Insurance
Insurance exists for one purpose: to protect against financial catastrophe. It's not for small, predictable expenses, it's for the events that would wreck your finances. Buy what you need, skip what you don't, and never be underinsured on the things that matter.
The Insurance Principle
Insure against catastrophe. Self-insure against inconvenience.
| Should Insure | Should Self-Insure |
|---|---|
| House burning down | Cracked phone screen |
| Major medical event | Minor dental work |
| Permanent disability | Small fender bender |
| Liability lawsuit | Appliance breakdown |
| Premature death (with dependents) | Lost luggage |
Rule of thumb: If you can afford to pay the loss out of pocket without financial hardship, consider self-insuring (higher deductible, skip the coverage).
Types of Insurance You Need
Health Insurance
The most important insurance you carry. A single hospital stay can cost $10,000-100,000+.
| Plan Type | How It Works | Best For |
|---|---|---|
| HMO | Must use network, need referrals | Cost-conscious, healthy |
| PPO | In/out of network, no referrals | Flexibility, specialists |
| HDHP + HSA | High deductible, tax-advantaged savings | Healthy, want tax benefits |
| EPO | Network only, no referrals | Mix of HMO/PPO |
Key terms:
| Term | Meaning |
|---|---|
| Premium | Monthly cost regardless of usage |
| Deductible | Amount you pay before insurance kicks in |
| Copay | Fixed amount per visit ($25 for PCP, $50 for specialist) |
| Coinsurance | Your percentage after deductible (typically 20%) |
| Out-of-pocket maximum | Most you'll pay in a year; insurance covers 100% after this |
| Network | Doctors/hospitals with negotiated rates |
Choosing a plan:
| Factor | Choose Lower Deductible (HMO/PPO) | Choose HDHP + HSA |
|---|---|---|
| Health status | Frequent doctor visits, ongoing conditions | Generally healthy |
| Medications | Expensive prescriptions | Few/no medications |
| Cash reserves | Limited savings | Can cover deductible |
| Tax situation | Lower income, lower bracket | Higher bracket (HSA deduction worth more) |
| Risk tolerance | Want predictable costs | Willing to accept variability |
Out-of-pocket maximum is the most important number. It caps your worst-case scenario. For 2024: $9,450 individual / $18,900 family (marketplace plans).
Auto Insurance
Required in almost every state. Protects you from enormous liability.
| Coverage | What It Covers | Recommended |
|---|---|---|
| Liability (bodily injury) | Injuries you cause to others | 100/300/100 minimum |
| Liability (property damage) | Damage to others' property | $100,000+ |
| Uninsured/underinsured motorist | Injuries from uninsured drivers | Match your liability |
| Collision | Damage to your car from accidents | Required if financing; optional on old cars |
| Comprehensive | Theft, weather, animals | Required if financing; optional on old cars |
| Medical payments/PIP | Your medical bills regardless of fault | Required in some states |
Liability limits explained: 100/300/100 means:
- $100,000 per person bodily injury
- $300,000 per accident bodily injury
- $100,000 property damage
State minimums are dangerously low. If you cause an accident with $50,000 in injuries and carry $25,000 liability, you owe $25,000 out of pocket. Carry at least 100/300/100.
Deductible decision:
| Deductible | Premium Savings | Best When |
|---|---|---|
| $250 | Baseline | Can't afford out-of-pocket |
| $500 | 10-15% lower | Good emergency fund |
| $1,000 | 20-30% lower | Strong emergency fund |
| $2,000 | 30-40% lower | Older car, self-insuring minor damage |
Home Insurance (Homeowners)
Protects your largest asset and shields you from liability.
| Coverage | What It Covers |
|---|---|
| Dwelling | Structure of your home |
| Personal property | Belongings (furniture, electronics, clothing) |
| Liability | Someone injured on your property |
| Loss of use | Living expenses if home is uninhabitable |
| Other structures | Detached garage, shed, fence |
Key considerations:
- Insure for replacement cost, not market value (it costs more to rebuild)
- Get replacement cost coverage on personal property (not actual cash value)
- Review coverage annually, renovation increases replacement cost
- Standard policies exclude floods and earthquakes (buy separately if at risk)
- Document belongings with photos/video for claims
Renters Insurance
Cheap and essential. Covers your stuff and liability.
| What | Details |
|---|---|
| Cost | $15-30/month |
| Personal property | Covers theft, fire, water damage to your belongings |
| Liability | Covers injuries in your rental |
| Loss of use | Covers temporary housing if displaced |
| Typical coverage | $30,000-50,000 personal property, $100,000 liability |
No excuse not to have this. $15/month protects everything you own.
Life Insurance
Replaces your income if you die. Only needed if someone depends on your income.
| Type | How It Works | Cost | Best For |
|---|---|---|---|
| Term life | Coverage for set period (10-30 years) | Low ($20-50/month for $500k) | Almost everyone who needs life insurance |
| Whole life | Permanent coverage + cash value | High ($200-500/month for $500k) | Very specific estate planning situations |
| Universal life | Flexible permanent + cash value | High | Complex estate needs |
How much: 10-12x your annual income, or enough to:
- Replace income until youngest child is 18
- Pay off mortgage
- Cover education costs
- Cover final expenses
Who needs it:
- Parents with dependent children: Yes
- Spouse who depends on your income: Yes
- Single with no dependents: No
- Retired with sufficient savings: Usually no
- Stay-at-home parent: Yes (replacement cost of childcare, household management)
Term life is almost always the right choice. Buy term, invest the difference. Whole life is expensive, complex, and rarely optimal.
