Ch6. Personal Finance — Insurance & Risk Management

The Purpose of Insurance

Insurance is not an investment — it is risk transfer for events that are:

• Low probability but high financial impact
• Beyond your ability to self-insure with savings

Insurance you need:

• Major medical expenses
• Death of a primary income earner (with dependents)
• Liability from car accidents

Insurance you probably don’t need:

• Extended warranties on small electronics
• Credit card insurance
• Whole/universal life insurance in most cases

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The 5 Essential Insurance Policies

1. Health Insurance

• Most critical insurance — a single hospital stay can cost $50,000+
• Priority: Minimize deductible + use HSA if enrolled in HDHP
• Open enrollment: use carefully; review plan annually

2. Term Life Insurance

• Pays a fixed death benefit for a set period (10, 20, or 30 years)
• 20–30x annual income for 20-year coverage is a common guideline
• A healthy 30-year-old can get $500,000 coverage for ~$25–$35/month
• Avoid whole life: 5–10x more expensive; investment returns are weak

3. Disability Insurance

• Most underrated insurance: 1 in 4 Americans becomes disabled before retirement
• Covers 60–70% of income if you can’t work
• Employer LTD policies exist but are often insufficient; consider supplemental

4. Auto Insurance

• Carry liability limits of at least 100/300/100 (bodily injury/total/property)
• State minimums are dangerously low
• Comprehensive/collision: Skip if car value < $5,000

5. Renters/Homeowners Insurance

• Cheap (~$150–$400/year for renters), covers belongings and liability
• Required by most landlords; critical protection

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Whole Life vs. Term Life

Feature	Term Life	Whole Life
Cost (same coverage)	$30/month	$200–$400/month
Duration	10–30 years	Lifetime
Cash value	None	Grows slowly
Investment return	N/A	~1–3% after fees
Best use case	Pure protection	Very rare exceptions

Bottom line: Buy term, invest the difference.

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Next: Retirement Planning — Social Security, 401(k) projections, the 4% rule, and FIRE (Financial Independence, Retire Early) movement.