Being underinsured—having coverage, but not enough of it—can wreak havoc on your finances if life takes an unexpected turn. Whether it’s a car accident, house fire, or sudden illness, the worst time to discover a gap in your coverage is in the middle of a crisis.
Auto insurance: Liability limits that leave you exposed
Many drivers carry only the minimum liability coverage required by their state, often to keep premiums low. But in the event of a serious accident, those limits may be far from sufficient.
Consider this scenario: You accidentally cause a collision that injures 2 people and totals a luxury SUV. If your policy is 25/50/25, it covers only $25,000 per person for injuries and $25,000 for property damage, and a total of $50,000 for bodily injury overall per accident. In that case, you could be personally responsible for much more in uncovered costs. Your insurance pays only up to its limits—the rest may come out of your pocket. In some cases, that could mean wage garnishment, liens on your home, or even the loss of savings. And certain legal judgments, especially those involving bodily injury, may not be dischargeable in bankruptcy.
It’s also important to carry uninsured/underinsured motorist (UM/UIM) coverage. With roughly 1 in 8 drivers in the US uninsured, this coverage can be a financial lifeline if you're hit by someone without adequate insurance.1
How to protect yourself:
- Consider increasing your liability limits to a more comfortable threshold (e.g., to 100/300/100).
- Add UM/UIM coverage if it’s not already included.
- Consider an umbrella policy for additional liability protection.
Homeowners and renters insurance: The devil is in the details
After a disaster, many policyholders face a second shock: discovering they’re underinsured. A fire, flood, or theft can quickly reveal gaps in coverage that leave you financially exposed. And it’s critical to know that damage from events like a flood or earthquake is typically not covered under a standard policy. You will need separate coverage if you are in a flood or earthquake zone.
One common issue is actual cash value (ACV) coverage, which factors in depreciation. That means your 10-year-old roof or appliances may be valued at a fraction of their replacement cost. A major loss could leave you with a $100,000+ rebuilding bill and a payout that falls far short—forcing you to dip into savings, take on debt, or settle for a lower-quality rebuild.
Valuable items like jewelry, art, or electronics are often capped at low limits. Without scheduled personal property coverage, also known as a personal property floater, or an endorsement, a stolen engagement ring or rare guitar may not be fully reimbursed.
For renters, the risk is even more basic: many don’t have insurance at all. A landlord’s policy covers the building—not your belongings. A burst pipe or fire could destroy everything you own, and without renters insurance, you’d be on your own to replace it.
Considerations:
- Is your policy based on actual cash value or replacement cost?
- Have you updated your coverage after renovations or major purchases?
- Renters: Do you have a policy in place?
What to do:
- Switch to replacement cost coverage if available.
- Create a home inventory with photos and receipts.
- Add scheduled coverage for high-value items.
- Renters: Consider a policy—it’s often less than $20/month.
Life insurance: Critical for everyone
Many people assume life insurance is only necessary to cover final expenses—but that’s just the beginning. A well-structured policy can help your family stay in their home, pay off debts, fund education, and maintain financial stability for years to come.
Employer-provided life insurance is a good start, but it’s often limited to 1–2 times your salary—far less than what most families need. And if you leave or lose your job, you can also lose your coverage. If you have dependents, a general guideline is to carry 10–15 times your annual income.
Read Fidelity Viewpoints: What you should know about life insurance
And don’t overlook stay-at-home parents. The economic contributions of stay-at-home parents, including childcare, transportation, and household management, have significant value. A policy for both parents can help protect the entire household.
Considerations:
- Do you rely solely on your employer’s life insurance?
- Would your current coverage replace your income for 10+ years or cover major debts?
- Have you accounted for the value of unpaid caregiving in your household?
What to do:
- Use a life insurance calculator to estimate your needs.
- Consider a term life policy—affordable, flexible, and easy to customize.
- Review your coverage after major life events like marriage, children, or buying a home.
To learn about term life insurance, read: Term life insurance: Insuring their future starts here
Disability insurance: An often-forgotten essential
Your most important financial asset isn’t your home or retirement account—it’s your ability to earn an income. Yet many people overlook disability insurance, leaving themselves vulnerable to financial hardship if illness or injury prevents them from working.
