Following up on my financial directives post, here are some of my thoughts about insurance. Nearly everyone has to purchase multiple insurance policies. It’s a constant cost you’ll have your entire financial life. It’s worth spending some time optimizing.

Friends and family have asked me about this multiple times, so I’ve slowly compiled my notes for them. Here they are!

Don’t Prepay, Self-Insure Instead

I like to think of insurance as something you most likely never have to use. If you expect to use insurance, you’ll pay for it in increased premiums and the insurance companies will come out ahead. Then, it’s not really insurance, it’s prepayment for services you are going to use.

This means you don’t want to insure something that:

1. Has a high probability of happening and
2. You can pay for it if it does happen

If you do this across everything (house, cars, health, etc) you are effectively self-insuring these events that probably will happen and you’ll come out ahead (i.e. you’ll keep the profit for insuring yourself!).

The easiest way to do this is to have a "self-insurance" fund where you stash away 10k (which you’ll earn interest on!) and can fund any low-to-medium-cost medium-frequency events. Obviously, you may not have 10k lying around, but you can setup an automatic transfer to slowly invest enough to have your own self-insurance fund.

Buy A-la-Cart Insurance for One-off Items

It’s best to have separate insurance for a fancy ring or other specific high-value items that you cannot replace and need to replace if they break or get stolen. You want to minimize claims on your home insurance to avoid a premium increase (previous claims are the biggest contributors to your premiums).

However, it’s even better to self-insure to avoid paying additional insurance costs! That’s not practical for everyone, and buying one-off policies can be a good middle ground.

Similar logic applies to filing a claim for stolen property. If someone steals your $3k computer, and you file a claim, you will pay back the claim over time because of increased deductibles. It’s better to eliminate coverage for the stolen property directly or indirectly via a large deductible and self-insure against theft.

Save With Higher Deductible

Higher deductibles are generally better. You get pretty hefty discounts on your premiums for this. In my example, increasing my deductible from 2.5k to 10k on my house saved me $800 in premiums per year. You can think of this as getting paid $800/year for taking on $7.5k in risk. Also, your premium will increase less each year.

In low-risk areas, deductibles may not change the premium significantly. However, in Colorado, there is a very high risk of hail damage, which is priced heavily into low-deductible policies.

The main reason not to take this approach is if you plan on using the insurance. For instance, in Colorado, hail destroys old roofs. Roofs cost ~20k to replace. It’s common practice here for folks to wait until a hail storm comes and then make a claim and replace their old roof. It may make sense to drop your deductible if you plan to use this strategy (you are effectively taking advantage of a regulatory glitch—insurance companies must cover roofs).

Derisk the catastrophic scenario. i.e. use very high liability and very high replacement coverage. If the house burns down or someone sues you, you want to be covered 100% and not have to worry about it at all. Increasing the coverage here costs very little because the chance of this happening is incredibly low, so this is something you want to do.

Wait, Isn’t it Dangerous to Have a High Deductible?

If you have little to no money in savings, yes. You should lower your deductible and increase your cash savings.

However, if you have cash in savings to cover most expensive repairs, it isn’t. Let’s think about why you might file a claim on your house insurance:

• Sewer line broke. Expensive (5-10k) repair.
• Someone steals your stuff, damages your property, etc. Biggest damage this could cause is breaking windows. (10k)
• Water line in the house breaks. Could only damage the basement (< 10k).
• Water backup. (< 5k)
• Wind/Hail damage. With a brick house, wind/hail can’t really damage much outside the roof. (< 10k)

Now if you live in a fancy house or the prices of these repairs are much more in your locale, the calculus may change.

For me, with any of these repairs, I’d have to pay a 2.5-10k deductible (lower deductibles would mean a crazy-high premium). Filing a claim would also likely increase my premiums. This means on a 10k repair I’d get a maximum 7.5k in benefit, not counting increased future premium costs.

At a 10k deductible (essentially self-insuring for everything but a total house destruction) I’d save ~$800/year in premiums. In eight years, if nothing bad happens, I’m ahead (without considering interest earned on your self-insurance fund and savings—and hopefully increases contribution to retirement/investment funds—due to decreased premiums).

I’ve used this same philosophy with car insurance (buy cars 3-5 years old, only buy liability, in a couple years you break even if you self-insure for comprehensive).

This doesn’t work with health insurance due to the complex rate negotiations that insurance companies do with various providers. However, the reason health shares are so much cheaper than traditional insurance is effectively because of this self-insurance model (health shares are not a obviously good choice for most people—many footguns there).

Life Insurance

Buy term life insurance. Go to do it right now. You can get started online.

Whole life insurance is a terrible investment account coupled with worse-than-term life insurance policy. Don’t do it.

Get it as young as you can and buy a 30-40yr policy for a higher amount than you think you need. Don’t get a 500k policy. Get a $1-1.5M policy.

The idea with life insurance is if something terrible happens you want your kids, wife, etc to be completely taken care of. 500k won’t do that. In 30yr, you’ll have enough saved where they’ll be fine anyway, so you really want to protect the next 30yr while you are earning.

This means:

1. You don’t want life insurance forever, just until you are at the end of your career
2. You’ll have other investments, so you don’t need this to be an investment vehicle
3. You want to get it before your health declines / you discover health issues (while you are young)