From a financial planning perspective, insurance is a core risk management tool. By transferring risk to an insurance company, individuals and families may reduce the financial impact of misfortune. In this article, we’ll provide an overview of major types of insurance coverage, the risks each one is designed to address, and the role insurance plays in a financial plan.
Insurance Through a Financial Planner’s Lens: Risk Management First
Risk management is an essential pillar of financial planning. It involves identifying, measuring, prioritizing, and mitigating the potential for losses. Risks can be managed in several ways, as shown in the chart below. For instance, maintaining an emergency fund covering three to six months of expenses reduces the potential financial impact of a job loss or an unexpected expense. While you could put that emergency savings under the mattress, using an FDIC-insured savings account avoids the risk of loss or theft. For unlikely events with high costs, insurance is the risk management tool of choice.
Risk Management Matrix
| Probability / Severity | High Probability | Low Probability |
| High Severity | AVOID | TRANSFER (Insurance) |
| Low Severity | REDUCE | RETAIN (Self-insure) |
It is possible to be underinsured or overinsured. For instance, insuring risks which can be retained affordably may mean paying too much for insurance. The goal of risk management through insurance is to achieve sufficient coverage to mitigate financial risk at the lowest available cost. Insurance is designed to protect assets and income so that you can stay on track for long-term financial goals like retirement or legacy planning.
Core Insurance Coverage Types
The five most common types of insurance are property and casualty, health, life, disability, and liability. We’ll review what each type of insurance protects, why it matters, common gaps in coverage, and financial planning considerations.
Property & Casualty Insurance
What it covers: Property and casualty insurance covers physical and personal property. The most common forms of this coverage are auto, homeowners, and renters policies. Homeowners (HO) insurance bundles coverage of structures, personal property, loss of use, and liability. Renters insurance is a type of HO policy which excludes coverage for structures. Personal automobile policies also bundle coverage such as liability, property damage (to your car), and sometimes uninsured or underinsured motorists.
Why it’s important: This coverage is important because car and home repairs can be costly, and they often need to be addressed quickly. The average cost of an unexpected auto repair in 2026 can range from under $100 to over $15,000 (Consumer Affairs). Unexpected home repairs can be far more expensive, and a total loss through a flood or fire could be financially ruinous without insurance.
Common coverage gaps:
- Failing to update coverage amounts over time. Inflation doesn’t just increase the cost of gas and groceries. Building materials also become more expensive, and that means the cost to replace your home in the event of a loss does too. It is a good idea to review coverage every year or two and increase coverage as needed. (Covenant)
- Failing to insure personal property adequately. Homeowners and renters insurance both provide coverage for personal property, which is all the possessions in the home. The default coverage for personal property may exclude jewelry over a certain value, collectibles, antiques, and more. If you own valuable collectibles, antiques, or expensive hobby equipment, you may need a separate policy or rider. Review your policy to ensure adequate coverage. (Forbes)
- Inadequate liability coverage. Homeowners and auto policies typically include a base level of liability coverage which may cover damage to other property or medical payments for injuries. The limit can often be increased if the base amount is insufficient. Many insurance companies may also offer Personal Liability Umbrella Policies (PLUP) to increase liability coverage beyond the limits of an HO or auto policy. More on this later.
- Renters without insurance. Homeowners usually have an HO policy as it is a requirement of many mortgage lenders. However, many renters don’t consider renters insurance. A renters policy covers not just a renter’s personal property but also offers liability coverage which is often the larger financial risk.
- Water damage isn’t always covered. Most HO policies cover burst pipes, but sewer backups may only be covered if specified, and flood insurance is always a separate policy. (Forbes)
Key planning considerations:
- Actual Cash Value (ACV) vs. Replacement Cost. This is an important coverage distinction. Replacement cost coverage pays to replace an item with a new or comparable one after a loss. Actual cash value reflects depreciation, so you may need to pay part of the replacement cost yourself. (LegalClarity)
- The right amount of coverage is key. If you can afford the gap under an ACV policy, replacement cost coverage may be more than you need. Deductibles also affect premiums: lower deductibles usually mean higher premiums, and higher deductibles usually mean lower premiums. On the other hand, too little liability coverage can leave you underinsured. Reviewing your policies regularly helps keep coverage aligned with your needs.
Liability Insurance
What it covers: Liability insurance protects your assets and future income if you are held legally responsible for injury, damage, or other covered losses.
Why it’s important: Homeowners and auto policies include liability coverage, but their limits may not fully protect your assets or future earnings. A Personal Liability Umbrella Policy (PLUP) can provide additional coverage above those limits at a low cost.
