Why I Love Insurance

Why I love insurance

My wife and I probably have more insurance than anyone we know who’s anywhere close to our age. Way more insurance.

We have the typical stuff: health insurance and car insurance. But we also have life insurance. A lot of it. We have renter’s insurance with full liability coverage. Our car insurance has full liability coverage. I have disability insurance. We have an umbrella policy. It’s a lot.

Insurance is not an incredibly exciting thing to have. But I think it’s pretty great. I would even go so far as to say that I love insurance.

Let me explain why.

What is insurance good for?

Very simply, insurance is meant to protect you financially from events that are unlikely to occur but that would cost you dearly if they did.

Not all insurance ends up working exactly that way (think health insurance), but at its core that’s what it is.

So why is this great? Well, I’ve said before that making sure my family always has money for basic life necessities is my top financial goal. The reality is that there are certain events that could occur that would prevent me from reaching that goal if insurance didn’t exist.

If I died tomorrow without life insurance, my wife and son would be in a tough financial position. They could probably figure things out and be okay in the long-run, but I would much rather ensure that they had the resources to handle it.

If I developed a serious illness, making it impossible to work the same job I have now, and I didn’t have good long-term disability insurance, it would suddenly become a real struggle to make things work over a potentially long period of time.

If I got into a car crash and seriously injured someone, and I didn’t have liability coverage through my car insurance and umbrella policy, I could not only be forced to spend my current savings on their care but I could have my future wages garnished as well.

None of these things are particularly likely, although they may be more likely than you think. But that’s not the point. The point is that they certainly could occur, and relying on them not occurring is, to me, not an option that helps me reach my goal of protecting my family.

Someday I may have saved up enough money to self-insure for at least some of these things. But I’m not there yet. Until I reach that point, insurance is my good friend.

Insurance saves me money

Most of our insurance is pretty affordable on its own (with the exception of health insurance, which is crazy expensive), but when you add all of it up it comes out to about 15.5% of our gross income. That’s a pretty significant chunk!

But here’s the thing. If I’m serious about my goal of protecting my family no matter what, then that’s MUCH cheaper than if I had to self-insure everything. If I’m being realistic about our needs, foregoing insurance would require that 100% of my income would have to go towards savings. Not only is that absurdly unrealistic for obvious reasons, but I honestly don’t even think that would be enough to provide true protection.

So my options are threefold:

  1. Put 100% of my income towards savings.
  2. Give up at least some of my goal of protecting my family.
  3. Buy adequate insurance.

Without giving up my goal, which I’m not willing to do, insurance is by far the cheapest route. Because I have those worst-case scenarios covered, I can use my money for other purposes, like saving for retirement and traveling across the country to see family.

What is insurance not good for?

With all of that said, there are certain things that insurance is not good for.

It’s not meant to cover regular costs. As an example, insurance that covers regular car maintenance like break and water pump replacements is not an efficient use of money. If you have an event that is almost certain to happen, the cost of insurance will almost always be more than the cost of simply saving money on your own in anticipation of that event.

It is not meant to cover small costs. This is the point of a deductible. Insurance loses its cost-effectiveness when you start covering things like a broken side-view mirror or your dvd player getting stolen. It might not be fun to have to pay for those things, but you’re going to be better off saving for them on your own than paying for insurance coverage. My wife and I actually no longer even have comprehensive or collision coverage on our cars because the annual cost of the insurance isn’t worth it when compared to the value of our cars. And we have enough in savings to cover the cost ourselves if our cars were ever totaled.

Finally, insurance is not an investment. This probably deserves it’s own post because it’s one of the biggest misconceptions about insurance. It’s also one of the things that insurance salesmen, particularly life insurance salesmen, hook you on in order to sell you something you don’t need (read: whole life insurance).

You should not expect to make money off of insurance. If the event you’re covering never happens, that’s a good thing. The insurance wasn’t a waste of money. It served it’s purpose, even if the event never happened, because it protected you in the case that it did happen. No one wears a bulletproof vest hoping to be shot. Be happy that you were protected, and be happy that you didn’t end up needing the protection.

Summary

So yeah, I think insurance is pretty great. Without it, I couldn’t achieve my top financial goal. With it, I sleep well at night knowing my family is protected.

For me, that’s well worth the cost.

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21 Comments... Read them below or add one of your own
  • Holly Johnson April 29, 2013

    I have always hated paying for insurance……
    UNTIL I was rear ended by someone while I was 4 months pregnant. I ended up getting two front teeth knocked out and having to have 17K in dental work including dental implants and porcelain veneers. All of a sudden I was very glad to have insurance with adequate coverage (including underinsured motorist)

  • Grayson @ Debt Roundup April 29, 2013

    While I hate paying for insurance, I know that it really is a necessity. I am a planner and you can’t plan without having good insurance. Insurance is awesome, but some people don’t like paying for it.

  • John S @ Frugal Rules April 29, 2013

    Great post Matt! I hate paying for insurance, but I would hate even more what might happen if we did not have it. It’s a necessary cost that many need to have. The whole insurance is not an investment thing is a great point and one that too many do not realize.

  • Matt Becker April 29, 2013

    Glad it was helpful!

  • Matt Becker April 29, 2013

    Thanks Cat! Really nice of you to say. But I like to think I’m the lucky one.

  • Matt Becker April 29, 2013

    Oh wow, that would have been really tough to handle on your own. Glad you were ok and glad you had it covered!

  • Matt Becker April 29, 2013

    Insurance definitely isn’t the most fun thing to pay for, but like you said it’s vital for any kind of planning. It’s too bad when people let the price tag affect their security.

