Investment Workshop 23: How Much Insurance Do I Need?

Wanderer
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Wanderer

The Wanderer retired from his engineering job at a major Silicon Valley semiconductor company at the age of 33. He now travels the world, seeking out knowledge from other wealthy people, so that he can teach people how to become Financially Independent themselves.
Wanderer
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Hello again and welcome back to the Millennial Revolution Investment Workshop! New readers, please click here to start from the beginning.

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A reader recently asked us “Can you do a post on insurance? I have no idea how much insurance I need.”

Which is a great question. Insurance is something we often don’t talk about in personal finance blogs, but is something everyone has to do deal with.

In my experience, when it comes to how much/what types of insurance people own, they usually fall into two categories:

  1. Over optimistic idiot who doesn’t own ANY insurance even though they should
  2. Overly pessimistic scaredy-cat who owns WAY TOO MUCH insurance than they need

We actually know both types of people. There’s the homeowner friend back in Toronto who rants and raves about how much her condo has appreciated in value every time we go out for lunch, yet doesn’t own any home insurance because all her money is going towards the mortgage and there’s nothing left over for anything else. She is one fire or burst pipe from financial ruin and refuses to do anything about it. She is underinsured.

And we have another friend who pays hundreds of dollars a month on life insurance despite the fact that he’s single and has no kids. He is overinsured.

But I’m not gonna yell at these people for being idiots, because it’s not that easy to figure out how much insurance you actually need. They sure as Hell don’t teach it in school, so the only authority available on how much insurance you need is left to insurance salesman. And from them, the answer is always “As much as I can trick you into signing up for.”

So we are left with Goldilocks scenario. Too little insurance and you may get wiped out financially. Too much and you’re wasting money. So how much is “just right?”

Shoulda bought Bear Insurance before this happened, dumbass.

To answer this, we will break down the different types of insurance most people have to deal with into 4 categories:

  1. Life Insurance
  2. Medical Insurance
  3. Asset Insurance
  4. Travel Insurance

Life Insurance

Life insurance is an insurance contract where if you kick the bucket while shark-surfing, or whatever awesome thing it is that you do in your spare time, your family gets a lump-sum benefit to provide for them while you remain unable to work (you know, because you’re dead).

You’re calling in dead AGAIN? Typical Lazy Millennial…

So do you need this? Well, obviously if you’re not married or have any dependents, then the answer is no. But if you do, it gets a little trickier.

While Working Towards FI

When you’re still working and savings towards FI, it does make sense to purchase life insurance. However, and this is a BIG however, you don’t want to purchase too MUCH life insurance.

Let me explain.

You may have noticed that in the many case studies we do on this site, one of the first things we calculate is the reader’s “FI Number,” meaning the portfolio size they need to hit to be able to retire. This is typically calculated by taking their annual expenses and multiplying by 25, as per the 4% rule. So someone spending $40k a year will need $1M, someone spending $50k a year will need $1.25M, etc.

So let’s say your FI number is $750k and you currently have $250k saved. This means you need to save $500k to get to your FI number, and given your current savings rate you should be able to get there in about 10 years.

So how much insurance do you need? The answer is just enough to get you (and by that, I mean your surviving family) to your FI number in case you get run over by a car. So you need $500k of coverage over the next 10 years. That way, if you make it, you win. And if you don’t make it, your family is still taken care of.

So you should purchase Term Life Insurance. Term Life Insurance covers you for a specific period (or term), and for a specific coverage amount. In this scenario, you should purchase a Term Life policy with a coverage of $500k (the amount you need to become FI) for a duration of 10 years (the amount you think it will take to get there on your own). Other insurance products like Permanent/Whole Life or Universal Coverage are meant to cover you for your entire life, but you don’t need that much coverage.

Why? Because you only need that insurance coverage over the set period of time it will take you to become FI, not your entire life. And because of this, your insurance costs will actually be very low. I plugged in this data into State Farm’s website and I got a cost of…$32 a month. By comparison, Permanent Life Coverage from the same company cost $615 a month, or 20X MORE!

Figure out how much coverage you need, and don’t pay a single penny more than you have to. If you’re paying more than $50 a month, you are doing something seriously wrong.

Cost: $30-$50 a month.

After Retirement

Here’s the fun part. After you retire, you do NOT need Life Insurance at all.

Got it? Zero. Zip. Nada.

That’s because your portfolio acts as your life insurance. In retirement, your portfolio, not your job, provides you enough income to live via your Yield Shield, so your family is provided for whether you’re physically there or not. So life insurance is redundant.

