Insurance Basics
Insurance is about protecting yourself from financial catastrophe. It's not exciting, but it's essential. The right insurance prevents a single bad event from derailing years of financial progress.
The Core Principle
Insure against catastrophes, not inconveniences. You can handle a $500 expense. You can't handle a $500,000 medical bill or lawsuit.
This means:
- High deductibles are often fine (you pay more out of pocket for small stuff)
- Never skip liability coverage (protects you from lawsuits)
- Don't over-insure things you could afford to replace
Health Insurance
Health insurance is non-negotiable. A single hospital stay can cost tens of thousands of dollars.
Key Terms
| Term | What It Means |
|---|---|
| Premium | What you pay monthly for coverage |
| Deductible | What you pay before insurance kicks in |
| Copay | Fixed amount you pay per visit (e.g., $20 for doctor, $50 for specialist) |
| Coinsurance | Percentage you pay after deductible is met (e.g., you pay 20%, insurance pays 80%) |
| Out-of-pocket max | Most you'll pay in a year; insurance covers 100% after this |
HDHP + HSA: A Powerful Combo
A High Deductible Health Plan (HDHP) paired with a Health Savings Account (HSA) can be a great choice for healthy young people:
- Lower monthly premiums
- HSA contributions are tax-deductible
- HSA grows tax-free
- HSA withdrawals for medical expenses are tax-free
- Triple tax advantage - the only account with this benefit
Pro tip: If you're healthy and can afford the higher deductible, max out your HSA ($4,400 for individuals in 2026) and invest it. It becomes a stealth retirement account.
FSA vs. HSA
| Feature | FSA | HSA |
|---|---|---|
| Requires HDHP? | No | Yes |
| Use it or lose it? | Yes (mostly) | No - rolls over forever |
| Can you invest it? | No | Yes |
| Portable if you leave job? | No | Yes |
Renters Insurance
If you rent, get renters insurance. It's incredibly cheap ($15-30/month) and covers:
- Your belongings if stolen, damaged by fire, water, etc.
- Liability if someone is injured in your apartment
- Living expenses if your place becomes uninhabitable
Your landlord's insurance does NOT cover your stuff. If there's a fire, you're on your own without renters insurance.
Auto Insurance
Required in almost every state. Here's what the different coverages mean:
| Coverage | What It Covers |
|---|---|
| Liability | Damage/injuries you cause to others (NEVER skip this) |
| Collision | Damage to your car from accidents |
| Comprehensive | Damage from theft, weather, animals, etc. |
| Uninsured motorist | If you're hit by someone without insurance |
How Much Liability?
You'll see numbers like "100/300/100" which means:
- $100,000 per person for bodily injury
- $300,000 total per accident for bodily injury
- $100,000 for property damage
Get more than the minimum. If you cause an accident with $200,000 in damages and only have $50,000 coverage, you're personally liable for $150,000.
Life Insurance
Do you need it? Only if someone depends on your income (spouse, kids, aging parents you support).
If you do need it:
- Get term life insurance (coverage for a set period, like 20 years)
- Avoid whole life / universal life (expensive, complicated, usually unnecessary)
- Get 10-12x your annual income in coverage
If you're single with no dependents: You probably don't need life insurance yet. Revisit when your situation changes.
Disability Insurance
Often overlooked but important. If you can't work due to illness or injury, disability insurance replaces a portion of your income.
- Check if your employer offers it (many do)
- Long-term disability is more important than short-term
- Aim for coverage of 60-70% of your income
The Bottom Line
| Insurance Type | Priority | Notes |
|---|---|---|
| Health | Essential | Never go without |
| Auto (liability) | Essential | Required by law, protect your assets |
| Renters | High | Cheap protection for your stuff |
| Disability | Medium | Especially if no emergency fund yet |
| Life | Situational | Only if you have dependents |