It Won’t Happen to Me

Nobody likes getting sick, having their house burn down, or dying in a car crash.  Unfortunately, these things happen every day to a single group of people:  people who didn’t think it would happen to them today!  Today’s post deals with the important and too-often neglected topic of insurance.  What kinds do I need?  Which types of insurance are superfluous?  What should my philosophy on insurance be?  We’ll answer those and more as we unpack how insurance in its various forms can be a great blessing to our lives.

 

We’re all in this together

At its most basic level, insurance is the banding together of a large group of people to create a fund which pays the expenses of a few of the people when disastrous circumstances hit.  You’re not very likely to need open-heart surgery next week, but someone near you will.  We just don’t know who!

In this context, insurance is a wonderful blessing because it offers protection for unusual events beyond our control.  While you likely couldn’t afford the $300,000 medical bill for diagnosis, surgery, and treatment for heart disease, you can afford a few hundred dollars a month in insurance premiums.  All these premiums from a large number of people go into a big pot of money to be used to pay the expenses of the few members who contract a serious medical condition.

When to buy, when to pass

Given that understanding of what insurance is and how it works, what should be our insurance philosophy?  Should we buy every kind of insurance that is offered?  Or if we shouldn’t, how should we differentiate between the vital and the superfluous?

Generally, I believe it is the wisest course to insure yourself against any event that is reasonably likely to occur and would have disastrous financial consequences.  In this statement, you’ll notice two inexact terms:  “reasonably likely” and “disastrous consequences.”  You’ll have to apply these for yourself in your specific situation, but let’s take a look at a few examples to illustrate the idea.

An expensive lapse of judgment

When you buy a car and head out on the road, there are multiple potential disasters that can occur.  You could neglect to stop at a red light and demolish a $45,000 truck, along with your own vehicle.  Or worse yet, perhaps you injure the drivers or passengers, creating a stream of medical bills.  So, is this insurance worth having?  First, is it reasonably likely to occur?  Certainly!  Driving is one of the most dangerous things most of us do in our daily lives.  Second, could it have disastrous financial consequences?  Yes again.  This one is a no-brainer: car insurance is vital.

I never get sick

Some people think they can get by without health insurance.  They feel healthy and think that it’ll be cheaper to just pay for minor medical expenses out of pocket.  While this plan can temporarily provide relief to the budget, ultimately it is playing with fire.  You set yourself up to erase years of hard work, saving, and investing in a moment.  A friend of mine was recently diagnosed with cancer, having no insurance, and he now has medical bills approaching half a million dollars.  Another man I know recently broke his thumb in two places, and is facing the possibility of needing surgery—which will cost more money than he has.  In both cases, these men thought they were healthy and could go without health insurance.  Unfortunately, none of us will stay well forever.

As with car insurance, it is strikingly evident that a health issue can be financially disastrous and has a reasonable likelihood of occurring.  Even if you can’t or don’t want to pay the premiums for an expensive plan, you must at least get a basic policy that will limit your exposure in the case of a major health problem.  High-deductible insurance plans are a good fit in this case—you generally pay for minor services yourself, but your maximum out-of-pocket might fall somewhere between $10,000 and $20,000.  Obviously, this would still cause financial difficulty to most families, but it would at least be survivable.

Avoid death by a thousand cuts

Finally, let’s look at an example that doesn’t pass the test.  Many electronics stores offer insurance for computers, TVs, or other big-ticket items.  These tend to be quite profitable for the electronics store, and consequently a bad deal for you.  These types of insurance fail the “financially disastrous” test.  If your TV were to break after the manufacturer’s standard warranty has expired, you’d be without a TV.  Guess what?  Plenty of people survive without a TV!  If you’re managing and saving your money well (as taught by the ThriveWealthy system), you’ll be able to save and pay cash for a new set quickly anyway.  And by avoiding paying extra for unnecessary insurance policies in other areas (pet insurance, laundry machine insurance, insurance providing you with a rental car when yours is involved in an accident), you’ll have more money available to save for that new TV quicker!

So, when it comes to insurance, it’s important to recognize events that are reasonably likely to occur and would have disastrous financial consequences.  For these events, it is absolutely vital that you carry insurance with appropriate limits.  Insurance policies that fail this test are superfluous and you’ll be better off to save or invest that money instead.  And enjoy the comfort and security that goes with knowing that you are protected from financial disaster and are being a good steward of your resources.

 

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