Cost: $0

Medical Insurance

Medical Insurance is, depending on where you live, either ridiculously complicated (*cough* AMERICA *cough*), or ridiculously simple.

If you live in a developed country outside the USA like Canada, the UK, Australia, etc, you can pretty much just skip this section. You’re good.

For Americans though, this is a tad more complicated…

While Working Towards FI

While you’re working, your health insurance should be covered by your employer. However, your employer doesn’t pay for your entire health insurance premium, and instead shares the cost with the worker. Typically, the employer picks up about 70-80% of the tab, leaving the worker having to contribute the rest. In 2016, this was, on average across the US of A, about $5000 a year, or $420 a month according to the Kaiser Family Foundation.

And of course, for everyone else with a single-payer health care system, your health insurance is paid for by your taxes, so the additional cost for you guys is $0.

Cost (USA, National Average): $420 a month

Cost (Everyone Else): $0

After Retirement

In the past, if you didn’t have a job (or had a job, but also a pre-existing condition) the American health care system would simply wish you the best of luck in your future (and likely, brief) endeavours.

But after the implementation of ObamaCare (and the Republicans rather embarrassing failure to repeal it), the situation is considerably better for Early Retirees. This is because ObamaCare offers federal subsidies (and expanded Medicaid, for the states that implemented it) that were income tested rather than means tested. This means that Early Retirees can now access health care plans at way cheaper prices.

This is all due to the fact that once you retire, your earned income drops dramatically. Here’s our good buddy Justin McCurry talking about how Obamacare helps Early Retirees retain their health insurance at a fraction of the cost. Plugging my own information into an Obamacare calculator, I got a monthly premium of $200 a month, but this could be much less for you depending on your MAGI and number of dependents. I’ve seen it as low as $50 a month.

And of course, for everyone else with a single-payer health care system, your health care is guaranteed as a basic human right whether you work or not, so your cost is $0.

Cost (USA, National Average): $50-200 a month

Cost (Everyone else): $0

Asset Insurance

And finally, we come to Asset Insurance. These are the insurance policies you take out on your fixed assets (like a home or a car) to insure you from financial loss in case that asset spontaneously combusts.

Right. “Spontaneously.”

Let me get this out of the way: Yes, you should insure your major fixed assets like your house or your car. You don’t want the majority of your net worth to get wiped away by that evil-looking girl up there.

But on the other hand, as we write endlessly on this weird little blog of ours, if the majority of your net worth is tied up in a house or a car, you’re probably not going to EVER retire.

This is because money tied up in a house or a car can’t be used to fund your living expenses. That’s the reason why in our case studies we exclude home equity from contributing towards a person’s FI number.

So on home/car insurance, as long as you own those things, YES, you should definitely insure them to protect your investment. But unless your home/car is a small fraction of your net worth, you’re going to need to sell it to unlock your equity and help you retire. Otherwise, you’ll have to keep paying to insure it forever (as well as property taxes, maintenance, utilities, etc.), possibly delaying your retirement indefinitely.

We never owned property, or a car, so our insurance cost was $0.

Cost: $0 (ideally)

Travel Insurance

Obviously, this only applies to people who are like us who travel nomadically. If your plan in retirement is to stay in your home country, this doesn’t apply to you.

Travel Insurance is meant to cover your health care costs while you are away from your home country. Even if you are in a country with universal health care, since you’re not a resident you typically have to pay out of pocket. For things like checkups or teeth cleanings, this isn’t a big deal since those things are usually much cheaper abroad than in North America, but if something really bad happens and you fall and break your leg or you’re diagnosed with something more serious (knock on wood), Travel Insurance will prevent you from going bankrupt as a result. I know a couple who gave birth prematurely while travelling in the US and the entire ordeal (the birth itself, complications from being premature, extended hospital stay, and medevac back to Canada) ended up costing about $1M! But because they had Travel Insurance, the were OK.

We’ve been using World Nomads for Travel Insurance, and they’ve actually been pretty good, having paid out to us on numerous occasions when bad things did actually happen on the road. They’re also one of the few companies that offer “Worldwide” travel insurance for an extended period of time. Our premiums for this year are $1585 annually, or about $130 CAD a month.

Cost (if living nomadically): $130 a month

Cost (if staying in home country): $0

The cost varies depending on where you live, so you can use this widget to generate a quote if you’re interested in Travel Insurance.

