What are the different types of insurance?
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A few years ago I went through the process of getting life insurance. My wife and I were at a place where we needed to add life insurance to our personal finance portfolio, so we did (we can talk more about when the right time to get life insurance is in another post). That experience got me thinking, what are the different types of insurance?
Some of the different types of insurance below we are all familiar with, auto, home/renters, health, life, but some others are used a bit less often and folks might not know about them. Before we give you a rundown of all the various types of insurance let's break down what insurance is and how it is useful for you.
Here is the list of 11 different types of insurance
Long term care
What is insurance?
Insurance is a contract, a contract between an insurance company and you (or an entity/business/etc.). It is intended to protect you financially from some type of accident/unforeseen event.
How does insurance work?
This is a slightly harder question to answer because in some cases it can be complicated. In its most basic form insurance works like this; you pay for insurance, something bad happens, and insurance gives you money to cover the costs. For example, you get in a car accident and insurance gives you a check to pay for the damages and any additional costs associated with the accident (rental car, hospital fees, etc.).
Things can get more complicated when you are talking about health insurance, or homeowners, or liability. These types of insurance can have all types of "small print" that cover you in some situations and not in others. As we walk through each type of insurance below I'll include some things you should be aware of and potentially even ask your insurer about before you sign up with them.
Different Types of Insurance
This is certainly not an exhaustive list, but it'll cover the most common types for most people. If you are in financial services or are very wealthy there are other types of insurance to protect you, your family, and your property. As I'm not either one of those I won't speak to them here.
Most of us are already familiar with this, but there are different types of car insurance to be aware of. Auto insurance is used in case of a car accident. There are 5 different, core types, of auto insurance, liability, comprehensive, collision, medical, and personal injury, which we expand upon below.
Liability - This covers bodily injury and/or property damage of the other driver in an accident if the accident is your fault
Comprehensive - This covers your car from a wide variety of things including theft, fire, falling objects, animal attacks (seriously), natural disasters. One important note here is that comprehensive doesn't cover the things that liability covers so these two types of auto insurance are typically purchased together.
Collision - If you hit something, then the damage to your vehicle is covered
Medical Payments - If you or your passengers are injured during an accident medical payment coverage may help pay for the costs.
Personal Injury - This type of coverage isn't available everywhere. As the name states, this type of coverage is for injury to you during an auto accident.
This is another common type of insurance that many of us are familiar with. As with auto insurance, there are a lot of options within home insurance.
Basic - Home and personal belonging are covered at their actual cash value. There are limits to the types of events this will cover (Yes = fire, hail, smoke: No = aliens, bigfoot)
Broad - This is more common than Basic. Your home is covered at replacement cost (very nice if your house burns down because you can build the same home with no cost to you, ideally). Your property is covered at actual cash value. The list of things covered extends here as well (Yes = weight of ice/snow/sleet, overflow of stream, freezing: Still No = aliens, bigfoot)
Special Form - They call this "all risks" coverage for your house and property. Special form policies cover "everything". I put quotes around everything because they will have a list of specific events that will not be covered. This list should be discussed with your insurance agent so you are very familiar with what you have covered. Typically insurance companies don't like to cover mold damage, power failure, neglect, intentional damage, etc.
Contents Broad Form - More commonly referred to as renters insurance which we will cover in more detail below.
Comprehensive - Comprehensive coverage is very similar to special form coverage but takes it a step further. Your home and property are covered at replacement cost. This type of coverage is typically for high-value properties and even more typical for high-value properties in higher-risk areas (think Florida coast or Caribbean island where hurricanes are a risk).
Unit-owners - Condo coverage would be the more common name here. Coverage of this type can vary greatly based upon what your HOA will cover. Your HOA coverage won't cover your personal property and/or any improvements you make to the property along the way. That is why you need unit-owner coverage if you own a condo.
Mobile Home - Very similar to special form coverage, but with a mobile home twist. This type of policy covers the most common types of mobile homes you would think of, modular, RVs, trailers, travel trailers, etc.
Modified Coverage - Modified coverage is typically used for very old homes that don't have modern electrical or plumbing (and no intention of updating). Older homes can be a big risk and traditional policies won't allow you to cover the home without upgrades. If you don't plan to upgrade you will need a modified coverage policy to ensure you get paid should something bad happen to the home?
Renters insurance is another very common type of insurance. As with home and auto, there are various levels of coverage you can get, but at the most basic level, you will be covering your personal property as you have no vested interest in the physical property.
Life insurance is one of those "optional" insurance types that many people overlook or simply delay too long. There are eight types (we will cover these in more detail in a later article) of life insurance and most of us will really only consider two types, Term, and Whole Life.
Term - This type of life insurance will pay your beneficiaries a pre-determined amount (whatever you agree to with your insurance agent) within a pre-determined time frame. For example, you can have a $250,000 Term Life Insurance plan that lasts 30 years. Over the course of 30 years, you make a monthly/yearly payment, and should you pass within that time frame your beneficiaries will receive $250,000. The payout amount and time frame can vary, but that will have an impact on your payments.
Whole Life - Similar to term life insurance, whole life provides your beneficiaries with a payout should you pass. The key difference is that whole life lasts your whole life, no matter how long you live, and term only lasts a predetermined length. Another key difference between term life insurance and whole life insurance is the cost, whole life can be 5x to 15x the cost of term insurance.
Umbrella insurance is another level of "nice to have" insurance beyond life insurance. A basic form of umbrella insurance will cover you from accidents in your life. These can be accidents at your home, with your vehicle, a boat, etc. It basically helps cover your tail should something very unfortunate happen. Typically, this type of insurance is fairly cheap, so definitely something you should consider fairly early in life.
Everyone needs health insurance, the problem is that it comes in so many different forms. You can get it from your employer, Medicare, "Obamacare", and on and on and on. In America, this type of insurance is critical to protecting your wealth. Health care costs can be outrageous should something bad happen. With good, quality health care, you can mitigate those costs, protect your family, and your wealth.
Other, less common, insurance types:
Identity protection - The title is the definition, if your identity gets stolen, this type of insurance will reimburse you for any associated costs/losses you may incur
Long-term care - This type of insurance will cover you should you have an accident that requires long term care
Marine - This protect any water-based vehicle
Fire - Typically this is included within home or renters insurance, but should you have some other property or want additional insurance you can buy this specialized type
Liability - This protects you in a situation where you may be the cause of some type of damage
Insurance is complicated and there are a ton of different types out there. Honestly, if you are trying to decide what career you want, maybe insurance is the way to go because you will always have something to sell to someone. Seriously though, having the right type of insurance at the right time in your life is critical to your financial health, and the safety and security of your family.
Please thoroughly consider where you are in your life and what type of insurance might be critical to that. If you need insurance advice you can reach out to your current insurance agent, or contact my partners: