The purpose of insurance is simple, and it is not what the industry's marketing implies. Insurance exists for one reason: to transfer a risk that would financially destroy you to a company that can absorb it. That is the entire product. Anything smaller than "would financially destroy me" — extended warranties on a $200 blender, phone insurance that costs a third of the phone itself over three years, rental car coverage you already have through your credit card — is a bad bet mathematically, and you should skip them all.
Insurance companies employ actuaries whose entire job is to price policies so the company wins on average. That is not a scandal — it is how the industry has to work. What it means for you is that anything insurable that you can afford to self-insure, you probably should. Small losses are inconvenient; catastrophic losses are the ones that ruin lives. Reserve your premium budget for the catastrophic ones.
1. Term life insurance
If someone depends on your income, you need term life insurance. Not whole life. Not universal life. Not "indexed" anything. Just plain, boring, level-premium term. It is cheap — a healthy 35-year-old non-smoker can typically get $500,000 of 20-year term cover for under $25 a month — and it does exactly one job: replace your income if you die during the term.
Rule of thumb: 10–12× your annual gross income, for a term that lasts until your children are financially independent or your mortgage is paid off, whichever is later. Whole-life policies bundle insurance with investment at painfully high fees; the returns inside them are almost always worse than what you would earn buying term separately and investing the difference in a low-cost index fund. Buy term, invest the difference, ignore the sales pitch.
2. Income protection / disability insurance
This is the coverage almost nobody talks about, and it is arguably more important than life insurance. You are far more likely to be unable to work for an extended period than to die during your career. Long-term disability insurance replaces 60–70% of your income if you cannot work due to illness or injury, and it is the difference between a health setback being a financial inconvenience or a life-altering catastrophe.
Check first what your employer provides — it is often inadequate, maxing out at a low monthly amount and only covering "own occupation" for a limited period. Top it up with a private policy. Prioritise "own occupation" definitions (pays if you cannot do your job, not any job) and non-cancellable, guaranteed-renewable terms.
3. Health insurance
A single hospital stay in a country without universal health cover can wipe out a decade of savings in a week. Whether through your employer, a public system, or the private market, do not go uninsured for a single day of your adult life. The most common financial mistake made by otherwise sensible people in their twenties is dropping health cover because "I'm young and healthy". The freak accident does not check your age.
If premiums feel expensive, a high-deductible health plan paired with a Health Savings Account (in the US) is often the mathematically optimal combination: lower premiums, triple tax-advantaged HSA contributions, and a strong incentive to shop around for elective care.
4. Property and liability insurance
Home insurance if you own, renters insurance if you don't (it's typically $10–$20 a month and covers your possessions plus liability), plus adequate auto liability cover. The state-minimum auto liability limits are almost always dangerously low — a serious accident where you are at fault can leave you personally liable for hundreds of thousands of dollars beyond the policy limit. Upgrade to $300,000 / $500,000 or a $1M umbrella liability policy; the extra premium is trivial compared to the exposure.
What to skip
- Extended warranties on electronics and appliances. Manufacturers wouldn't sell them if they weren't wildly profitable — meaning they cost more than they pay out on average.
- Whole life insurance as an investment vehicle. Fee-heavy, illiquid, and poor returns compared to buy-term-and-invest-the-difference.
- Credit-card payment insurance — overpriced and duplicates disability coverage you should have separately.
- Rental-car insurance at the counter if your credit card or personal auto policy already covers it (most do).
- Cancer / critical-illness one-off policies if you already have decent health and disability cover — they duplicate coverage you already paid for.
- Mortgage life insurance — a plain term life policy for the same amount is cheaper and more flexible.
- Air-travel accident insurance — commercial aviation is statistically the safest form of travel by an enormous margin.
How much cover is enough?
The question to ask yourself for any potential loss is: if this happened tomorrow, what would it cost me, and could I pay it out of savings without derailing my life? Insure what would ruin you. Self-insure the rest by maintaining a healthy emergency fund. This single principle eliminates most of the overpriced policies people are quietly paying for every month without ever using.
As your net worth grows, your insurance needs shift. A 25-year-old with no dependents and no assets needs health cover and renters insurance and not much else. A 45-year-old with two kids, a mortgage, and $500,000 in retirement accounts needs the full four. A 65-year-old whose kids are independent, mortgage is paid, and portfolio can replace income indefinitely may not need life insurance at all.
Insurance is not an investment. It is a moat. Build it wide enough that no single event can breach the castle you're constructing, and no wider.