Insurance

1. Insurance is a tradeoff of risk vs expense.

For most forms of insurance, you as the policy holder generally don’t want to have to utilize the policy, because that means something bad has happened to you or your assets (house damage, car accident, serious illness, lawsuit, etc). Winning at insurance looks like paying your monthly or annual premiums and rarely needing to utilize it. We acknowledge that the best case scenario means it’s a regular expense that we pay in order to minimize risk, and we probably won’t see that money again. The main exception to this is health insurance, where it is more common to utilize the benefits of the policy on a regular basis. To learn more about the concept of insurance and how it fits into your financial plan, check out this article: Insurance is a Financial Planning Tool – ChooseFI.

2. Insurance and investing don’t mix.

Don’t listen to people who try to sell you the best of both worlds in one package. Insurance is an expense that you will hopefully never see again. But it’s designed that way – you pay more now to reduce unknown risks later. Investing is taking your money and placing it somewhere where you reasonably expect it will increase in value before you need it again. There is one major insurance product that seeks to combine insurance and investing in a way that preys on average customers: ‘whole life insurance’. This product should be avoided at all costs. More on that below.

3. Term life insurance is good and useful on the path to FI.

Does anybody else depend on your income? Then term life insurance is a good idea. Term life insurance provides financial security for your family members or other financial dependents in the event that you pass away within the policy period or ‘term’ (usually 10, 15, 20, 25, 30 years). Most people pursuing financial independence (FI) will purchase a term life insurance policy that lasts until the year that they believe they will reach FI. At the point that you reach FI, you have effectively self-insured. If you were to pass away after reaching FI, your assets would be enough to provide for your family in perpetuity, so you would have no need of life insurance.

As the policy holder, you get to set the value of the policy (how much it would pay out if you died) and the term length. But how much is enough? Generally, calculate your ‘FI number’, and subtract your current retirement assets to determine your required policy value. For example, a 30 year old whose FI number is 1.5 million and currently has $250,000 in retirement accounts would need a term life insurance policy of 1.25 million. If that goer expects to reach FI in 25 years, then their policy term should last about 25 years as well. By signing up for that policy, they will now make monthly payments to the policy for that 25 year period. If at any point they don’t want the policy anymore, they can cancel it.

Term life insurance can be purchased for any family member, regardless of if they earn income. Parents can buy term life insurance policies of smaller amounts (10-20K) for their children. If a child dies earlier in life, this policy would help cover funeral costs. Non-working spouses should also consider getting term life insurance policies. If a stay-at-home parent were to pass away, the surviving parent would certainly have increased expenses to provide sufficient child care while they work. That added expense should be considered in determining the value of the non-working spouse’s term life insurance policy.

Typically, companies offer life insurance to employees, but usually it is in such small amounts (10-20K) that it is more comparable to the amount you would choose for children. For a larger policy (1-2 million) most goers will need to shop on the insurance market. ChooseFI, a leading resource hub for Financial Independence (FI) content has partnered with PolicyGenius to provide a straightforward search and purchase engine to compare life insurance policies. 

4. Find a term life insurance product made for expats.

Some life insurance policies might have exclusions for residing in specific countries, or anywhere outside the US. Goers need to find term life insurance policies that are designed for expats. These plans will likely be more expensive than comparable plans in the US. International Insurance has a good article to learn about these policies and start comparing rates.

5. Stay away from whole life insurance.

Whole life insurance is not simply taking a ‘term life insurance’ product and extending it for your whole life. Whole life insurance is a complicated product with many exclusions, fees, large upfront costs, and other complicating factors. It is not easily understood and years later the front-loaded fees can feel like a sunk cost, keeping you trapped. It is said that whole life insurance is more often ‘sold’ than ‘bought’, as it nets an immediate commission for the insurance salesman, but just drains money from the policy holder. To a casual investor, sales pitches for whole life insurance can seem compelling, as it seemingly combines elements of an insurance policy with an investment that grows over time. But most potential buyers would be better off buying a term life insurance policy with no gimmicks, then taking the extra money they would have invested in a whole life policy and instead invest it directly into the stock market themselves with a brokerage account. Read more here:

6. Bundle home and auto insurance and go shopping for better rates annually.

These are critical insurance products that are required by law in many countries. Oftentimes, these can be purchased locally in your country of service if it’s for a house or vehicle overseas. If it’s for an asset in the US that you leave behind, home and auto insurance can often be bundled together to save on premiums. Also, consider shopping around annually to find better rates and consider switching policies.

7. Always have health insurance.

This guide does not cover health insurance, though it is a significant monthly expense. For goers looking to save money on health insurance premiums by forgoing health insurance coverage for a few years, beware that high medical bills could wipe out your retirement savings. It is very risky to not have health insurance. Your physical health and financial health are worth the cost. This is a recommended expense throughout your life. GeoBlue is a leading health insurance company for expats and specifically goers. Generally, when selecting a health insurance plan, you are balancing the cost of monthly premiums with the cost of your deductible. If you want the lowest monthly premiums, you’d have to pay a high deductible before you start receiving benefits. Go this route if you expect to rarely use health insurance this year. If you expect to have regular visits to the doctor, you might prefer to select a plan with high premiums but a low deductible, so that you can start receiving benefits sooner.  

Lower-cost alternatives to traditional health insurance include ‘health cost-sharing plans’, which are not technically insurance, but a system of sharing medical expenses with a large pool of people. These generally cost less than insurance while providing similar benefits, but oftentimes still carry some risk. 

8. Consider disability insurance.

A less commonly purchased insurance, but can be a life saver. Just as life insurance provides financially for your family in the event of your death, disability insurance would provide similarly in the event you suffered a serious illness or disability preventing you from working and earning an income.This is different from workers compensation insurance, which is provided through your employer. Learn more about disability insurance at this article: Disability Insurance – ChooseFI.

9. Consider umbrella insurance.

Investopedia says, “An umbrella policy is liability insurance that provides additional coverage in excess of the policyholder’s current policy limits. For example, if damages exceed the limits of a policyholder’s property insurance (e.g., home or auto), the umbrella policy will provide the additional liability coverage, up to policy limits. This type of insurance most benefits those with sizable assets, which could be subject to seizure.” Umbrella insurance is also useful if the insured is sued, providing extra coverage to prevent retirement accounts from being seized to pay the offended party and usually covering the cost of lawyers to represent the insured.

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1. Get a health insurance policy that matches your stage of life.

2. Calculate your FI number and how long you expect it will take to reach FI.

3. Purchase a Term Life insurance product to insure yourself for the period of time until you expect to reach FI.

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