What Insurance Do I Need? The Four Policies That Protect a Household, the Ones You Can Skip, and the Disability Gap Almost Everyone Has (Money School, Lesson 8)

Most households need four kinds of insurance, and only four: health insurance, disability (income) insurance, liability cover on your car and your home or rental, and term life insurance if anyone depends on your paycheck. Everything else you are offered, at a checkout, a car dealership or a loan signing, is optional at best and usually protects the seller's margin more than it protects you. The rule that sorts them takes one sentence: insure what would ruin you, and pay for what would only hurt. Here is the part almost nobody is told: the policy most working adults are missing is not life insurance; it is the one that pays you when you cannot work. About one in four of today's 20-year-olds will become disabled and qualify for Social Security disability benefits before age 67, and far fewer people carry disability cover than carry car insurance, which protects a vehicle worth a fraction of their earnings. Check what your employer already gives you before you buy anything. This is Lesson 8 of Money School.

Jake's shop was broken into on a Tuesday night in March. The thieves took two laptops, a box of new screens and the cash float, and they broke the back door on the way in. Jake had insurance; he had more insurance than he knew. When Ethan helped him gather the paperwork for the claim, they found nine policies across the business and the house: the shop's property policy, which paid for the screens and the door, and eight others, including a warranty on a microwave, phone insurance on a phone he had since replaced, a credit insurance line on the van loan and an accidental-death policy that came "free" with a card and then quietly started charging. What they did not find was the one thing that would have mattered if the thief had hurt him on his way out: anything that paid Jake if he could not work.

If your insurance looks like Jake's, a drawer of policies you half remember and a feeling that you are either over-covered or under-covered and cannot tell which, you are in the overwhelming majority, and it is not your fault. Insurance is the one financial product that is almost always sold rather than bought: someone offers it to you at the exact moment you are excited, anxious or signing something else. Nobody taught me how to sort it either. I paid for a phone protection plan for three years on a phone I could have replaced from savings, and I had no idea, until I was off work for six weeks with a back injury, that my job's sick pay ran out after two. This lesson is the sorting I wish someone had done with me.

The one rule that sorts every policy: insure what would ruin you

Insurance is a trade: you pay a small certain loss, the premium, to avoid a large uncertain one. On average the insurer wins the trade, because premiums have to cover claims, staff, sales commissions and profit. That is fine, and it is the whole point, when the loss you are avoiding would change your life. It is a bad trade when the loss is one you could absorb.

So every policy goes into one of two piles. Pile one: losses that would ruin you. A hospital stay, losing your income for a year, a lawsuit after you injure someone in a crash, a fire, your family losing your paycheck if you die. You cannot save your way out of these in time, and these are exactly what insurance is for. Pile two: losses that would only hurt. A cracked phone, a broken microwave, a $600 car repair, a canceled cheap flight. These are what your emergency fund from Lesson 2 is for, and paying an insurer to handle them means paying their costs and margin on a loss you would have survived anyway.

Here is how the rule sorts the losses people insure most often:

The rule has a direct consequence that saves real money: once your emergency fund exists, raise your deductibles. A deductible is the part of each claim you pay yourself, and the higher it is, the lower your premium, because you have taken the small losses back from the insurer. If your fund can cover a $1,000 car deductible, there is rarely a reason to pay extra every month for a $250 one. This is why insurance is Lesson 8, not Lesson 1: the fund makes the cheaper version safe.

Jake: "So the microwave warranty and the shop insurance aren't the same kind of thing at all."

Ethan: "One covers a loss that could close the shop. The other covers a loss smaller than one day's takings. You'd survive the microwave."

What insurance do I need? The four policies that protect a household

Here are the four, the loss each one stops, and who can skip it. If you have all four set up sensibly, you are better protected than most households in the country, whatever else is in the drawer.

Notice what is not on the list: anything that covers a single object you could replace. Every policy above covers either your body, your income, or your legal exposure to other people, because those are the three things whose loss you cannot recover from on a normal paycheck. The rest of this lesson takes them one at a time, then the list of things you can usually cancel tonight.

Health insurance: the non-negotiable, and how to read the price

In the U.S., 7.9% of people, about 26.7 million, had no health insurance for all of 2025, and the highest rate of any age group was young adults aged 19 to 25, at 14.5%. If you are one of them, you are not careless; you are often in the gap between a parent's plan and a job that offers one. Close that gap first, before anything else in this lesson, because a single hospital stay without coverage can cost more than everything else on this page combined.

