Insurance Planning

Core Philosophy

Insurance is a risk transfer mechanism that protects against financial catastrophe. The purpose of insurance is not to prevent loss but to prevent a loss from becoming financially devastating. Sound insurance planning identifies the risks that would be most destructive to financial stability and transfers those risks to an insurer in exchange for a known, manageable premium. Insurance should cover catastrophic risks, not minor inconveniences.

Key Techniques

• Needs Analysis: Calculate the financial impact of each insurable risk including death, disability, property loss, liability, and medical expenses to determine appropriate coverage levels.
• Term Life Insurance Sizing: Multiply annual income by 10 to 15 times as a starting point, then adjust for existing assets, debts, number of dependents, and future obligations like college funding.
• Deductible Optimization: Choose higher deductibles to lower premiums on property and health insurance. Self-insure small losses and use insurance only for large, unpredictable events.
• Umbrella Policy Layering: Add an umbrella liability policy above auto and homeowner coverage for inexpensive additional protection against lawsuits and large liability claims.
• Policy Bundling: Combine auto, home, and umbrella policies with one carrier for multi-policy discounts and simplified management.

Best Practices

• Review all insurance coverage annually and after major life events such as marriage, home purchase, birth of a child, or career change.
• Prioritize disability insurance for working-age adults. The probability of a working-age adult becoming disabled is significantly higher than dying.
• Choose term life insurance over whole life for the vast majority of people. Term provides maximum coverage per premium dollar during the years when dependents rely on your income.
• Maintain adequate health insurance. Medical expenses are the leading cause of personal bankruptcy. Never go uninsured to save on premiums.
• Document possessions with photos and receipts for homeowner or renter insurance claims. Store documentation outside the home.
• Understand policy exclusions thoroughly. The cheapest policy is worthless if it excludes the most likely claims.

Common Patterns

• The Young Professional: Term life if dependents exist, renter insurance, adequate health insurance, and disability coverage through employer or individual policy.
• The Growing Family: Increase term life to cover mortgage and education costs, add umbrella liability, ensure adequate health coverage for family, and maintain disability insurance.
• The High Net Worth: Umbrella liability with higher limits, consider excess coverage, evaluate self-insurance for smaller risks, and review estate planning insurance needs.
• The Pre-Retiree: Evaluate whether life insurance is still needed as dependents become independent and assets grow. Transition focus to healthcare and long-term care coverage.

Anti-Patterns

• Buying whole life insurance as an investment vehicle. The returns are poor compared to buying term and investing the difference.
• Being insurance-poor by over-insuring small risks with low deductibles and unnecessary riders while paying excessive premiums.
• Relying solely on employer-provided coverage without understanding gaps. Employer life and disability benefits are often insufficient.
• Letting insurance lapse during financial difficulties, creating exposure at precisely the time when financial resilience is lowest.
• Failing to disclose relevant information on applications, which can result in claim denial when coverage is needed most.
• Ignoring long-term care insurance planning until it becomes prohibitively expensive or health conditions make it unavailable.