Insurance Essentials
Protecting What You've Built
Introduction
Insurance is boring—until you need it. A single uninsured event can wipe out years of financial progress. While we've focused on building wealth, protecting it is equally important. This lesson covers the essential insurance types everyone should understand.
How Insurance Works
Insurance is a transfer of risk. You pay a predictable premium to transfer unpredictable, potentially catastrophic risk to an insurance company.
Key Terms:
| Term | Definition |
|---|---|
| Premium | What you pay for coverage |
| Deductible | What you pay before insurance kicks in |
| Coverage Limit | Maximum insurance will pay |
| Claim | Request for payment after a loss |
The Trade-off:
Higher deductibles = Lower premiums (you're taking on more risk) Lower deductibles = Higher premiums (insurer takes on more risk)
Rule of Thumb:
Insure against catastrophic risks you couldn't handle financially. Self-insure (skip coverage or choose high deductibles) for risks you could absorb.
Health Insurance
The most important insurance for most people. Medical bills are the leading cause of bankruptcy in America.
Types of Plans:
| Type | Characteristics |
|---|---|
| PPO | Most flexibility, higher premiums |
| HMO | Lower cost, must use network, need referrals |
| HDHP | High deductible, lower premiums, HSA eligible |
| EPO | Mix of PPO and HMO features |
What to Look For:
- Monthly premium
- Annual deductible
- Out-of-pocket maximum (crucial—caps your worst-case cost)
- Network coverage
- Prescription coverage
Don't Go Uninsured:
Even if you're healthy, one accident or illness can result in six-figure bills. The out-of-pocket maximum is your key protection number.
Auto Insurance
Required in most states. Protects against liability and damage.
Coverage Types:
| Coverage | What It Covers |
|---|---|
| Liability | Damage you cause to others |
| Collision | Damage to your car from accidents |
| Comprehensive | Damage from theft, weather, etc. |
| Uninsured Motorist | When the other driver has no insurance |
| Personal Injury Protection | Medical costs for you/passengers |
How Much Do You Need:
- Liability: At minimum, cover your net worth (if you have $200k in assets, get at least $200k liability)
- Collision/Comprehensive: Required if you have a car loan; optional if you own the car outright and could afford to replace it
- Consider umbrella policy for additional liability coverage
Ways to Save:
- Increase deductible (if you have emergency fund)
- Bundle with home/renters insurance
- Shop rates annually
- Ask about discounts (safe driver, multiple vehicles, low mileage)
Home and Renters Insurance
Homeowners Insurance:
Covers your home's structure and contents against damage/theft. Usually required by mortgage lenders.
What it covers:
- Structure damage (fire, storms, etc.)
- Personal property
- Liability (injuries on your property)
- Additional living expenses (if home is uninhabitable)
What it typically doesn't cover:
- Floods (separate policy needed)
- Earthquakes (separate policy in some areas)
- Normal wear and tear
Renters Insurance:
Covers your belongings and liability; landlord's insurance doesn't cover your stuff.
- Typically $15-30/month
- Covers theft, fire, water damage to your possessions
- Includes liability coverage
- Often required by landlords
Very inexpensive protection everyone renting should have.
Life Insurance
Replaces your income if you die, protecting dependents.
Who Needs It:
- Anyone with dependents who rely on your income
- Those with significant debts that would burden survivors
- Stay-at-home parents (childcare/household services have value)
Who May Not Need It:
- Single people with no dependents
- Retirees with sufficient savings
- Those whose death wouldn't create financial hardship for others
Types of Life Insurance:
| Type | Characteristics |
|---|---|
| Term Life | Coverage for set period (10, 20, 30 years); affordable |
| Whole Life | Permanent coverage; expensive; includes investment component |
| Universal Life | Permanent coverage; flexible premiums; complex |
For Most People: Term Life Is Best
Term life provides the coverage you need at a fraction of whole life's cost. "Buy term and invest the difference" is solid advice.
How Much:
Rule of thumb: 10-12 times your annual income. Or calculate:
- Replace income for needed years
- Cover debts
- Fund future goals (kids' education)
Disability Insurance
Often overlooked but crucial. Your ability to earn income is your biggest asset.
The Statistics:
- 1 in 4 workers will experience a disability before retirement
- 90% of disabilities are from illness, not accidents
- Most people are underinsured
Types:
| Type | Details |
|---|---|
| Short-term disability | Covers weeks to months |
| Long-term disability | Covers months to years |
| Employer-provided | Often 60% of income |
| Private policies | Can supplement employer coverage |
What to Look For:
- Definition of disability (own occupation vs. any occupation)
- Waiting period before benefits start
- Benefit period (2 years, 5 years, to age 65)
- Benefit amount (typically 60-70% of income)
Umbrella Insurance
Extra liability coverage beyond your auto and home insurance.
What It Covers:
- Liability beyond your other policies' limits
- Lawsuits and legal costs
- Situations your other policies might not cover
Who Needs It:
- High net worth individuals
- Those with assets to protect
- Anyone with higher-than-average liability risk (pool, teenage drivers, rental property)
Cost:
Often $150-300/year for $1 million in coverage—very affordable for the protection provided.
Insurance Shopping Tips
- Shop annually: Rates change; loyalty isn't rewarded
- Bundle policies: Multi-policy discounts are significant
- Raise deductibles: If you have emergency fund, save on premiums
- Review coverage: Make sure it matches your current situation
- Compare quotes: Use brokers or comparison sites
- Check insurer ratings: AM Best, Moody's for financial stability
Key Takeaways
- Insurance transfers catastrophic risk for a predictable premium
- Health insurance is essential—medical costs cause most bankruptcies
- Auto insurance should at minimum cover your net worth in liability
- Renters insurance is cheap and everyone renting should have it
- Term life insurance is best for most people with dependents
- Disability insurance protects your biggest asset—your income
- Umbrella insurance provides extra liability coverage at low cost
- Shop and compare insurance annually
Summary
Insurance protects the wealth you've built from being wiped out by a single event. Health insurance is essential—always have it. Auto insurance should cover your liability exposure. Renters insurance is extremely affordable and everyone should have it. Life insurance (term, not whole) is crucial if you have dependents. Disability insurance protects your earning ability, your most valuable asset. Umbrella insurance adds extra liability coverage cheaply. Shop and compare annually, raise deductibles if you have an emergency fund, and bundle policies for discounts.