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Given that I'm spending $x per year on insurance, I would like to know how to most efficiently spend that money (on car, house, disability insurance etc) in order to minimize my overall risk of loss.

I want to avoid the situation where one is over-insured in one area but under-insured in another. Is there an academic theory that addresses this or some website that estimates where this "insurance balance" is for a particular person?

If there's no theory that covers this (I was thinking of something like Modern Portfolio Theory), maybe people could provide a list of factors that I should consider when choosing between (for example) increasing auto limits versus adding earthquake insurance for the house.

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    "Given that I want to spend an extra $x per year on insurance" is starting from the wrong place, I believe. You should buy enough insurance to ensure that you aren't in a huge financial hole if something rare and catastrophic happens. If you've done that, and you have money left over, buy a boat. Or a cheeseburger. – DJClayworth Feb 21 '12 at 21:36
  • Each person has a different standard for how much risk they want to avoid (i.e. how high is your "rare and catastrophic" standard). However, the question still stands - how do you properly apportion the money that you're prepared to spend on insurance? Or, (I think) equivalently, how do you decide if you're avoiding all the risks equally? – Rehan Khwaja Feb 21 '12 at 22:23
  • @RehanKhwaja I don't think I understand what you mean. You can't avoid risks, you can insure against certain events/losses. The cost of insurance is derived from the coverage it provides, so you need to decide what coverage you want - and that would dictate the costs. What's the point allocating funds for premiums and then taking whatever coverage it gets you? Its plain stupid. – littleadv Feb 21 '12 at 22:43
  • You avoid risks by transferring them to the insurance company. That's the purpose of insurance. I've edited my question to hopefully make it clearer. – Rehan Khwaja Feb 21 '12 at 23:02
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If you are not open to changing the amount of money you are willing to spend, your options are limited.

Why change your amounts and proportions? Your situation changed. You got married, divorced, purchased a new car, the company added free disability coverage.

If the amount spent per year can't change, then you are asking how to review if your proportions are correct. The first thing is to look at what must you spend it on.

If you have a mortgage or car loan, the bank will tell you the minimum amount. If you own a car the state will tell you the minimum amount for auto coverage.

If there is any money left look at life, and disability. These can wreck the life of your dependents.

When you have meet those needs, then increase auto and home to cover additional liability.

  • Obviously I agree that you have to cover what you're legally and contractually obliged to cover. Apart from that though, I'm looking for quantitative criteria how to compare (for example) increasing auto limits versus adding earthquake insurance – Rehan Khwaja Feb 22 '12 at 0:01
  • earthquake insurance is insurance on your house. That was already discussed. – mhoran_psprep Feb 22 '12 at 1:47
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For each liability, you should insure to the risk. A $150k home should be insured for that amount plus contents. Same for your car, if you want to insure for damages, fine, but liability is mandatory. It's not about what you want to spend but how to not take on more risk than nescesary and not over insure which is just wasteful.

  • To make my question more concrete, how do you decide (quantitatively!) whether to get earthquake insurance on your house versus higher limits on your car insurance? – Rehan Khwaja Feb 21 '12 at 23:45
  • If I lived in a flood or earthquake zone, I'd have that insurance. I'd have enough liability on the auto insurance to protect me in case I have a bad accident. It sounds like you might be under insured and are now trying to get the right amount? – JoeTaxpayer Feb 22 '12 at 0:59

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