Common coverage gaps:
- Underestimating liability. The liability limits in basic homeowners and auto policies may not fully protect your assets or future income in a lawsuit. Homeowners policies often include $100,000 to $300,000 of liability coverage, and state minimum auto requirements may also fall short. (moneygeek)
Key planning considerations:
- Review HO and Auto liability coverage first. Insurance companies may require a minimum amount of liability coverage on a homeowners policy before offering a PLUP. Check liability limits on home and auto policies and coordinate additional coverage with a PLUP.
- Liability insurance needs analysis. Consider total assets and expected future income to determine the level of liability coverage required.
Health Insurance
What it covers: Health insurance helps pay for medical care, including illnesses, injuries, and preventive services. Coverage is available through private insurers as well as public programs such as Medicare for people age 65 and older and TRICARE for active-duty service members, veterans, and their families.
Why is it important: Health care is expensive, and costs often cause people to delay treatment. In 2026, 36% of U.S. adults reported delaying or skipping care because of cost, rising to 75% among those without insurance. While insurance does not eliminate cost concerns, insured individuals are less likely to worry about medical bills. (KFF)
Problems paying medical bills – Peterson-KFF Health System Tracker
Common coverage gaps:
- Out-of-network risks. Every health insurance plan differs in which providers are in-network or out-of-network. In-network providers accept your insurance, and the insurance provider has typically negotiated a price for various services. Visiting an out-of-network provider may leave you covering the full cost of care. (BCBS)
- Choosing the right coverage. The right plan depends on individual health care needs. With a high-deductible plan, the insured takes on the risk of higher out-of-pocket health care costs today but becomes eligible to save for future health care costs with a Health Savings Account (HSA). With a PPO, the insured is not eligible to save in an HSA, but lower deductibles and more favorable cost sharing may lead to lower costs for care today. (Healthcare.gov)
- Misunderstanding COBRA. Since many Americans have health insurance through their employer, COBRA is an important safety net which allows an employee to remain on their former employer’s healthcare plan after separating from employment while they look for new coverage. The downside is that the former employer no longer pays a share of the coverage. Because of this, COBRA coverage can be very expensive and is more of a stop gap than a long-term solution. (COBRA)
Key planning considerations:
- Check your networks. Before changing plans, make sure your preferred providers are in-network. This can help you avoid higher costs or choose different coverage to keep your doctor.
- Understand the terms. Health insurance plans all have different deductibles, out-of-pocket maximums, copays, and coinsurance rates. It’s important to understand these terms so you can review your health insurance options (Aetna).
- Understand the tradeoffs. Plans that cover more usually cost more. Higher-deductible plans and plans with higher out-of-pocket maximums typically have lower premiums.
- Savings opportunities. There are certain tax-advantaged savings options specifically for medical costs such as Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs). While both accounts help with the cost of medical care now, HSAs are designed to invest for future medical costs and may be a useful tax planning tool. For more information on HSAs, see our articles about HSAs and Taxes and HSA Contributions.
- Medicare considerations. If you have Medicare along with other health insurance coverage, like an employer group plan, it’s important to know how they interact. (Medicare)
Life Insurance
What it covers: Life insurance covers the life of the insured and pays a benefit to their survivors. Life insurance provides financial security for the dependents and other survivors of the insured. The primary role of life insurance is to replace loss of household income.
Why it’s important: If a primary earner dies unexpectedly during their working years, the loss of income can create a serious financial strain for the household. Even in a two-income family, losing half of the household’s earnings can be a major burden. Life insurance helps replace that income for a time and can support ongoing expenses, future education costs, estate settlement costs, and other needs that income would have covered. Despite the importance of life insurance, there is a large gap between people with a need for life insurance and those with a policy.
2024 Insurance Barometer Study Report 1: The Generational Shift Has Arrived
Common coverage gaps:
- Waiting too long to find coverage. Life insurance usually costs more as you get older. Cost is the top reason many Americans go without coverage, and delaying often makes it even harder to afford. (Life Happens)
- Allowing term insurance to lapse. Term life insurance will lapse if premium payments are missed. Once a policy lapses, coverage is lost unless the policy is reinstated, or a new policy is purchased. Ensuring premiums are paid on term life policies is critical to maintaining coverage.
- Too little coverage. Life insurance needs vary by family and typically change over time as income and expenses shift. Yet only 19% of insured Americans have both employer-sponsored group coverage and an individual policy, and group coverage alone may not be enough. (moneygeek)
- Paying for coverage longer than needed. Term life insurance may no longer be necessary once you are financially secure. If you are retired, have no dependents or debt, maintain positive cash flow, and have enough assets to meet your legacy goals; it may no longer play a key role in your financial plan. (Ethos)
Key planning considerations:
- Estimate your coverage needs. Life insurance needs vary by family. The DIME method looks at debts, income replacement, mortgage balance, and future education costs for dependents. You can also use a Life Insurance Needs Calculator.
- Monitor coverage. Review your coverage regularly to make sure it still matches your needs.
