Insurance & Risk
66% of bankruptcies involve medical bills [@ajph2019]. One uninsured hospital stay can erase a decade of savings.
Insurance isn’t an expense. It’s a hedge against catastrophe.
The Insurance Principle
Insure catastrophes. Self-insure inconveniences.
- Catastrophe: Medical emergency, house fire, death of breadwinner → Insure
- Inconvenience: Phone screen crack, appliance failure → Self-insure (save money for it)
The rule: if an event would financially ruin you, insure it. If it would merely annoy you, skip the coverage and pocket the premium.
The Essential Coverage
| Type | Who Needs It | How Much |
|---|---|---|
| Health | Everyone | At minimum, high-deductible plan to cap max exposure |
| Life | Anyone with dependents | 10-12× annual income, term (not whole) |
| Disability | Anyone relying on income | 60-70% income replacement, long-term |
| Renters/Home | Everyone | Replacement cost of belongings + liability |
| Auto | Car owners | Liability + comprehensive if car is valuable |
| Umbrella | High net worth ($500k+) | $1-2M above auto/home liability |
Optimize Premiums
Higher deductibles = lower premiums. If you have an emergency fund, take the highest deductible you can stomach. You’re self-insuring the small stuff.
Bundle policies. Same company for auto + home = 10-25% discount typically.
Shop annually. Loyalty isn’t rewarded. Get quotes every 1-2 years.
Skip extended warranties. They’re insurance with terrible odds. The seller profits because you usually don’t.
What NOT To Insure
- Extended warranties on electronics
- Flight insurance
- Credit card protection
- Rental car damage waiver (if your auto policy covers it)
- Life insurance if no one depends on your income
If the premium exists, someone calculated that they’ll profit from it on average. For small losses, the math favors self-insurance.
Definition
The insurance principle is a risk management framework: insure catastrophic losses; self-insure predictable, affordable ones. Insurance is a tool for transferring low-probability, high-impact financial risks to an insurer in exchange for a predictable premium. The key insight is that most insurance products beyond the essentials (health, life, disability, property) are profitable for the seller — meaning they’re a bad deal for the buyer on average. Rational risk management means covering ruin scenarios and accepting small, manageable losses.
When This Applies
- Major life transitions: Marriage, children, home purchase, new job — each changes your risk profile and coverage needs
- Open enrollment: Annual review of health, life, and disability coverage
- Offered an extended warranty: Almost always decline — the math favors the seller
- Building an emergency fund: A strong emergency fund lets you raise deductibles and lower premiums
- High net worth milestone: Umbrella liability becomes worth considering once assets exceed $500k
Related
- Protocol: Build Emergency Fund (emergency fund enables higher deductibles)
- Concept: Cash Flow Principle (insurance premiums are a budget line item)
- Concept: Human Capital (disability insurance protects your largest asset)
- Anti-Patterns: Wealth Anti-Patterns (ignoring coverage, or over-insuring small risks)
Insure what would ruin you. Self-insure everything else.