Which insurance policies do I absolutely need, and which are nice-to-haves?

Taking care of yourself and living on your own comes with a lot of responsibilities, such as rent, utility bills, budgeting, and insurance.

With an overwhelming number of insurance types to choose from, it can be difficult to differentiate between those that are critical and those that are nice to have.

From the non-negotiables like auto and employment insurance to the more situational types such as dental and body part insurance, I’ll give you a quick overview of some of the most popular types of insurance policies and what they cover.

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How insurance works

Insurance isn’t a new concept. In fact, archeological evidence from thousands of years ago suggests that ancient cultures like the Babylonians had established insurance agreements to protect trade arrangements.

The primary aim of insurance is to protect the insured individual (or business) from financial loss in exchange for a fee. At its core, insurance is just an organized form of risk management.

You can purchase insurance for many things in life, including:

• Your home
• The belongings in your home.
• Your vehicle
• Your business
• Your body

In the event that one of these insured items is damaged, lost, or stolen, you won’t have to pay the full cost to replace it out of your own pocket. In exchange for your insurance payment (often called a premium), your insurance company agrees to cover part or all of the replacement costs.

How much of the damage you must pay for out of pocket is determined by your policy’s “deductible.” For example, a dental insurance policy with a $500 deductible may cover all eligible dental expenses for the year after you pay $500 out of pocket.

Essential types of insurance

Whether you're safeguarding your health, home, or income, understanding your insurance needs is a key step in solidifying your financial well-being. With that in mind, here are some of the most essential types of insurance that you may be required to have.

Auto insurance

Auto insurance refers to an insurance policy taken out on a vehicle. The Insurance Bureau of Canada informs us that all motor vehicles driving on the road must meet minimum insurance requirements to ensure that all drivers on the road are adequately protected.

Auto insurance can include many types of coverages, including:

• Liability coverage: covers health and repair expenses for the victim
• Comprehensive coverage: provides coverage against a range of non-collision incidents that could damage your vehicle. This includes events like theft, vandalism, fire, natural disasters, falling objects, and collisions with animals (like hitting a deer). It's optional in most cases
• “Gap” coverage: covers the remaining vehicle payments if the car is declared a total loss
• Rental vehicle coverage: provides funds for the insured to rent a vehicle after an accident

Renters insurance

Renters insurance is a must-have for tenants, offering a safety net for personal belongings and liability coverage. Many apartments, condos, and property management companies require all tenants to purchase base coverage options.

It protects against losses due to theft, fire, and other damages not covered by your landlord's policy. Additionally, it offers liability protection in case someone is injured in your rented space.

Considering the relatively low cost compared to the value of your possessions and potential liabilities, renters insurance is an essential aspect of financial prudence for anyone leasing their home.

Homeowners insurance

Homeowners insurance in Canada is designed to offer a safety net for your home, personal belongings, and financial security in the face of certain unexpected events.

The coverage usually encompasses the structure of your home itself, which ensures that if your house suffers damage due to perils like fire, hail, or windstorms, the policy will step in to cover the costs of repairs or reconstruction, up to the specified policy limits. Home repairs can cost tens of thousands of dollars to repair, which is often more than many can afford to pay for upfront.

Beyond the standard offerings, homeowners insurance policies in Canada can be customized with optional coverages for an added premium. For example, water damage coverage can protect against specific types of water-related incidents, including sewer backup or overland flooding.

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For those seeking protection against identity theft, certain policies offer identity theft coverage to help with the costs associated with recovering your identity. For high-value items like jewelry, art, or collectibles, valuable articles/floater coverage can offer broader protection and higher limits.

Employment Insurance

Employment insurance protects workers from unforeseen unemployment resulting from job loss, illness, or other situations. All workers and employees in Canada are required to contribute to a federal Employment Insurance (EI) program managed by Employment and Social Development Canada (ESDC).

A small amount is automatically deducted from each paycheque you receive, and your employer must match your contribution.

In the event that you’re fired or forced to call out of work sick for several weeks, EI may offer you a weekly payment until you begin working again.

Additional insurance to consider

Depending on your personal situation, there are many other types of insurance that you may consider purchasing to protect yourself and your investments.

Disability insurance

Disability insurance offers income replacement if you're unable to work due to illness, injury, or accident. There is short-term coverage for immediate needs and long-term coverage for extended periods of disability.

Policies typically replace 60% to 85% of your income and define disability in terms of your ability to perform your own or any occupation. Waiting periods before benefits start are standard, varying from a few days to several months.

Besides private insurance options, Canadians can also access government-sponsored disability benefits. Some employers provide disability insurance, but coverage details can vary, making it crucial to understand the specifics of any policy you're considering.

Dental insurance

In Canada, our universal health-care system ensures that most major medical costs are covered. Similar to EI, a small amount of each paycheque we receive goes to contribute to the system.

However, our health-care system doesn’t cover the majority of dental procedures - many of which can be quite expensive.

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If you’re somebody with a family history of dental disease or foresee dental problems in the future, dental insurance could save you a lot of money in the long run.

Life insurance

Life insurance offers a payout to select or multiple family members in the event of your death. This type of insurance is often recommended for married couples and those with children, as it can help cover funeral expenses and provide additional funds for the beneficiaries to pay off your home and cover other vital expenses while in mourning.

Body part insurance

Did you know that you can insure your body parts? Many celebrities and models may choose to insure their face, hands, or other body parts that are vital to their income.

For example, a model could be the victim of an accident that prevents them from being able to continue their career as a model. In this event, body part insurance could offer them some compensation, which could cover expenses until they’re able to find alternative employment.

Mortgage insurance

Mortgage insurance is required on all mortgages obtained through the CMHC and may also be required by other mortgage lenders until your mortgage is paid off or a certain amount of equity is established in the home.

Essentially, mortgage insurance protects your lender in the event that you’re unable to afford your mortgage. If you default on your mortgage, your mortgage insurance will cover the remaining cost of your home. This gives lenders the peace of mind to offer housing to prospective home buyers for less than 20 per cent down.

Insurance is largely situational

While federal law requires most Canadians to pay into employment insurance and universal health insurance through their paycheques, most other types of insurance are purely situational and depend on your own unique situation, assets, and needs.

Christopher Liew is a CFA Charterholder and former financial advisor. He writes personal finance tips for thousands of daily Canadian readers on his Wealth Awesome website.