Conclusion

So there you have it. Insurance: Who needs it? And that’s because as a Canadian who retired at 31 and travels the world (and therefore doesn’t own a house or a car), our insurance burden is just $130 CAD ($100 USD) a month for the two of us (we have travel insurance, but that’s it). As an American, you have to pay some health insurance premiums, but thanks to ObamaCare it doesn’t have to break the bank and your dream of Early Retirement is still possible.

So what do you guys/gals think? How much insurance do you currently buy, and how much do you actually need?

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Disclaimer: The views expressed is provided as a general source of information only and should not be considered to be personal investment advice or solicitation to buy or sell securities. Investors considering any investment should consult with their investment advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decisions. The information contained in this blog was obtained from sources believe to be reliable, however, we cannot represent that it is accurate or complete.

37 thoughts on “Investment Workshop 23: How Much Insurance Do I Need?”

  1. Hey guys, as an early retiree hopeful from Canada – what can you offer as advice for travel insurance options. Also, how are you managing OHIP coverage while not in Ontario? I believe you coverage is seamless if you aren’t outside Canada for more than 212 days in a year? Thanks and love your weird blog 🙂

    1. Just updated the post with travel insurance info.
      As for OHIP, you can be outside the country for 2 1-year periods to travel and still have continuous coverage. After that, you can either limit your time outside Canada, or you can apply for a waiver that will allow you work or volunteer for a charity for 5-year periods at a time. I’m planning on doing the second one after my 2nd 1-year travel waiver runs out.

  2. Very helpful overview, guys. One thing to consider is the need for disability insurance. Obviously, not needed if you’re at FI, but it’s something that is super important during your working years, especially if you’re in a very specialized field. Chances of becoming disabled for at least some period of time are really high.

    I’m still trying to learn more about this for my very soon to be wife. She has disability insurance now while she’s a resident, but we’re going to need a ton more once she’s actually practicing and making way more money. Imagine if she broke her hand and couldn’t do dentistry anymore!

    There’s a pretty good book I checked out at the library once called Money Ratios that I thought was pretty useful in figuring out how much insurance you needed. It’s a bit outdated, but I think the actual ratios are still strong.

    1. Good point. My high-risk desk job didn’t really warrant us looking into disability insurance, but the math for that acts similarly to life insurance. It pays you a set amount if you incur an insured injury, so figure out how much you need to hit your FI number and buy only enough insurance for the minimum amount of time that you need.

  3. We follow the exact method you described for life insurance: term life policy that we reduce every so often, as we hit milestones in our assets.

    We also cover an umbrella policy, for what it’s worth. With the level of assets most early retirees have (especially those who are using rental property in their FIRE plans), it might be something worth looking in to.

    1. Right, I looked into it myself and concluded an umbrella policy is useless if you don’t own a house or a car. If part of your retirement plan involves rental property, then yeah that might make sense (though most home insurance plans include liability coverage as part of it)

      1. Right, but your first line talks about the insurance most people need, not just your particular situation, so I assumed your article was targeted at a general audience of pre- and early retirees, many of whom might need an umbrella policy if they run a business, rent out a home etc.

  4. I don’t know but life insurance is something I’ll never have. After all, after I’m gone why would I care…and my wife will inherit fat investment account which will allow her to have a very good retirement so…I don’t see the point of having life ins.
    As per medical insurance I really hope not to live in the US during my FI so I wouldn’t need it as Wanderer very well explained

  5. This is very helpful! My husband and I are actually contemplating moving to a lower COL country (potentially to Mexico) for when we early retire in order to speed up our early retirement and were concerned how health insurance/travel insurance would work. It will be several years down the line but we’re already dreaming and starting to formulate a plan of action. Would love to only need Travel Insurance though!

    1. I think you still have to have to have health coverage in your home country when you travel, but again if your income drops in retirement the Obamacare subsidies kick in.

  6. Great article, as always! I’d love your take on personal critical illness insurance. My FA is urging me to take on this kind of insurance in case I get sick. I’m 35, single, no kids and perfectly healthy, but anything can happen where I might be unable to pay for any type of medical support or living expenses long-term. I don’t have anyone close to me to help if anything happens either. The CI insurance is $300/month, which I find ridiculously expensive but given my status as a single woman, I wonder if this is worth the investment. TIA for your thoughts!

    1. Critical Illness insurance operates similarly to life insurance, in that you get a lump-sum payment (or series of payments) if you incur an insured injury, so the math operates similarly to life insurance. Figure out how much you need to save and how long it will take you to save that amount, then buy coverage equal to that amount for a term equal to your time projection.

      Then, as you get closer to retirement, reduce your coverage (and your premiums) until you hit zero right as you retire.

