Thinking About Insurance

  • Insurance is one of the most mis-understood, mis-used, mis-sold, mis-bought, mis-loved, mis-hated financial tools ever created.
  • Insurance is perhaps the only thing we buy hoping that we never have to use it. An expensive but valuable spare tire that you have to make rental payments on every year just to keep it in your trunk. Just in case.
  • We should only buy insurance to cover the big losses, to protect our big assets. Hopefully, a windshield is no big deal.
  • Typical big losses: death/disability that create a big financial loss: liability lawsuits; big medical bills; big property losses. Typical big assets are earning ability, investments, business value, and homes. While Typical big insurances are life/disability, liability, medical, and home.
  • The insurance industry is generally very secure and very profitable- often at our expense. And, insurance companies have created insurance for almost anything that they can convince us to protect. This minor insurance is very profitable- for them.
  • Avoid and/or reduce risk where possible. (Be more prudent. Buy less and smile more). Be your own insurance company for the relatively little things. Increase deductibles. Eliminate the extras, the bells and whistles.
  • Auto Insurance: We are required by law to have liability coverage which makes sense. Also uninsured and underinsured liability coverage is important beacuse it protects you and your assets if an accident is the other guy’s fault and he has little or no insurance and assets. And, believe it or not, many of us should consider dropping comprehensive and collision coverage on old cars with little value.
  • If you have a high enough net worth, you should consider Umbrella coverage. Inexpensive but potentially very valuable.
  • Shop around every few years to make sure you are not overpaying.
  • Alas, you often don’t know for sure what you really have and how it will work until you file a claim. Sort of like Life, no?
  • Don’t mis investing and insurance. The purpose of investing is to grow your wealth, while the purpose of insurance is to protect that wealth. Although, they can work together in some cases.
  • We don’t want insurance. What we want is no trouble. No accident, no loss, no hospital, no lawsuit, no early death. For example, I would gladly pay twice or even three trice the premium for my auto insurance if the company could guarantee that I would never have a claim.
  • It’s a cost/benefit analysis. Paying too much cost for too small of a potential benefit which you hopefully never get doesn’t make sense. Or, under-appreciating the potential benefit and over-emphasizing the cost doesn’t make sense either. Still, insurance properly understood and purchased is a very positive and necessary financial tool.