flood zone by checking the FEMA Flood Map Search Center.

Aside from earthquakes and floods, some other threats may not be covered by your property insurance. For example, mold, landslides or intentional acts — like breaking an old TV you have to get enough money to buy a new one — won’t fall on your insurance company. That also extends to actions that cause “expected or intended” bodily injury to the insured. So, just in case you’ve ever thought about destroying your home like a rock star tearing up a hotel room, know that you’ll be on the hook for the damages.

Additionally, your insurance company won’t cover damages caused by negligence or normal wear and tear. These categories include events like a bedbug infestation, sewer backup or an outdated water heater bursting and causing water damage to part of your home.  

Property insurance can include many types of coverage but it will also exclude some. Learn how to read your homeowners insurance policy so you’re not left empty-handed after an incident.

Life insurance

Life insurance is a good idea if anyone is financially dependent on you. That could mean family members — either parents, siblings or children — business owners, homeowners with a mortgage or those worried about funeral costs.

Life insurance is a contract that promises money to designated beneficiaries after the insured dies. The monetary payout is often called a death benefit and will go to whomever you determine, usually a family member or spouse.

You qualify for life insurance through an application. The application often includes a phone or online screening that discusses your health and any pre-existing conditions and may require a physical exam. Your health information including your age, personal and family history, career, lifestyle, hobbies and driving record all factor into your life insurance cost. These factors will affect your rate and how much life insurance you need. To keep the coverage going, you’ll pay a premium at a regular cadence, usually monthly. 

When you die, your beneficiary files a claim with the life insurance company. This process requires official documentation like a death certificate. Once the life insurance company is satisfied, the beneficiary can choose to receive the death benefit as a lump sum or in annual payments. In both situations, there’s no tax on the payments.

Life insurance is broken up into three different types of policies:

Term life insurance 

This type of policy covers you for a set number of years and is typically the cheapest policy available. It’s based on a fixed rate over that period of time. Once you reach the term limit, you’ll have to renew to keep your coverage.

Whole life insurance

Also known as cash value life insurance, whole life insurance will last the rest of your life while covering you for that entire time (without changing your premium). A portion of each premium payment you make goes into a tax-deferred cash value account that generates interest at your policy’s rate. This cash value amount is different from the death benefit and is designed to be used by the policyholder while they’re still alive, not by the beneficiary after the policyholder’s death.

Universal life insurance 

This type of insurance is similar to a whole life policy, but the cash value correlates with a stock index instead of a fixed rate. If the market under or overperforms, it could lead to a smaller or larger payout.

Health insurance

Health insurance is a contract between you and your insurer in which you pay a monthly premium and in return, they’ll pay for some of your medical costs. It typically covers most visits to the doctor or hospital, wellness visits or care (such as physical therapy), prescription drugs, and medical tools and devices. Health insurance often won’t cover experimental treatments or drugs or cosmetic procedures, unless there’s also a medical reason to have the procedure done.

Many companies offer benefits that may pay for some or all of their employees’ health insurance, which covers medical expenses. If you don’t receive health insurance through your job or are unemployed, you can get it through a variety of other ways, including the Marketplace, Medicaid, or a Child’s Health Insurance Program (CHIP).

Some auto insurance pays for medical visits as the result of an accident, so your health insurance would likely be used more for regular and specialty doctor visits and medication. However, if you don’t have bodily injury liability coverage or personal injury protection, you could use your health insurance to provide coverage against a car accident.

Health insurance is also incredibly helpful if you experience a major medical event, such as cancer, a multi-week hospital stay, or other long-term illness, since it helps support costs for the duration of your visit. 

There’s no federal law requiring health insurance and you won’t receive a tax penalty if you don’t have any. However, it can be tremendously helpful should any medical emergencies rise, so it’s worth exploring your options. Here are the main types of health insurance:

Health Maintenance Organizations (HMOs) 

HMOs require you to choose from a local network of doctors, hospitals and healthcare professionals. You’ll select one as your primary care provider (PCP), which can also provide referrals to other specialists within your network.

Exclusive Provider Organizations (EPOs) 

EPOs let you choose from a network of providers. If you go to a provider or facility that isn’t in the plan’s network, you’ll likely pay the full cost out of pocket.

Preferred Provider Organizations (PPOs) 

PPOs let you choose from a larger network of providers and don’t require a PCP or referral to see specialists.

Point of Service Plans (POSs) 

POSs are a combination of an HMO and a PPO plan. The provider network isn’t as large but in-network costs are lower. You can also choose to see specialists either inside or outside your network, though costs are higher for out-of-network providers.

Health insurance comes with deductibles, which is the amount of money you’ll pay before your health insurance begins to cover your costs.

Most plans offer multiple options. If you don’t expect a lot of trips to the doctor, you might choose a higher deductible and lower premium to pay monthly. However, if you have several doctor’s visits scheduled or are coming off an injury or other medical issue, you may choose an option with a lower deductible and a higher premium.

Travel insurance

If you’re planning a big vacation, you may consider getting travel insurance. It can help cover some or all of the costs of unforeseen situations that can occur on a trip.

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Depending on the policy, travel insurance might cover:

  • Travel delays and cancellation, including expenses incurred for hotels, meals or transportation
  • Lost or delayed baggage
  • Medical coverage
  • Accidental death and flight accident. If you or a family member you’re traveling with suffers an accident resulting in injury or disability, or dies during a flight, the surviving party can receive benefits.

However, in several cases, other insurance types will overlap travel insurance. Always check whether your health insurance already covers you while abroad. Or if you have a life insurance policy, it will likely cover you in case of accidental death while traveling. If you’re taking a domestic road trip, you don’t need to purchase travel insurance. Your auto insurance policy will cover any potential mishaps along the way.

Wrapping Up

Now that you have a better idea of the insurance types available and how they work to cover different aspects of your life and possessions, consider comparing prices to make sure you're not overpaying for your home or auto policies. 

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