Disability Insurance
Protects your income if you can't work. More likely than death before 65.
| Type | Details |
|---|---|
| Short-term disability | Covers 3-6 months, 60-70% of salary |
| Long-term disability | Covers years/until 65, 50-70% of salary |
| Employer-provided | Often free but may be insufficient |
| Individual policy | More expensive but more control |
"Own occupation" vs. "any occupation":
- Own occupation: Pays if you can't do YOUR job (surgeon who can't operate)
- Any occupation: Pays only if you can't do ANY job (much harder to qualify)
Get own-occupation coverage if possible. It costs more but protects your actual earning power.
How much: 60-70% of gross income. If employer provides 60%, consider supplemental to reach 70%.
Umbrella Insurance
Extra liability coverage above your auto and home policies.
| Coverage | Typical Cost |
|---|---|
| $1 million | $150-300/year |
| $2 million | $200-400/year |
| $5 million | $300-600/year |
Who needs it:
- Net worth above $500,000
- Own property
- Have a pool, trampoline, dog
- Teenage drivers in household
- High-income earner (target for lawsuits)
At $150-300/year for $1 million of coverage, this is the best value in insurance.
Insurance You Probably Don't Need
| Insurance | Why Skip It |
|---|---|
| Extended warranties | Margin product, rarely used, credit cards often cover |
| Flight insurance | Already covered by life insurance and credit cards |
| Cancer/disease-specific | Regular health insurance covers treatment |
| Accidental death (AD&D) | Regular life insurance covers all causes |
| Credit card payment protection | Expensive for what it covers |
| Identity theft insurance | Minimal actual coverage; free monitoring exists |
| Rental car damage waiver | Often covered by credit card or auto policy |
| Mortgage life insurance | Declining benefit; regular term life is cheaper |
| Pet insurance | Usually better to self-insure with savings |
| Cell phone insurance | $200+/year for a $50 deductible; save instead |
The pattern: If the premium is high relative to the potential loss, or if it covers something unlikely or something you could pay out of pocket, skip it.
How to Evaluate Coverage
The Right Deductible
Higher deductible = lower premium. Choose based on emergency fund:
| Emergency Fund | Appropriate Deductible |
|---|---|
| Less than $1,000 | Lowest available |
| $1,000-5,000 | $500-1,000 |
| $5,000-15,000 | $1,000-2,500 |
| $15,000+ | $2,500-5,000 |
Always calculate: Annual premium savings vs. deductible increase. If raising deductible from $500 to $1,000 saves $300/year, you break even in under 2 years.
Shopping for Insurance
| Step | Action |
|---|---|
| 1 | Get quotes from 3-5 companies |
| 2 | Compare same coverage levels (apples to apples) |
| 3 | Check company ratings (AM Best, J.D. Power) |
| 4 | Read reviews for claims experience |
| 5 | Ask about bundling discounts (home + auto) |
| 6 | Reassess annually |
Common Discounts
| Discount | Typical Savings |
|---|---|
| Bundling (home + auto) | 10-25% |
| Good driving record | 10-20% |
| Good credit score | 5-25% |
| Safety features (car) | 5-10% |
| Security system (home) | 5-15% |
| Multi-policy | 5-15% |
| Loyalty (years with company) | 5-10% |
| Payment in full (annual) | 5-10% |
Don't let loyalty cost you. Rates change. Re-quote every 2-3 years.
Filing Claims
When to File
- File: Major damage, liability situations, theft, total loss
- Don't file: Small claims near your deductible amount
Why skip small claims: Each claim raises your premiums and stays on your record for 3-5 years. A $600 claim on a $500 deductible nets you $100 but could cost $200+/year in premium increases.
Claims Process
| Step | Action |
|---|---|
| 1 | Document everything (photos, video, police report if applicable) |
| 2 | Contact insurer promptly (most have 24-72 hour reporting windows) |
| 3 | Get claim number and adjuster contact |
| 4 | Get your own repair estimates (don't rely solely on insurer's) |
| 5 | Keep records of all communication |
| 6 | Don't accept first offer if it seems low |
| 7 | Understand your right to appeal |
Tips
- Read your policy BEFORE you need it
- Take a home inventory annually (photos of every room, receipts for valuables)
- Keep insurance documents accessible (digital copies)
- Don't exaggerate claims (insurance fraud is a felony)
- Ask about "claims-free" credit if you haven't filed recently
Insurance Review Schedule
| When | What to Review |
|---|---|
| Annually | All policies: shop for rates, check coverage |
| Marriage/divorce | Life insurance beneficiaries, add/remove spouse |
| New child | Life insurance (increase), health plan |
| Home purchase | Homeowners policy, umbrella |
| New car | Auto policy adjustment |
| Career change | Disability coverage, health options |
| Retirement | Reduce life insurance, evaluate Medicare |
| Major purchase | Update homeowners for valuables |
Key Takeaways
- Insure catastrophe, self-insure inconvenience. That's the entire principle
- Health and liability are non-negotiable. These can bankrupt you
- Term life is almost always right. Skip whole life unless estate planning demands it
- Disability insurance is underrated. Your income is your biggest asset
- Umbrella insurance is the best value. $1M of coverage for $200/year
- Skip warranty-style insurance. Extended warranties, gadget insurance, payment protection
- Higher deductible if you have an emergency fund. Save on premiums
- Shop every 2-3 years. Loyalty discounts rarely beat competitive quotes
- Document everything. Photos, receipts, inventory for claims readiness