Insurance: Protecting what you've built

Most people insure their car without a second thought. Far fewer insure the thing that pays for the car — their income.

What it is

Insurance is a pooling mechanism. Many people pay small amounts regularly so that the few who experience a large loss are covered. You are not buying a product you hope to use — you are buying certainty that a specific financial catastrophe cannot happen to you.

The right mental model: insurance is the floor beneath your financial plan. It does not grow your wealth. It prevents wealth destruction. And that distinction matters enormously for how you think about which products are worth having.

Why it matters

Your most valuable financial asset is probably not your savings account or your investment portfolio. For most working adults, it is your future earnings — the income you have not yet made. A 40-year-old earning $70,000 a year has roughly $1.75 million of future earnings ahead of them before age 65. Yet research consistently shows that only around 1 in 10 working adults in countries like the UK have disability cover, despite state benefits replacing only a fraction of lost income for most claimants.¹

The general principle is simple. If you could comfortably absorb a financial loss — a broken appliance, a minor car repair — you are better off self-insuring, because paying premiums for small, recoverable losses is a guaranteed negative return. Risks you cannot absorb without materially derailing your financial plan are exactly what insurance exists for.² The sections below cover the main categories, ordered by typical impact.

The types of insurance that matter

Disability / income replacement

The most underrated and underowned insurance product for working adults. Known as income protection in the UK and Australia, and short- or long-term disability insurance in the US, this pays a regular income — typically 50–70% of your salary — if you cannot work due to illness or injury. Short-term cover bridges the gap in the weeks immediately after an event; long-term cover sustains you through a prolonged or permanent inability to work, often until retirement age. Most employer-provided group policies offer some level of cover; understand the duration and percentage before assuming you are adequately protected. For the self-employed, this is especially critical — there is no employer sick pay to fall back on, and state benefits are minimal.

Life insurance

Only necessary if other people depend on your income. If you have dependents, a mortgage, or financial obligations that would fall to others on your death, term life insurance — a fixed-period policy that pays a lump sum on death — provides cover for exactly the period of dependency. Studies modelling household financial resilience consistently find that term life cover is one of the strongest predictors of whether a family maintains financial stability after the death of a primary earner.³ Choose term over whole life or permanent life for a pure death benefit: term policies provide the same payout for significantly lower premiums, and whole life products mix insurance with investment at a poor return on both.⁴

Critical illness cover

Pays a lump sum on diagnosis of specified serious conditions — typically cancer, heart attack, or stroke. Different from disability insurance in two important ways: it is a one-off payment rather than ongoing income, and it is condition-specific rather than covering any cause of inability to work. Useful for clearing debts, adapting your home, or funding treatment options not covered by standard health insurance. Best thought of as a complement to disability cover, not a substitute.

Health insurance

The most context-dependent category. In the US, health insurance is foundational — understand your deductible, out-of-pocket maximum, and network coverage before evaluating anything else; inadequate health cover is one of the leading contributors to personal financial hardship.⁵ In the UK, the NHS covers most acute needs, and private health insurance provides faster access and broader choice for non-urgent conditions rather than replacing state provision. Universal principle: understand what your employer or state provides before deciding how much supplemental cover makes sense.

Home, contents, and renters insurance

Property insurance is typically required by mortgage lenders, so homeowners rarely overlook it. Contents insurance is optional and frequently skipped by renters — a mistake given that replacing all your belongings out of pocket is a significant unplanned expense. The premium for contents cover is low; the potential loss is not.

Car insurance

Legally required in most jurisdictions, so the existence of a policy is rarely the issue. The more important question is whether your liability limits are adequate. Minimum legal cover is often set well below the cost of a serious at-fault accident involving injury or significant property damage. Review your liability limits, not just whether you have a policy.

Personal liability / umbrella insurance

An umbrella liability policy provides broad personal liability coverage above the limits of your home and auto policies. It becomes increasingly important as your net worth grows — the more you have built, the more there is to protect from an unexpected liability claim. Particularly relevant for landlords, business owners, and anyone with significant assets. The cost is generally low relative to the protection provided.

How to improve it

• Start with disability cover — audit this first; it is the most commonly neglected product, and the financial exposure from an extended inability to work is severe for most households.
• Check what your employer provides — many employers offer group disability and group life insurance; understand the terms before buying private cover to supplement it.
• Size life insurance to your actual obligations — a common starting point is enough to clear outstanding debts plus replace five to ten years of income for dependents; a financial adviser can model this precisely.
• Choose term life over whole life for pure death benefit — term provides equivalent cover for lower cost; whole life products mix insurance with investment at a poor return on both.⁴
• Do not treat insurance as an investment or savings vehicle — endowment and investment-linked products that promise to "return your premiums" are almost always inferior to holding term insurance and investing the difference separately.
• Prioritise health cover relative to your country — in the US this is non-negotiable and should be reviewed annually; elsewhere, assess what state provision covers before paying for supplemental products.
• Add contents or renters insurance if you do not have it — the premium is low; the potential cost of replacing everything you own is not.
• Review your liability limits on home and car policies — minimum legal cover is often insufficient; an umbrella policy is worth considering once your net worth grows significantly.
• Review your cover when your life changes — new dependents, a new mortgage, a significant income change, or becoming self-employed are all triggers to reassess.
• Maintain an emergency fund alongside your insurance — insurance covers catastrophic, low-probability events; an emergency fund covers foreseeable, medium-probability events like a job transition or an unexpected repair; both serve different purposes and both matter.

UK note: State welfare benefits (Employment and Support Allowance, Universal Credit) currently provide around £90–100 per week for most claimants — far below average earnings. For unbiased guidance, MoneyHelper (moneyhelper.org.uk) is a good starting point; for personalised advice, an FCA-registered independent financial adviser.

US note: Employer-provided long-term disability insurance typically covers around 60% of salary; consider supplemental private coverage if your fixed costs would exceed this. For unbiased guidance, the NAIC consumer resources (naic.org); for personalised advice, a fee-only financial adviser (NAPFA.org).

The 100 Great Years perspective

At 100 Great Years, we think about financial planning through the lens of Wealthspan — not how much money you accumulate, but whether your wealth supports the life you want for as long as you live. Insurance fits that frame precisely: it is not a wealth-building tool, and it should not be treated as one. Its value is structural. A serious illness or an early death should not be able to unravel ten or twenty years of careful, patient progress. Making a few deliberate decisions in this area — ideally once, reviewed when your circumstances change — creates a floor beneath everything else you are building. That is not pessimism. It is the kind of thinking that makes a long and well-funded life genuinely possible.

¹

² . [Canonical reference on the risk-pooling rationale for personal insurance.]

³

⁴

⁵

Find out how you're doing across health and wealth

Get your free Health and Wealth scores in 5 minutes.

This article is for educational purposes only and does not constitute financial advice. Past performance is not a reliable indicator of future results. Always consider your personal circumstances and consult a qualified financial adviser before making investment decisions.