Insurance: Protecting What You’ve Built

Health insurance is complex enough to deserve dedicated treatment. See pf-9 for a full breakdown of premium vs. deductible vs. coinsurance vs. out-of-pocket maximum, the HDHP+HSA vs. PPO trade-off, and how to use your HSA as a stealth retirement account. The general insurance principles in this module (insure catastrophic risks, self-insure small losses) apply to health coverage too — but the mechanics are specific enough that pf-9 covers them on their own.

Two disability policies can look identical on price and pay the same 60% of income — and one is worth far more than the other. Three fine-print terms make the difference:

1. Own-occupation vs. any-occupation. This is the single most important word in a disability policy. An own-occupation policy pays you if you can no longer do YOUR specific job — a surgeon who loses fine motor control gets paid even if she could technically work as a greeter. An any-occupation policy only pays if you can't do ANY job you're reasonably suited for — far harder to qualify for, and the cheaper, weaker version most group plans offer. Own-occupation coverage costs more but is the protection you actually think you're buying.

2. Elimination period. This is the waiting period between becoming disabled and when payments start — disability insurance's version of a deductible, measured in time instead of dollars. A 90-day elimination period means you cover the first three months yourself (this is exactly what your emergency fund from pf-1 is for). A shorter elimination period (30 days) costs more; a longer one (180 days) costs less. Match it to how many months your emergency fund can carry you.

3. Portability. Employer-provided disability coverage usually ends the day you leave the job, and the payout is often taxable because the employer paid the premium with pre-tax dollars. A private policy you buy yourself is portable — it follows you between jobs — and the benefit is tax-free because you paid the premium with after-tax money. For high earners and the self-employed, a portable own-occupation policy bought young (when you're healthy and rates are low) is one of the highest-value insurance decisions available.

Most people shop auto insurance on price and obsess over the deductible. Two other dials matter far more.

Liability limits — buy more than the state minimum. Liability coverage pays for the OTHER person's injuries and property when you cause an accident. It's written as three numbers, e.g. 100/300/100: $100,000 per injured person / $300,000 total per accident / $100,000 for property damage. State minimums are often as low as 25/50/25 — dangerously thin, because a single serious injury can generate medical bills well into six figures. If you cause an accident that exceeds your liability limit, the injured party can come after your savings and future wages. Carrying 100/300/100 (and an umbrella policy on top once you have assets, per the table above) protects everything you've built. This is the part of auto insurance you should NOT cheap out on.

Comprehensive and collision — drop them when the car gets old. Comprehensive (theft, weather, vandalism) and collision (damage to YOUR car in a crash) only ever pay out up to the car's current market value, minus your deductible. The rule of thumb: once your annual comp-plus-collision premium climbs above roughly 10% of the car's value, you're paying a lot to insure a little. A 12-year-old car worth $3,000 isn't worth $400/year of comp/collision — if it's totaled you'd only collect ~$2,500 after the deductible. Drop those two coverages on an old, paid-off car and self-insure the loss; keep liability (which has nothing to do with the car's value) at full strength forever.