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:
- Put 100% of my income towards savings.
- Give up at least some of my goal of protecting my family.
- 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.
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.
Photo courtesy of woodleywonderworks