  7. Awesome post. The minimum amount of necessary insurance is the conversation I’m having with my husband right now. Canadian, no house, no kids, self-employed, and halfway to FI. Because we don’t have dependents, I’m almost thinking that disability is more important for us than life insurance, until we’re FI. Thoughts?

  8. Great topic!

    I would just add that at least here in America, most companies offer long-term disability insurance for cheap, and protecting 60-65% of one’s current work income can add up to a huge amount of protection over x years to retirement, especially the longer a person has left to FI.

    Also, umbrella coverage can help prevent financial ruin from lawsuits. As an example, I have a friend whose daughter rear-ended a highly-paid dentist, causing him a trip to the hospital requiring surgery, which was botched and he can no longer practice his craft, so now he is suing both my friend and the hospital for millions each…

    And finally, for collectors out there (like myself) who plan to monetize their collection sometime in the future, most renter/homeowner policies won’t cover large collections, so the only viable insurance option is to get a policy from a provider who specializes in covering collectibles.

    Just my $0.02. Keep up the great work on the FI revolution!

    1. Good point. Wow, millions each? You Americans sure love suing each other!

      And I’m gonna go ahead and trust you on the collectors insurance thing. ZERO experience with that. Zero.

  9. I absolutely agree that disability insurance is crucial if you are still working! That and car insurance (due to work I can’t go car-less yet) are the only insurances I have. Without disability insurance, you are just one accident/illness away from disaster.

    1. I did look into that. Generally, liability insurance is included as part of your home and car insurance to protect you from lawsuits in case you hit someone with your car or someone slips and hits their head on your property. You can also get additional liability insurance to increase your coverage if for whatever reason you think you might need more. However, this type of coverage tends to be pretty cheap.

      In the absence of owning a home or car, though, I see no reason to own personal liability insurance since I can’t hit anybody with a car I don’t have. The only other reason is if your line of work may attract lawsuits (think a journalist or a doctor), but that’s specific to each industry and not generally applicable to everyone.

  10. Hello I have a question regarding to your world nomads insurance….
    Is it effected by being outside of Canada for more then 6 months a year?
    I’ve recently found out that most travel insurance offered to Canadians is still connected to their Provincial health care scheme.
    From every insurance company I’ve contacted they’ve told me that if I plan to be outside of Canada for longer then 6 months I’d have to call my Provincial health care and have them extend my coverage despite my lack of residency.

    This has constantly been an annoyance over the years.

    1. Yeah, by default if you’re out of the country for 212 days (or something) your health insurance turns off. In Ontario, I can be outside the country travelling for 2 1-year periods as long as I inform them beforehand. After that, I can be outside the country for 5 years at a time if I’m doing it for work or volunteer purposes.

      I’m currently in my 2nd 1-year travelling absence. After that I plan on using either the work or volunteer reasons for absence.

      This is all Ontario only, so check with your provincial insurance provider.

      1. Any idea if there are any insurance companies who will insure you without needing provincial healthcare? for anyone who will not be working or volunteering?
        Just living somewhere warmer and more affordable 😀

  11. As someone who works pricing home and auto insurance here’s my two cents if you do decide to possess those types of insurable assets:

    1) There is no reason to maintain more than basic liability coverage on an older vehicle.

    2) Beyond the unwise interest expense of financing an auto purchase, keep in mind you will pay more to insure it to cover the “loan-lease gap”.

    3) Location matters a lot in insurance pricing, so this perhaps something to research if you are planning to settle somewhere different in retirement. Anywhere with hurricane exposure is going to have much higher insurance costs in general, and some random states with atypical auto insurance regulations (Michigan is the obvious example) have dramatically higher rates.

    4) Those who keep a car for infrequent or low mileage use could save significant cash by switching to pay-per-mile auto insurance. I use Metromile. You plug a device into your car that tracks how much you drive, and are charged only a small base amount every month, plus 3 cents for every mile driven (you won’t be charged for more than 100 miles per day, I believe).

    5) Floods and earthquakes are excluded from the typical homeowners insurance contract. If you live in an area where these are significant risks look into NFIP (National Flood Insurance Program) or a state-specific earthquake carrier (CEA for Californians).

    6) Shop around periodically. Insurance pricing is complex, and every company has their own unique algorithms, and all of them are constantly trying to find new variables that predict your relative riskiness to get a competitive edge in the marketplace, and you could very well end up on the better side of that. No one insurer will offer the best rate to everyone. That being said, don’t be overeager to dump your current insurer if your rate goes up at renewal. When insurers raise rates it is often due to pressure from loss experience from across the industry, so even if you could get a slightly better deal elsewhere right now, your new company could end up raising rates on you the next year anyway, as they catch up on bringing their rates into alignment. Additionally, being continuously insured for a longer period of time with your previous carrier often earns you a discount when you do switch.