Most people with coverage get it through work, and it is expensive even when it does not feel that way. The average employer family plan cost $26,993 a year in 2025, of which workers paid $6,850 directly from their pay; single coverage averaged $9,325. When you compare plans at open enrollment, the premium is only one of four numbers that matter:

• Premium: what you pay every month whether you use it or not.
• Deductible: what you pay each year before the plan starts sharing costs.
• Coinsurance or copays: your share after the deductible.
• Out-of-pocket maximum: the most you can pay in a year for covered, in-network care. This is the number that tells you the worst case, and it is the one most people never look at.

The same rule from the top of this page applies: if your emergency fund could cover the out-of-pocket maximum, a high-deductible plan with a lower premium is often the better trade, especially if it comes with a health savings account you can fund. If your fund could not, a lower deductible is worth paying for until it can. The wrong question is "which plan is cheapest per month"; the right one is "which plan's worst year could I survive."

Disability income insurance: the policy almost everyone is missing

Your ability to earn is very likely the largest asset you own. Someone earning $50,000 a year for the next 30 years will earn $1.5 million before any raise, which is more than their home, their car and their savings combined. And yet most people insure the car and not the earnings. About one in four of today's 20-year-olds will become disabled and qualify for Social Security disability benefits before age 67, and those benefits are designed as a floor, not a replacement for a paycheck; most disabilities that stop people working for a while are not even long enough or severe enough to qualify.

Disability insurance pays you a share of your income, often 50% to 70%, if illness or injury stops you working. Two kinds, and you want to know which you have:

1. Short-term disability covers the first weeks or months, often after a waiting period of one or two weeks. Many employers provide it.
2. Long-term disability starts after a longer waiting period, often several months, and can pay for years or until retirement age. This is the one that protects you from the life-changing case.

Before you buy anything, find out what you already have, because many employers include group long-term disability cover in benefits. Log in to your benefits portal or ask HR three questions: is there long-term disability cover, what percentage of my salary does it pay, and is the benefit taxable (it usually is if the employer pays the premium, and not if you pay it with after-tax money). If there is no cover, or it pays 50% and you could not live on 50%, an individual policy fills the gap. Read the definition of disability in any policy: "own occupation" pays if you cannot do your job; "any occupation" pays only if you cannot do any job, which is a much harder test to pass.

Jake: "I'm self-employed. There's no HR to ask."

Ethan: "Then you're the HR. For you this is the first policy to price, before any of the others you're adding. If you can't fix screens for six months, the shop stops and so does everything that depends on it."

Car, renters and home insurance: it is the liability, not the object

People think of car insurance as insurance for the car and renters insurance as insurance for their stuff. The most important part of both is the part that protects you from other people. If you cause a crash that injures someone, their medical bills and lost wages can run far beyond what any car is worth, and if your policy's liability limit is the legal minimum, the difference can become a judgment against you and your future wages.

Three things to check on your car policy tonight:

• Liability limits. State minimums are often very low. Raising your bodily-injury limits is usually one of the cheapest increases in coverage available, per dollar of protection.
• Uninsured and underinsured motorist cover. About one driver in seven was uninsured in 2023, and one in three was either uninsured or underinsured. This cover pays for your injuries when the other driver cannot.
• Collision and comprehensive on an old car. These cover your own car. On a car worth $3,000, paying for collision with a $1,000 deductible may cost more over a couple of years than the most it could ever pay you. That is a pile-two loss; your fund covers it.

Renters insurance is the best value in the whole field and the most skipped. The national average is about $170 a year, roughly $14 a month, and it covers your belongings against fire and theft, temporary housing if your home becomes unlivable, and, most importantly, personal liability if a guest is hurt in your home or you accidentally damage someone else's property. Your landlord's policy covers the building, not you. Homeowners insurance does the same for owners, plus the structure; check that the dwelling limit would rebuild the house at today's construction costs, which have risen sharply in recent years, rather than the price you paid for it.

When your assets and income grow, an umbrella policy adds a large layer of liability cover on top of your car and home policies, often for a modest price per year. It is not a starter policy; it is the one to add once you have something worth suing you for.

