Does Buying Insurance Make Sense?

Although buying insurance for everything from automobiles to mortgages has become common and is considered a necessity of modern life, is it really necessary? Is it possible that there's a better way to guard against life's unexpected occurrences - and save a lot of money while you're at it? The answer is yes if you're willing to practice a bit of self discipline and planning.

First you have to understand the real purpose of insurance. It's commonly thought of as a way to get some company to pay for unpredictable expenses in life. But there is another way to see it: as a way for you to pay over time for those occurrences. You pay for that car wreck with ten years of insurance premiums before the damage actually happens, or you pay for ten years afterwards if it happens as soon as you buy the policy, but either way you still pay.

Policies which cover the largest expenses in life, like health costs and homes burning down can be different. In these cases, the insurance companies really do "spread" the risk among many people. Your homeowners insurance cost, for example, will probably never add up to what a destroyed home would cost you to fix. Since most homes never are destroyed, you essentially share the risk with all other owners insured by the company - just in case yours is the one to burn. Of course the insurance company makes a nice profit for arranging all this for us home owners.

But suppose you buy collision coverage on all the used cars you own over the years. The many thousands of dollars spent by most people will be far more than any claims made in their lives. In other words, collision insurance is essentially a losing bet.

You also have to look at the real loss you would suffer versus the payouts on insurance claims - they're not the same thing. This is because we don't act the same when we have someone else paying the bills as when we pay for them "out of pocket." I Suppose you ding your car door on an uninsured used car, for example. You might very well live with it for the life of the car, so your cost is nothing. With collision coverage however, you'll have it fixed for $400. The quality of your life won't change much in either case unless you are really uptight about the appearance of your automobile.

An Alternative to Buying Insurance

Why not stop buying insurance policies which don't cover life-altering events, and instead put the money you would have spent on premiums in a special account? You'll have some protection of your own for life's unexpected events and accidents. Plus, if you don't have many expenses that you have to pay for out of your special account, the money left over later in life is yours to keep for retirement or whatever.

As an example, let's suppose you're paying an extra $500 each year for collision coverage and you have a used car that is only worth $3,500. Drop the collision coverage and put that money into your "emergency account" instead. Unless you have a total wreck every eight years you'll be further ahead. Most accidents are minor in any case, so you can probably afford the occasional $1,000 repair without insurance coverage. In fact, if you can pay $500 extra for that policy every year and can't afford a $1,000 surprise, you need budgeting skills more than you need collision coverage.

Do the same with renters insurance if your the furniture and personal items you would replace in the event of a fire are only worth a few thousand dollars or less. Skip buying any "insurance" policies on electronic devices too, and put all the premiums you would have paid for any of these non-essential policies into your "emergency account."

You probably should keep insurance on the home you own, and health insurance is a good idea as well, but there are options. Find out how much you can save by raising the deductibles a bit. As mentioned in the previous example, if you can't afford the first $500 on a health policy, you need budgeting skills more than you need a lower deductible. Just make you put the money saved into that emergency fund.

Now, with the money that would have gone to several different policies going instead into your special account, you'll quickly build a little "insurance fund" that is all yours. Instead of buying insurance you don't need and paying more than you ever collect, you'll get whatever is left over when it is time for retirement, and a lifetime of saved premiums can add up to a lot of money even after a few withdrawals for accidents, theft or other unexpected events.

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