Insurance Done Right

One principle, most of the answers

Insurance generates more confusion per dollar than almost any financial product, and one principle resolves most of it: insure the losses you couldn't absorb; self-insure the ones you could. Insurance is, mechanically, a losing bet on average — premiums fund payouts plus the insurer's costs and profit, so the expected value is negative by construction. Buying it is rational for exactly one class of risk: the catastrophe — the loss that would break you (Emergency Buffer Sizing's cascade, at ruin scale) — where the negative expected value purchases something worth more than the difference: the capping of your downside. For losses you could absorb — the inconvenience tier — the same negative expected value buys nothing you needed, which makes over-insuring small risks a quiet standing leak (The Extraction Economy's economics, wearing protection's clothes).

The principle, applied

Insure big: liability (lawsuits are the unbounded tail — auto and umbrella liability limits deserve more attention than they get), income (disability insurance — one of the more widely underbought coverages relative to its risk: Social Security Administration data shows roughly 1 in 4 of today's 20-year-olds will experience a disability lasting a year or more before reaching retirement age, yet well under half of civilian workers have employer disability coverage and only about 1 in 5 adults own an individual policy¹ — your earning power is most households' largest asset, and Optimism, Restraint, and the Cost of Compounding's optimism bias is why it goes unprotected), life (term, sized to dependents' needs — High-Commission Insurance Products settled the term-vs-whole-life economics), health (catastrophic medical costs being the classic un-absorbable), and dwelling (the home's full replacement).

Self-insure small: the phone, the appliance, the trip, the minor collision — the extended-warranty tier (Buying a Car's F&I room lives here) where the buffer is the correct insurer: it pays no premiums, charges no deductibles, and covers everything. The structural link: every dollar of buffer raises your self-insurance capacity — which is why growing households rationally raise deductibles as the buffer grows (trading premium for retained small-risk, a strictly-good trade once the buffer can absorb the deductible) and drop the small-loss riders entirely.

The audit

The Negotiating and Eliminating Bills sweep, pointed at coverage: annually, list every policy and rider with its annualized premium (the framing habit); check the big five above for gaps (the catastrophes uninsured); check the small tier for waste (the inconveniences over-insured); re-shop the shoppable (Negotiating and Eliminating Bills's price-optimization defense). The pattern the audit typically finds is the principle inverted — warranties on gadgets, low deductibles, comprehensive-everything on old cars, and no disability coverage, thin liability limits: paying retail to insure what the buffer covers free, while the actual catastrophes ride bare.