Life insurance, honestly: term, whole life, and how much

Life insurance is for one situation: someone would struggle financially if you died. A partner sharing a mortgage, children, a parent you support, a co-signed loan. If nobody depends on your income, a single person with no dependents usually needs little or none beyond enough to cover final costs, and that is often already in an employer's basic benefit.

In the U.S., 52% of adults owned life insurance in early 2026, and 38%, about 92 million people, said they needed coverage or more of it. One reason the gap persists is price confusion: adults under 31 guess the cost of a term policy at five to six times what it actually costs. If you have put this off because you assumed it was expensive, you were probably wrong in the direction that should make you feel better.

Two families of policies, and the plain difference:

• Term life covers you for a set number of years, commonly 10, 20 or 30, for a fixed premium. If you die during the term, it pays; if you outlive it, it ends. It is designed for the years when people depend on you most: while children are young, while a mortgage is large. It is inexpensive because most policyholders outlive it.
• Permanent life (whole life, universal life and their variations) covers you for life and builds a cash value. It costs many times more for the same death benefit, and the sales commission on it is usually far larger. It has genuine uses, mostly in estate planning for people with complicated situations or large estates. For most working families, the honest comparison is term life plus investing the difference in the retirement accounts in Stage 3.

How much? A common starting point is enough to replace your income for the years your dependents would need it, plus any debts you would not want to leave behind, minus savings and existing cover. If your children are 3 and 5 and you want them covered until they are through school, a 20-year term matches the need. Work out the number before anyone quotes you a policy; a quote that starts from what the seller can sell is not the same as one that starts from what your family needs.

What you are being sold: the policies you can usually skip

Here is the other half of the hub's promise: the policies that protect the person selling them more than the person buying. None of them is a scam, and each one is right for someone. Run each through the one rule, would this loss ruin me, and most of them fall into pile two.

• Extended warranties on electronics and appliances. The loss is a replaceable object, the failure rate in the extended period is usually low, and the price is often a large share of the item's cost. Your fund covers it.
• Phone insurance and protection plans. Same logic, plus deductibles that make small repairs barely worth claiming. Check whether a card you already use includes phone cover before paying for it again.
• Credit life and credit disability insurance on loans. These pay a specific loan if you die or are disabled. Ordinary term life and disability cover protect the same debt and everything else, usually for less.
• Accidental death only. Pays only if you die in an accident, which excludes most of the ways people die. If you need life insurance, buy term, which covers both.
• Single-disease policies (cancer-only and similar). Good health insurance and disability cover protect you against the disease and every other one.
• GAP insurance when you made a large down payment. GAP pays the difference between your car's value and your loan if it is totaled, which matters only when you owe more than the car is worth. Regulators found lenders selling it to borrowers whose loans were already well below the car's value. If you buy it and pay the loan off early, ask for the refund of the unused premium.
• Rental car damage cover you already have. Your auto policy or the card you pay with often covers it already; check before the counter, not at it.
• Identity theft insurance. The free credit freeze from Lesson 7 prevents most of what it insures.
• Life insurance on young children. Life insurance replaces income someone depends on; children do not have any.
• Trip cancellation on cheap trips. Worth it for an expensive, non-refundable trip; rarely for a $200 flight.

If you hold some of these, there is no shame in it; they were sold to you by people trained to sell them at the moment you were least likely to say no. Cancelling the ones that fail the rule is one of the few financial moves that saves money every month for the rest of your life with one phone call each.

The insurance review: add it to the cost review from Lesson 5

Insurance is the largest re-shoppable bill most households have, and it is the one that quietly creeps up every renewal. In Lesson 5 you put insurance on the "re-shop" list; here is how to run that part well, once a year, a month before your car or home policy renews.

1. Gather the current declarations page for each policy: car, home or renters, life, disability, plus anything in the drawer.
2. For each, write three numbers: the premium, the deductible, and the limit. Ask whether the limit covers the ruinous case, and whether your fund could cover a higher deductible.
3. Get at least two comparison quotes for car and home with the same limits and deductibles, so you are comparing price for the same cover.
4. Ask your current insurer what discounts you qualify for, such as bundling car and home, a clean driving record, or a security system, and whether a higher deductible changes the price.
5. Cancel what fails the one rule. Keep a note of what you canceled and why, so next year's review starts from a clean list.

One evening a year. The first one is the long one; every one after it is half an hour.