  • Matt Becker April 29, 2013

    Definitely a necessary cost. It really bothers me when it gets sold as an investment. That tactic really prays on people’s fear of losing money and it’s almost always a bad decision for the buyer.

  • Matt Becker April 29, 2013

    Glad to hear I’m not alone! Umbrella coverage is so cheap, it just seems like a no-brainer.

  • The Frugal Path April 30, 2013

    I agree that insurance isn’t something that you want to use. It’s there to help you through tough times and keep you from going bankrupt.

  • Matt Becker April 30, 2013

    I agree 100%. I sleep much better knowing I’ve got good insurance in place.

  • Matt Becker April 30, 2013

    Exactly! If you never have to use it, then great! That should be cause for celebration, not remorse.

  • J W_Umbrella Treasury April 30, 2013

    I enjoyed this post. So helpful. Sometimes insurance feels like a “waste” of money when everything is going well and we don’t have to make any claims against the policy. But if/when something terrible happens, the last thing I want is for me or my family to have financial concerns on top of any emotional distress.

    I was renting a basement apartment when Hurricane Irene hit. I didn’t have renter’s insurance (long story that I’ll share sometime on my blog). It was a big mistake that I’ll never make again!

  • Matt Becker May 1, 2013

    I’m really sorry to hear about your experience with Irene. Renter’s insurance is one of those things that gets ignored by many people. I’ll be interested to hear your story. It will be a good lesson.

  • Cat Alford May 3, 2013

    Again, so sweet! 🙂

  • Cliff Nuttman August 22, 2013

    I generally agree with you on collision/comp for cars, with one exception. If you have a very high deductible and you get in an accident that’s at least partially your fault (you could be the 7th car in an 8 car pileup, not at fault for the 6 in front of you but partly liable for the 8th that hit you – this happened to my brother) subject to the deductible if the car is totaled it is the insurance company’s problem – not yours, and you’ll even get a check.

    I believe the rule of thumb is 10x, the average driver is going to get in some sort of accident about every ten years. If your car is worth $10,000 and your collission/comp costs $1,000/year, on average you’ll mostly get your money back. If you drive more than the average driver, you’re more likely to get in a wreck.

    But – even when collision/comp may not have much financial value – say you drive an older $5k car and the premium comes to $250/year with a high deductible, consider the fact that IF you get in a wreck, if you have this coverage, insurance takes care of towing and salvage. When my brother got in the above described wreck, we did not have the coverage. After having to spend so much time dealing with disposal of a totaled car, my dad concluded it was worth the small additional annual cost to have it be someone else’s problem in the event it happens again.

    So consider that you’ll get a check for your car if you have this coverage and you wreck it – sure you could just put the difference into a savings account and self insure, but you also get someone else doing all the work and you can spend more time with your family. If you just save the money and self insure, you’re still going to have to do all the work – also most people I know who’ve gotten into a wreck typically get a check for more than the replacement cost of the same car, even factoring in the deductible. They tend to pay you a little more than they need to so you’ll be satisfied and close the claim, not take them to court, etc.

    • Matt @ momanddadmoney August 22, 2013

      Thanks for the input Cliff. When I canceled my comprehensive and collision, the cost was enough to surpass the value of my car in 3 years. Considering that I have more than enough in savings to cover the value of my car, it was an easy decision. Sure it might be a temporary pain if I hit a situation similar to your brother’s, but I think that probability is low and still wouldn’t be worth the extra cost to avoid it.

      Your 1 accident every 10 years stat is interesting, but is it saying that you’ll total your car every 10 years or just be in an accident? I find it unlikely (though I don’t know that facts) that totaling your car once every 10 years is average, which would make the $1,000 per year cost you describe above less worth it.

      I think there’s certainly a place for those coverages, and in fact we’ll have a new car soon and I’ll be putting them back on our policy for that vehicle. But for an older car without much value, it can be a pretty easy decision to go without them.

      • jennifer June 14, 2015

        I have always thought of your insurance payments on auto insurance an “evil necessity. Like said above you hate to pay it, but the law dictates otherwise, so that being said at the end of my driving days when I finally volenteering and surrender my license I want to have won the insurance game by have the best coverage and have paid the least premiums. This can only be accomplished by having a reputable company that provides deep discounts for good driving and longivity.

        • Matt Becker June 15, 2015

          Getting the best coverage for the lowest premiums is definitely good goal! On that note, I would check out these two posts on auto insurance specifically. There may be some good ways to reduce unnecessary coverage, but there may also be some valuable coverage that’s worth adding:

          • jennifer June 15, 2015

            The adding or subtracting of full coverage is an easy finance 101 formula any car owner should become aware if once your auto ages to its 7th, 8th, 10th year plus. I say as early as the seventh year only because it makes you aware of where you are at with your properties worth, and the majority of the time the loan if any is paid off lending flexibility in making changes. The formula goes like this: First find the value number of your car, and I’m not talking retail, not even whole sale, I am talking the least amount you could possibly get for your car as the insurance companies will only return the “Actual Cost Value” of the property at the time of loss, and the older the car the more likely it is unrepairable as that price ticket with parts and labor would be more. Then take what you pay per year in premiums on this auto with full coverage, multiply that number by ten, and if the number you end up with is higher than the actual cost value of your car… You are paying too much for your insurance and need to drop the comprehensive and collision coverage because if you are not careful over the course of the next three or four premium cycles you will end up paying the whole cost of your car and have nothing to show for it.

          • Matt Becker June 15, 2015

            I like that rule of thumb. Thanks for sharing Jennifer!

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