Insurance is risk transfer for tail events that can break the balance sheet. Done right, it costs a few percent of income and absorbs the catastrophic outcomes that would otherwise liquidate your portfolio, foreclose on your house, or default a private-fund commitment. Done wrong, it costs the same few percent and pays out nothing useful when the catastrophe arrives: the policy excluded the actual cause, the limits were too low, the agent earned a 7% commission selling you a cash-value product that did neither of the jobs insurance is supposed to do.
The framework that prevents the latter outcome is the large-loss principle: insure what can wipe you out; self-insure what can’t. The catastrophic exposures are roughly five: an unrecoverable disability (loss of human capital), a successful liability judgment that exceeds your liquid net worth, a long custodial-care episode in late life, a total loss on the primary residence (especially in a wildfire, hurricane, or earthquake zone), and a premature death while dependents still need replacement income. The financial defense against each is a specific contract structure — the contracts are this chapter.
Self-insure the frequent losses — a $1,500 fender-bender, a $400 plumbing emergency, a $2,000 dental crown — out of the Tier 1 operating cash described in chapter “Emergency Fund”. Carrying low deductibles for these is the most common single mistake: you pay every year for coverage you’d rather absorb out of pocket, and the carrier prices a margin into that coverage that exceeds the actual frequency-times-severity expectation. Raise every deductible to the largest single loss your Tier 1 layer can absorb without restocking, and redirect the premium savings into higher catastrophic limits and an excess-liability layer.
A second principle, often violated: the contract is the product, not the brochure. Two policies with the same advertised premium can differ by hundreds of thousands of dollars in actual payout depending on the exclusions, the definition of disability, the replacement-cost formula, and which carrier is on the paper. Pay an independent broker for a real policy review — not the selling agent’s review of his own product — and read the exclusions list before the marketing brochure.
Replacement income for dependents (term), estate-tax liquidity for very large estates (second-to-die), and the narrow legitimate cash-value cases (PPLI for the very wealthy). Most of the retail cash-value market is best avoided.
Longevity hedging via SPIA and QLAC, and the structural illiquidity that makes income annuities useful as cognitive-decline insurance. The variable-annuity market is dominated by commission products that do not pay off the way the brochure implies.
HDHP plus HSA as the default working-age stack (section “Health Savings Account (HSA)”); concierge / direct primary care for service quality; Original Medicare plus Medigap Plan G after 65 (section “Medicare”); IRMAA as the stealth wealth tax it actually is (section “IRMAA: The Stealth Tax with Cliffs”).
Self-insure if your balance sheet sits meaningfully above plausible LTC outlay; hybrid LTC-life products in the $1M–$3M range; standalone LTC only in narrow cases (section “Long Term Care Insurance”).
The largest under-insured exposure for working-age high earners. Own-occupation contract definition is the single most important term; bonus and RSU inclusion in covered earnings is the second (section “Disability Insurances: Covering Your Lost Income”).
Private-client carrier (Chubb, AIG Private Client, PURE, Cincinnati Premier) for high-value homes; scheduled property floaters for jewelry, art, and collections; $5M–$10M umbrella plus an excess-liability layer; separate D&O for board service; personal cyber.
The trust / entity / state-shield layer underneath all of this. The contracts limit losses; the structure determines what’s reachable when the contracts run out (section “Asset Protection”).