finance
Managing Insurance Needs
2009 10 references
Insurance planning fundamentals — use when advising on life, health, disability, long-term care, property, or auto insurance decisions, coverage amounts, or policy selection.
insurance life-insurance health-insurance disability property-insurance risk-management
Overview
The Core Framework
- Insurance is for catastrophic, low-probability losses — absorb small predictable costs through budgeting and higher deductibles
- Use gap analysis for every coverage type: quantify obligations → inventory existing resources → insure only the difference
- Four risk management strategies in order: avoidance → prevention/control → assumption → insurance
- Insurance needs are lifecycle-dependent — reassess every 5 years or at major life events
- Information asymmetry favors sellers — understand policy mechanics before purchasing
Quick Lookup
| Situation | Do This | Avoid This |
|---|---|---|
| Calculating life insurance need | Use needs analysis: obligations - resources = gap | Multiplying salary by arbitrary number (5-10x) |
| Choosing life insurance type | Term for temporary needs, permanent only if lifelong need | Whole life as "investment" — buy term, invest the rest |
| Selecting health plan | Compare total cost (premiums + likely out-of-pocket) | Choosing lowest premium without checking deductible/stop-loss |
| Evaluating disability insurance | Get "own occupation" definition, 60-70% of income | "Any occupation" policies that deny if you can do any job |
| Setting homeowner's coverage | Insure at 80%+ of replacement cost | Insuring at market value (includes land, not insurable) |
| Choosing auto liability limits | At least $250K/$500K; add $1M umbrella | State minimums — one serious accident exhausts them |
| Buying any insurance | Check insurer ratings (A.M. Best, S&P, Moody's) | Single-agency reliance or buying from unrated company |
| Reducing premiums | Raise deductibles, consolidate policies, buy low-load | Dropping coverage or buying limited-peril policies |
The Key Insight
"All types of insurance are intended to protect you and your dependents from the financial consequences of losing assets or income when an accident, illness, or death occurs." — p. 255
References
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