    7) Unless you have some obscenely valuable personal property, scheduling it under your home insurance policy is probably a waste of money. Check out your coverage limits for personal property. If you think the value of your belongings falls under that amount, you’re probably fine.

    And…that’s all I can think of at the moment. Big fan of the blog. 🙂 You guys inspire me.

  12. I have term life insurance through my employer but considered getting term life insurance that was not connected to my job after having kids but never did so. I work in the public sector and the chances of me being fired/laid off is slim, plus while we are not FIRE, we do have a decent amount of assets. Another thing that many Americans don’t consider is that Social Security adds an extra layer of protection on top of life insurance if you pass away. For a frugal family, Social Security will cover a good amount of your expenses.

    1. Yeah we have that too, but it doesn’t kick in until 65. Ours (CPP) helps but I don’t think it’s enough to live on ($700-1000 a month). How much does Social Security pay?

      1. It will depend on your income level. According to my Social Security Online account, survivor’s benefits is a little under $2000 per child/surviving spouse up to max of $4500 a month. I think if the spouse works then he/she might not receive those benefits or it might be reduced…not sure.

  13. Great post. Although we have yet to reach our own personal FI number, we have a substantial net worth and no debt. This makes life insurance not necessary for us.

    As far as health insurance is concerned, we are U.S. citizens and currently have health insurance through my wife’s employer. We were planning to take advantage of lower rates under the Affordable Care Act since our income will be lower during retirement. However, the future of that plan, as you mentioned, is not clear. It will be interesting to see how things play out.

    Geographic arbitrage may be part of our future FI plans, due to the lower cost of living, including health care costs. Honestly, I hadn’t thought about the need for travelers insurance and the cost. Good to know it can be pretty affordable as you have demonstrated.

    Wanderer, do you have any experience with paying out of pocket for health care in any of the countries the two of you have visited? I’ve read on GCC that they often do so because it is so affordable in some places.

    1. Yeah, last I heard Trump was playing chicken with the Democrats and threatening to cut off funding the ACA in exchange for funding his wall. What’s the Chinese saying? “May you always live in interesting times”?

      We have paid out of pocket for health care for routine stuff. Outside US/Canada, it’s ridiculously cheap. We did the following in Mexico and Thailand:

      $25 USD for a doctor’s visit
      $25 USD for an EKG
      $25 USD for a teeth cleaning

      As for GCC, I know from talking to them they did IVF in Taiwan and it cost them 1/6th what it would have cost them back in the US! It’s pretty crazy how much health care costs in the US vs the rest of the world.

  14. Back when I was looking at buying a house, it was required to have life insurance to get a mortgage. The financial planner I was working with offered me one option of life insurance that started at like $40/month but every 10 years or so raised up exponentially. Like you’d be paying a few grand a month in your 70’s.

    He also showed me an option where if I paid around $160/month until I was 55, then I could take all the money out, + interest (~5%) so it would have been around $100,000 then I would still be covered for life and wouldn’t have to pay ever again.

    Heard of this before? To be eligible for that 2nd option you need a clean criminal record and to live pretty straight narrow.. but an interesting option. I forget what the program/option was named though.

    Also.. TRAVEL INSURANCE.. get it. Everytime.

    Colby

    1. oh Gosh…You’re getting a mortgage which is a pretty bad thing already and the FP tries to shove a life insurance down your throat? I just have a word for it- RUN !

      1. ??!? echoing this. You were forced to buy life insurance for the privilege of going into debt?

        You got played, sir.

        If I were you I’d research into whether that’s even legal. At best, that’s shady as fuck, at worst that might have been illegal.

  15. Hey Wanderer,
    What about your Ontario Health Care not covered by OHIP (dental, eye care etc …), do you have a private insurance in Canada for that or you pay out of pocket?
    You mentioned that you have only the travel insurance, so I m assuming so far you only used that one while traveling (ex: having your teeth checked in Thailand and not in Canada
    etc) and didn’t need a private insurance in Ontario?

    1. I had the same question… sure OHIP will cover tons but not prescription medication, dental care, eye exams, etc. Not an issue as you guys are travelling but any recommendations for someone staying in Ontario? We have young kids (who may or may not need braces and such) so are foreseeing future possible expenses in that area…

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