Employer-provided short-term disability coverage is often limited to just a few months. But what if you’re out of work for a year—or longer? That’s where long-term disability (LTD) insurance comes in. It can replace a portion of your income for years, helping you stay afloat while you recover.
This coverage is especially critical for professionals with specialized skills, self-employed individuals, and anyone whose household depends on their income.
Considerations:
- Could you cover your expenses if you couldn’t work for 6 months or more?
- Do you rely solely on short-term disability coverage from your employer?
- Are you self-employed, in a physically demanding profession, or in a highly specialized field?
What to do:
- Review your employer’s disability benefits—what’s covered, and for how long?
- Consider purchasing an individual long-term disability policy to fill any gaps.
- Aim for coverage that replaces 60%–70% of your income.
- Look for policies that cover both illness and injury and consider riders for inflation protection or own-occupation coverage.
Umbrella insurance: Extra protection for life’s big risks
Umbrella insurance provides an additional layer of liability coverage that goes beyond the limits of your auto, homeowners, or renters policies. It’s designed to protect your assets—and your future—if you're faced with a large claim or lawsuit.
For example, if someone is seriously injured on your property and sues for $1 million, but your homeowners policy only covers $300,000 in liability, umbrella insurance can cover the remaining $700,000. Without it, you could be forced to pay the difference out of pocket—putting your savings, home equity, and even future earnings at risk.
Umbrella policies also cover certain claims that standard policies don’t, such as libel, slander, or false arrest.
Considerations:
- Do you own a home or have significant savings or investments?
- Do you host guests, own rental property, or have teen drivers?
- Would a large lawsuit threaten your financial stability?
What to do:
- Review your current liability limits on auto and home policies.
- Get a quote for umbrella coverage. It may be more affordable than you think, $1 million in protection often costs $150–$300 per year.
- Make sure your underlying policies meet the minimum coverage required to qualify.
Read more about disability and umbrella insurance in Insights from Fidelity Wealth ManagementSM: Protecting yourself in uncertain times
Health insurance gaps: High deductibles, hidden costs
Even with health insurance, many people are surprised by how much they still pay out of pocket. Rising deductibles, coinsurance, and uncovered services can lead to unexpected bills that strain your finances—especially in the event of a serious illness or injury.
For example, a single hospital visit under a high-deductible health plan (HDHP) could result in thousands of dollars in out-of-pocket costs before your insurance even begins to pay. And while your plan may cover major medical expenses, it might not include dental, vision, or specialty care.
That’s why it’s essential to understand your plan’s deductible, out-of-pocket maximum, and what services are fully covered.
Considerations:
- Do you know your deductible and out-of-pocket maximum—and could you afford them today?
- Does your plan exclude dental, vision, or mental health services?
- Do you have a plan for covering unexpected medical expenses?
What you can do:
- If you have an HDHP, consider opening and funding a health savings account (HSA) to cover qualified expenses.
- Review your plan annually during open enrollment and adjust based on your health needs.
- Don’t overlook dental and vision insurance—routine care can prevent costly problems later.
Pet insurance: Because vet bills aren’t cheap
Even healthy pets can face unexpected medical emergencies! A serious illness or injury could accumulate bills of $5,000, $10,000, or more. Without insurance, those costs come straight out of your pocket.
Pet insurance can help cover accidents, illnesses, and even routine care, depending on the plan. It’s especially valuable for breeds prone to genetic conditions or for pet owners who want to avoid choosing between their savings and their pet’s health.
How to know if you need it:
- Do you have a pet and no emergency fund set aside for vet care?
- Would a large, unexpected vet bill strain your finances?
What to do:
- Compare pet insurance plans based on coverage, exclusions, and reimbursement rates.
- Consider enrolling while your pet is young and healthy to lock in lower premiums.
Don’t just be insured—be protected
Insurance provides a safety net to save your finances when life doesn’t go as planned. It can help you protect everything you’ve worked to build. Whether it’s your car, your home, your income, or even your pet, the right coverage can mean the difference between a temporary setback and a financial disaster. Take the time to review your policies, ask questions, and fill the gaps. Your future self will thank you.