The United Kingdom and Australia: same rule, different gaps

The rule travels everywhere; the gaps are in different places. In the United Kingdom, the NHS removes the ruinous medical bill that dominates American insurance decisions, which moves the biggest gap to income. Statutory Sick Pay lasts at most 28 weeks, and since April 2026 it is paid from the first day of sickness, but it is a fraction of most salaries. The British name for disability income cover is income protection; policies typically insure 50% to 70% of your gross income after a deferred period, often chosen to start when your employer's sick pay ends. Contents insurance does the job of American renters insurance, and life cover works the same way, with term policies covering the years people depend on you.

In Australia, many people already hold life and total-and-permanent-disability cover without knowing it, through their superannuation fund, with premiums deducted from their super balance. Check your fund's statement this week: what cover you have, what it costs, and whether you have it twice in two funds. Cover can stop if your account receives no contributions for 16 months, though the fund must contact you first, and new members under 25 or with balances under $6,000 do not get it automatically. Default disability cover in super usually ends at 65, and life cover at 70. Income protection is available inside some funds and on its own.

Wherever your paycheck lands: health, income, liability, and life if someone depends on you. The names change at the border; the four losses do not.

This week's exercise: the drawer clear-out, do this with me

One evening. A table, the drawer, your banking app, and the list below. I do this every January, and the first time I did it I canceled three policies and found one I had forgotten I was paying for.

1. Open your bank and card statements from Lesson 5 and list every recurring insurance payment. Include anything with "protection," "plan," "cover" or "warranty" in the name.
2. For each one, write which of the four it is: health, disability, liability, term life. If it is none of the four, mark it "pile two."
3. For each pile-two policy, ask: would this loss ruin me, or would my fund cover it? Cancel the ones your fund would cover.
4. Log in to your benefits portal or email HR: do I have long-term disability cover, what percentage does it pay, and who pays the premium?
5. On your car policy, check the liability limits and whether you have uninsured motorist cover. Note both on your renewal date.
6. If anyone depends on your income and you have no term life cover, write down the number you would want your family to have. That is next week's job, not tonight's.

That is all. Nobody to call tonight except to cancel, and no product to buy before you know what you already have.

Honest aside: the feeling insurance sells

Every insurance sale sells two things: a promise to pay, and a feeling of safety. The promise is worth exactly what the policy's terms say it is worth. The feeling is worth nothing at all, and it is the part most of the expensive add-ons are really selling. The warranty on a toaster does not make your life safer; it makes the moment of buying the toaster feel safer. The way to resist that feeling without becoming anxious is to have a real answer to the question it is exploiting: you have a fund for the small things and four policies for the big ones, so you can say no to everything else with a clear conscience.

That is also why the floor in Stage 2 is built in this order. A buffer first, a score that keeps borrowing cheap second, and insurance third, sized to the losses the buffer cannot handle. Done that way, insurance stops being a drawer of worries and becomes a short list with a purpose.

Where this fits in Money School, and what comes next

Lesson 8 completes most of Stage 2, "Build the floor": cash you can reach (Lesson 2 and Lesson 6), a score that does not cost you thousands (Lesson 7), and insurance that pays for the losses you could not survive (this lesson). Two lessons remain in the stage: Lesson 9 ranks every kind of debt by what it actually costs, so you know which to attack first, and Lesson 10 is about scams, the six shapes every financial con takes.

As always, the course page shows every lesson and which ones are live. If you have just finished the drawer clear-out, you have earned the rest of the evening off.

Insurance: your questions, answered straight

Jake canceled five of his nine policies that week: the microwave warranty, the phone cover on the phone he no longer had, the "free" accidental-death policy, the credit insurance on the van loan, and a rental car add-on he had been paying on his card. Together they had been costing him $47 a month. He moved that, and a little more, into a long-term disability policy that would pay 60% of his average earnings after a 90-day wait, raised his van deductible to $1,000 because the fund from Lesson 2 could cover it, and doubled the liability limit on his car for a few dollars a month. He has four policies now, and he knows what each one is for. Ethan wrote the line below on the inside of the drawer.

Revision note. Written October 24, 2026, as Lesson 8 of Money School. The figures carry their dates in the text: the Census Bureau's health insurance report for 2025, the 2025 employer health benefits survey, the Social Security disability fact sheet, the 2026 Insurance Barometer study, and the 2025 uninsured motorists study. "Don't put all your eggs in one basket," says the old proverb; insurance is the basket for the eggs you could not replace.