Insurance decisions involve dozens of variables, but a small set of heuristics covers most situations correctly. These rules are derived from actuarial data, behavioral patterns, and structural cost analysis across life, health, disability, property, and auto insurance. They are starting points for analysis, not substitutes for it.
Why This Matters
Most insurance mistakes fall into predictable categories: insuring small losses while leaving catastrophic gaps, using salary multiples instead of needs analysis, choosing convenience over cost comparison, and failing to reassess after life changes. Rules of thumb create a rapid screening filter that catches the most common and costly errors.
Good Examples
Life Insurance Heuristics
Rule
Rationale
Source
Use needs analysis, never salary multiples (5-10x)
Identical incomes mask vastly different obligations and resources
p. 259
Term for temporary needs, whole life only for permanent
Maximum protection per dollar when need has a defined endpoint
p. 267
Don't buy whole life just because "premiums are lower when young"
Lower annual cost does not equal lower total cost -- you pay longer
p. 268
Group life is a floor, not a ceiling (~1 year's salary)
Rarely sufficient; tied to employment; conversion is expensive
p. 274
Never buy credit life, mortgage life, or industrial life
Overpriced relative to standard term meeting the same need
p. 274
Require insurer ratings from at least 2 agencies (top 2-3 tiers)
Companies suppressing ratings almost certainly received low marks
p. 278
Insurer threshold: 25+ years in business, $100M+ annual premiums
Filters for financial stability and scale
p. 277
Reassess every 5 years or at major life events
"Life insurance needs are not static"
p. 284
Dual-income households need dual coverage
Losing either income creates a gap
p. 287
Health Insurance Heuristics
Rule
Rationale
Source
Target $300K-$1M medical protection; $2M+ lifetime max
A single major illness can cost hundreds of thousands
pp. 297, 299
Raise deductibles to redirect premiums toward catastrophic coverage
Health insurance is primarily catastrophe protection
p. 299
Premiums vary up to 50% for comparable plans -- always compare
Uninformed selection functions as a tax on inattention
Without a stop-loss, an 80% plan on a $1M bill leaves you owing $200K
p. 304
Income replacement target for disability: 60-75% of monthly earnings
Tax-free benefits mean after-tax income is the real benchmark
p. 297
Lifestyle choices drive 60%+ of diagnosed illnesses
Prevention reduces premiums and exposure simultaneously
p. 297
HSA over HRA if you may change jobs
HRA funds stay with employer; HSA funds are portable
p. 298
Disability Insurance Heuristics
Rule
Rationale
Source
Probability of extended disability before 65 is ~50% at age 35
2-2.5x greater than mortality risk, yet most lack coverage
p. 312
Choose "own occupation" over "any occupation"
"Any occupation" allows denial if you can do any job at all
p. 314
Extend waiting period + maximize benefit duration = same cost, better protection
30-day wait/2-year benefit costs the same as 6-month wait/to-age-65 benefit
p. 315
Benefits capped at 60-70% of gross income
Full replacement would incentivize fraud; design around this cap
p. 314
Employer group disability costs 15-35% less than individual
But coverage is lost on job change
p. 314
Add COLA rider (10-25% premium increase) to prevent inflation erosion
3% inflation reduces $2K/month to under $1,500 in purchasing power over 10 years
p. 315
Social Security disability replaces ~54% for $50K earner but ~78% for $20K earner
Higher earners face proportionally larger gaps
pp. 312-313
Property Insurance Heuristics
Rule
Rationale
Source
Insure dwelling at 80%+ of replacement cost
Falling below triggers proportional penalty on EVERY claim, even small ones
p. 330
Add inflation protection rider to auto-adjust limits
Prevents co-insurance drift in inflationary periods
p. 330
Replacement-cost on contents costs only 5-15% more than ACV
High-value upgrade for modest premium increase
p. 331
Triple liability from $100K to $300K for only $50-$100/year
Protects against catastrophic jury awards
p. 331
Standard deductible of $500-$1,000 saves ~10% on premiums
Small claims cost nearly as much to administer as large ones
pp. 331-332
Renter's insurance: ~$200-250/year for ~$15K coverage
Landlord is NOT responsible for tenant property unless proven negligent
pp. 327-328
Standard jewelry theft limit is only $1,000 -- schedule valuables separately
Personal property floater required for items exceeding sublimits
p. 327
Store property inventory off-site
Same event that destroys property destroys proof of ownership
p. 322
Auto Insurance Heuristics
Rule
Rationale
Source
Raise deductible from $100 to $500: save up to 25% collision, 30% comprehensive
Most underutilized cost lever in auto insurance
p. 341
Raise deductible to $1,000: save up to 50% on both
Absorb small losses from savings; insure catastrophes
p. 341
UM/UIM coverage costs $50-$75/year -- always carry it
~16% of drivers are uninsured
pp. 337-338
Drop collision on old cars when ACV minus deductible approaches zero
Premium exceeds possible recovery
p. 346
Umbrella policy: $1M for $150-$300/year
Highest-leverage insurance purchase; requires $100K-$300K base limits
pp. 342-343
Only one-third of car owners comparison shop
Significant behavioral gap -- be in the other two-thirds
p. 340
Drivers under 25: ~15% of population, ~30% of accidents
Actuarial basis for age-based premium differentials
p. 340
Counterpoints
Rules of thumb are screening tools, not final answers. Needs analysis (life insurance) and gap analysis (disability, property) should follow initial screening.
"People often assume risks unknowingly. They may be unaware of various exposures to loss or think that their insurance policy offers adequate protection when, in fact, it doesn't." (p. 256)
Do not cut coverage to save money during recessions -- 5% of homeowners canceled insurance during 2007-2009, creating catastrophic exposure (p. 330).
Key Quotes (ALL with page citations)
"Insurance is a reasonable way of handling risk only when people use effective loss prevention and control measures." (p. 256)
"The multiple-of-earnings method fails to fully recognize the financial obligations and resources of the individual and his or her family." (p. 259)
"The average chance of a person age 35 becoming disabled for 90 days or longer before age 65 is about 50%." (p. 312)
"Although most Americans have life insurance, few have taken steps to protect their family should a serious illness or accident prevent them from working for an extended period." (p. 312)
"There's an old axiom in the life insurance business that life insurance is sold, not bought." (p. 278)
Rules of Thumb
Red Flags -- Signs of Poor Insurance Planning
Salary-multiple life insurance without needs analysis (p. 259)
No disability coverage despite having life insurance (p. 312)
Dwelling insured below 80% of replacement cost (p. 330)
No umbrella policy with significant assets (pp. 342-343)
Special-purpose policies (credit life, dread disease, accident-only) in the portfolio (pp. 274, 303)
Never comparison-shopped across insurers (pp. 276, 299, 340)
Deductibles at minimum on auto and property while paying high premiums (p. 341)
Group coverage treated as sufficient without gap analysis (p. 274)
Decision Rules -- When to Act
Buy LTC insurance in mid-50s to 60s; premiums should stay under 5-7% of income (p. 309)
Convert term to whole life only when a permanent need is confirmed and budget allows (p. 267)
Add umbrella when assets exceed base liability limits or when renting property, hiring help, or hosting clients (p. 343)
Switch from ACV to replacement-cost on contents when total personal property value justifies the 5-15% premium increase (p. 331)
COBRA is an 18-month bridge, not a solution -- plan the next coverage source immediately (pp. 306-307)
Related References
auto-insurance.md -- PAP structure, premium factors, and claims process
implementation-playbook.md -- Full action sequence for building insurance portfolio
