I find it helpful to think in terms of alternatives. So yes, auto insurance is part of my Transportation category. Without a car, I wouldn't be paying it, so it is naturally a part of that cost. And a bike or the bus is an alternative, so Transportation is the top-level category, not "auto". Similarly for property tax, it is part of my Shelter category. It wouldn't exist if I were renting. Keeping the total costs of a certain option together helps evaluate how much you could save if you took a different approach.
How many categories and levels is a personal decision of course. Whatever provides utility in tracking and looking for ways to reduce spending. Personally I think about seven or eight high level categories is lots, and anywhere from two to five or six subcategories in each, and no deeper levels than that.
My top-level categories (with some subcategories, many also have "other" subcategory to catch small things):
Food (groceries, eating out)
Shelter (mortgage interest, utilities, tax, repair/maint, insurance)
Entertainment/Rec (vacation, my discretionary, spouse discretionary)
Goods&Services (clothing, medical, personal care, household, dental/disability insurance)
Transportation (fuel, insurance, repair/maint/replacement)
Giving (charity, gifts, kids' education)
Communication (phone, internet)
Savings (mortgage principal, pension, FI).
We've been planning and tracking using YNAB for about a year and a half, and this lets us see our "savings rate" at a glance, how much will go away later (when kids are self-supporting), and many of the big costs - food, transport, shelter with some breakdown for each.