- Compare term and permanent life insurance. Term life insurance offers a death benefit for a set period at a lower cost. Permanent life insurance provides lifelong coverage plus additional features, but it typically costs more. Understanding the tradeoffs can help you choose the option that best fits your needs. (Investopedia)
Disability Insurance
What it covers: Disability insurance replaces part of your income if illness or injury prevents you from working. Short-term disability typically covers up to one year, while long-term disability covers longer periods.
Why it’s important: For many working-age adults, income is their most valuable asset. The Social Security Administration estimates that about 1 in 4 Americans will experience a disability before reaching normal retirement age. Disability insurance helps protect your financial stability if you lose the ability to earn a living. (CDIA)
Common coverage gaps:
- Relying solely on employer plans. Disability insurance is a common workplace benefit. However, as with life insurance, group plans may not fully cover disability insurance needs. It’s important to review employer disability plans to see if they need to be supplemented.
- Relying on Social Security or state disability insurance programs. Very few states offer public disability insurance programs. Social Security Disability Insurance is notoriously difficult to get approved partially due to the strict definition of disability. (LegalClarity)
- Relying on Worker’s Compensation. Worker’s compensation is designed to cover work-related injuries and illnesses. If an injury or illness occurs on vacation and prevents a return to work, worker’s compensation won’t apply.
Key planning considerations:
- Understand benefit amounts, benefit periods, and waiting periods. Disability insurance replaces income if you cannot work for a covered reason. The benefit amount is the monthly payment, often 40% to 70% of base salary. The benefit period is how long payments continue. The elimination period is the waiting time before benefits begin. In general, higher benefits, longer benefit periods, and shorter waiting periods increase premiums.
- Understanding the role of short- and long-term disability insurance. Short-term disability insurance covers periods of up to a year while long-term policies cover periods over a year. Coordinate policies to avoid lapses in income when short-term coverage ends, and long-term coverage begins.
- Own-occupation vs. any-occupation. Own-occupation policies are designed to pay benefits if a disability prevents you from performing the functions of your chosen profession. Any-occupation policies will only pay if you are unable to work in any job. This is particularly important for highly skilled, high-income professionals. There are several definitions of own-occupation including true and modified own-occupation. Own-occupation policies are more expensive. (Guardian)
Additional Coverage Types
The five categories above cover the most common types of insurance, but they are not the only ones. Some situations call for specialized coverage. Homeowners in certain areas may need separate flood or earthquake insurance because standard homeowners policies often exclude those risks. Pet owners may consider pet insurance, and people with high-risk hobbies may want accident coverage to supplement health insurance. Business owners may also need protection such as key-person insurance. These needs can be addressed as part of a broader financial plan.
Many people worry about long-term care costs, and for good reason. In 2024, the average annual cost in the U.S. ranged from $29,640 to $127,020, depending on the level of care (2024 Cost of Care Survey). Traditional long-term care insurance is often expensive, offered by relatively few insurers, and not available to everyone. Alternatives may include annuities or permanent life insurance with long-term care riders. People with substantial assets may also choose to self-insure and cover these costs directly.
How Insurance Fits into a Holistic Financial Plan
Insurance is a key part of risk management, but it should be coordinated with the rest of your financial plan. Beneficiary designations on life insurance policies should align with your estate plan, and some forms of permanent life and disability insurance may come with tax considerations or create planning opportunities. The goal is to identify the most significant financial risks, address them efficiently, and adjust coverage as your circumstances change.
As your life, finances, and goals evolve, your insurance coverage should evolve with them. Reviewing your policies periodically can help you avoid gaps in protection or paying for coverage you no longer need. If you are unsure how to align your insurance decisions with your broader financial goals, Howe & Rusling is here to help.
Disclosures: This material is provided for informational and educational purposes only and should not be construed as legal, tax, insurance, or investment advice. The information presented is general in nature and may not apply to your individual circumstances. Insurance products and coverage provisions vary by carrier, policy, state, and individual circumstances. Coverage availability, premiums, benefits, exclusions, limitations, and eligibility requirements will differ among insurance providers. Individuals should review policy documents carefully and consult with qualified insurance professionals before making insurance decisions. References to specific insurance products, coverage types, public programs, or planning strategies are provided solely for educational purposes and do not constitute a recommendation, endorsement, or solicitation to purchase any particular insurance product or service. Any statistics, studies, surveys, or third-party information referenced in this article were obtained from sources believed to be reliable; however, Howe & Rusling does not independently verify such information and makes no representation regarding its accuracy or completeness. Insurance is one component of a comprehensive financial plan. Determining appropriate coverage levels requires consideration of an individual’s financial situation, objectives, risk tolerance, health status, and other factors. Howe & Rusling, Inc. is an SEC-registered investment adviser. Registration with the SEC does not imply a certain level of skill or training. Additional information about Howe & Rusling, including its Form ADV Part 2A, is available upon request or at www.adviserinfo.sec.gov.
