Self Insurance

One recurring bill category my wife and I are continuing to improve is our insurance line item.  This includes home, car, and life insurance.  On average, insurance is a losing prospect for the buyer, otherwise insurance companies would not be profitable.  So our goal is to minimize how much insurance we need to maintain for peace of mind.

As we continue down our financial independence journey, low deductibles become less and less critical.  When we were still operating with a lot of debt and a small emergency fund, the financial strain of an event happening is more impactful.  Let’s say I need to use the car insurance because I have gotten into an accident.  A $100 deductible makes the recurring insurance cost higher, but in the event it’s needed I am only out $100.  So the question becomes how much of a financial impact I need the insurance to cover.

We now have our house insurance deductible set all the way up at $5000.  That’s pretty high, but since our emergency fund is larger than that amount, we’d be able to cover the expense.  Our car insurance deductible is $500 since the likelihood of needing that coverage is statistically much higher than home insurance.  Also, when I had the insurance agent quote us a $1000 deductible, it only saved us maybe $15 per year.

What about life insurance?  I’ve carried a $1 million term life insurance policy for about the last 10 years on myself, since if I were to die, it would be financially crippling for my wife and kids.  Recently, I have reduced that down to a $500k policy to save about $100 a year.  Why?  Well, now that our net worth is about $500k and our FIRE target is roughly $1 million, we don’t need that full million dollar policy.  As we get closer and closer to being FIRE, life insurance becomes more and more unnecessary since my family would be covered by our assets instead of needing insurance to bridge that gap.  Once we are at the point of being FIRE, we don’t need life insurance at all and are completely self insured on that front, since neither of us would need to work to maintain our baseline lifestyle.

We won’t ever be insurance free, however.  For starters, that would be illegal in our state for car insurance, so we’d always need at least basic liability coverage on any car we own.  And I also don’t picture getting to the point where we would be able to foot the bill for a new house if something catastrophic were to happen.  But, I do expect that we’ll slowly reduce our insurance coverage as our net worth increases.  If our car were totaled and we had liability only insurance, we would need to foot the bill for approximately $15-20k for an equivalent replacement car.  We aren’t at the point where we could cover such an expense today, but we would be in that situation once we reach FIRE.  So our end game with insurance coverage looks something like: no life insurance, liability-only car insurance, and a high deductible home insurance plan.