I’ll need to acknowledge that I have a love/hate relationship with insurance. I know I’ve said “hate” is too strong of a word before so how about I say that I really, really, really don’t care for insurance, but I still have it, so why? I’ve put off addressing some of the insurance related questions because of my disdain for it, but I’d be remiss if I didn’t discuss it with everyone and get your input as well.
While I can feel my blood pressure rising as I’m writing this blog post, I also know deep down in my core (where my rational mind resides) that there are very real and beneficial purposes for insurance. At its very base level I feel insurance is about pooling risk. The theory should hold that if we all pay in a small amount at a time, there will be funds available to pay out to policy holders when a claim/calamity arises so that person isn’t paying the entire bill all at one time.
I’m a pretty safe guy in general and this probably leads to some of my contempt for the insurance industry. I’ve shown over history that I’m a safe driver, have a home in an area that has not been damaged by storms/fires and have very few health issues. In theory I should be getting the best rates possible, but there have been many times when I just don’t feel that’s the case. I’ve been driving for 28 years with no accidents and I’ve been a homeowner for 20 years with no major claims, however because of my age or geographical placement, I was lumped in with high risk groups that get charged higher rates.
A lot of this is due to actuaries and the statistics they are analyzing. Actuaries are the professionals who are crunching mountains of data, analyzing risks, and predicting financial impacts. They are pivotal to the business of insurance. Certain events will happen (e.g. death) but they want to find out what the probability of death at a certain age for a person considering certain variables and lifestyles that person exhibits to determine a risk level which will then correspond into a cost. That is a very brief description but I think you get the gist of it.
I’ll get off my soapbox for just a minute to get back to the original question posed here about whether insurance is worth the cost. If my house caught on fire tomorrow and burned to the ground, my answer would be “yes”. If I went rogue and crashed into several cars at a high rate of speed, my answer would be “yes”. If I get diagnosed with cancer tomorrow, my answer would be “yes”.
The point being, you never know when that major life tragedy will strike. If it does, insurance is there to hopefully make you whole (regarding possessions) or pay for your health care while you are being nursed back to health. Any of the calamities I mentioned are big ticket items and likely beyond what you have saved in your emergency fund (or maybe beyond what you have saved in your entire portfolio). Paying for one of those events could drain you completely of all your money, so in a way insurance can be considered part of your emergency fund or emergency planning.
Is all insurance worth the cost? Probably not. We’ll discuss more in some future posts.