Why is insurance important and what can you protect?

How insurance works
The importance of life insurance 
The main types of insurance 
How to select the right insurance
Things to consider when buying insurance
Insurance key terms explained

Insurance is important as it’s a crucial way to preserve your wealth and assets, as well as protect your family. It helps you to reduce risk around anything that could have a big financial impact, such as fire damage to your home or a costly lawsuit against your business.  

Insurance allows you to transfer specific financial risks to an insurance provider. In exchange, you pay the insurer a monthly or annual premium.  

If an insured event occurs, e.g. a car accident, you’d file a claim to your insurer. Once verified, the insurer would then financially reimburse you. This offsets any financial impact you may have felt due to the event.  

Having insurance can bring a sense of financial security in case unfortunate or unexpected life events were to happen. In general, having more cover can reduce your financial risk. But it’s also possible you’ll never need to make a claim on the policies you buy. 

You may need more than one type of insurance because different policies cover distinct risks, such as health emergencies, liability claims and wealth transfer needs. With a layered approach, you can be sure that a single catastrophic event won't compromise your overall financial security.

While some types of insurance are compulsory, others may be contractual and many are totally optional. For example, in nearly all U.S. states, auto liability insurance is a legal requirement for driving any vehicle.  

Other types of insurance may be required contractually, such as home insurance or landlord insurance (if you’re renting out a property).  

There are many other optional types of insurance including medical insurance, travel insurance and life insurance. Whilst medical insurance is optional, it’s considered to be an essential form of insurance in the U.S.  

People often choose to purchase optional insurance to protect their wealth, possessions or liabilities in some way.  

Life insurance is important because it provides immediate financial security for your dependents and serves as a highly efficient tool for wealth transfer. Beyond simply replacing lost income, certain permanent life insurance policies offer tax benefits and can help diversify your investment portfolio through cash value accumulation.

Some types of insurance will be important for everyone (such as medical insurance). Others will only apply to certain lifestyles, professions, assets or environments.  

As you build wealth and estate over time, it’s likely you'll become more mindful of preserving these through insurance. The importance of insurance is about protecting what matters most in life such as health, well-being, your finances and leaving a legacy for your family.  

Different stages of life and wealth require specific forms of protection. Let’s break down some of the most common types of insurance in relation to those stages.

Explore: Protecting your loved ones

To select the right insurance, start by evaluating your current financial needs and future legacy goals. Then, pick a policy that protects the specific assets you want to safeguard. Customize it by adjusting coverage limits, deductibles and optional add-ons to fit your needs.

Generally, a higher level of cover means a more expensive premium, while higher upfront deductibles can reduce the premium.  

You might also be able to choose the benefit amount that would be paid if a covered event happens. For example, with life insurance, you can decide how much would be paid to your beneficiaries if you die. People often choose an amount that could help to: 

The specific details of what each insurance covers are unique to the policy holder. 

Explore more: Buying insurance 

Taking out an insurance policy is a financial commitment, so affordability needs to be considered. Funding insurance premiums should be accounted considered a part of your monthly expenses, so it’s important that you don’t overcommit to too many different policies. 

Before purchasing any additional insurance policies, check what you might already be entitled to through your employer or your bank. If you’re an employee, you may have some insurance as part of your employment benefits. Similarly, many credit cards and bank accounts offer insurance benefits. 

Try to prioritize risks that would be hardest to absorb or correct financially. Which risks would have the most catastrophic impact on your life? Those are the things to insure first.

For example, most people would not be able to rebuild their home and replace all their belongings after a serious fire. This is why homeowners insurance is almost always a contractual requirement. 

Your insurance needs are likely to change and evolve throughout the course of your life. Be sure to review what insurance you’re prioritizing on a regular basis.  

For smaller and more predictable risks (such as losing your cell phone), you could focus on building a healthy emergency fund as an alternative to insurance. This could be more cost effective than insuring absolutely everything you own. 

Policies renew each year, often with increased pricing or adjusted terms. Review the amount you are paying for your insurance policies on an annual basis. If necessary, you can always cancel your policy and switch providers for a more competitive rate. 

Policy - The contract that explains what your insurance covers, what it doesn’t cover, and the rules for using it. 

Premium - The amount you pay for insurance, usually monthly or yearly, to keep your coverage active. 

Claim - A request you make to your insurance company to pay for a covered loss or expense. 

Deductibles - The amount you pay out of pocket before your insurance starts paying on a covered claim.

Optional add-ons - Extra coverage you can choose to buy to expand what your policy covers, usually for an additional cost. 

Renewal - When your policy continues for a new term, sometimes with updated price or terms.

A waiting time, or waiting period, is the specific length of time you must wait after purchasing a policy before your coverage becomes fully active and you can file a claim. This is common in disability and health insurance policies.

Yes, permanent life insurance includes a cash value component that grows over time. This cash value grows tax-deferred and can be borrowed against to provide liquidity during your lifetime.

In most cases, the death benefit paid to your beneficiaries from a life insurance policy is free from ordinary income tax. However, without proper estate planning, it could be subject to estate taxes. Always consult a tax advisor.