The Purpose of Insurance
Insurance exists to protect against financial catastrophe — events that would devastate your finances. The principle is simple: insure against losses you can't afford to absorb, and self-insure (skip coverage) for losses you can handle from savings. This framework helps you avoid both dangerous under-insurance and wasteful over-insurance.
Coverage You Absolutely Need
These policies protect against catastrophic loss:
• Health insurance — medical bankruptcy is the #1 cause of personal bankruptcy • Auto liability insurance — adequate limits, not just state minimums • Homeowner's/renter's insurance — protects your largest asset or belongings • Disability insurance — protects your income-earning ability (your most valuable asset) • Term life insurance — if anyone depends on your income • Umbrella liability — $1-2M for high-net-worth households
Coverage You Can Usually Skip
These policies are often overpriced relative to their value:
• Extended warranties on electronics (save the money in an emergency fund) • Credit card protection plans • Accidental death insurance (term life already covers this) • Whole/universal life insurance for most people (buy term, invest the difference) • Rental car insurance if your auto policy already covers rentals • Flight insurance
Optimizing Your Premiums
Higher deductibles dramatically lower premiums. Increasing your auto deductible from $250 to $1,000 can save 15-30% annually. Bundle home and auto policies for 10-25% discounts. Shop rates every 2-3 years — loyalty penalties are real, with long-term customers often paying 20% more than new customers for identical coverage.