When Insurance is Prudent

Buying insurance is about as fun as having a root canal, but also a prudent move to safeguard yourself against losses that arise from unknowable risks that occur in every day life. The world is imperfect, and no amount of planning can protect your home, your auto, or your health quite as effectively as having insurance at levels you feel are adequate for you.

Insurance was created way back in the days of East India Trading Company, when a group of businessmen gathered together and created a pool of money to protect for the loss of a ship or its cargo to weather or piracy. From then to today, insurance has taken on an entirely different life. The Lloyd’s of London operation continues to this day, primarily insuring against enormous or unique risks.

It is important to understand what insurance really is. Insurance is a way to transfer part of the financial risk from possible events to a third party, for a fee. Virtually any type of loss can be insured against. Underwriters assess the level of insurance you wish to purchase against the potential that an event will trigger, which would then require them to pay a claim if one of the insured events occurred.

Insurance companies are not all that different from a casino, when it comes down to it. The founding members of Lloyd’s looked at the pool as a wager, and that is still the mindset of insurance companies, no matter the pretty words that have been invented since. The insurers know the odds of most common events that will occur, and the premium you pay will be a fraction higher than the total losses from that particular bet you’ve placed, against all of the other people who are also buying protection against the same loss.

It is prudent to purchase insurance with deductibles that are as high as you can afford to cover. This is sometimes called self-insurance by the insurance industry, because you are going to be paying out the first X amount of dollars for the insured event your self, and they are responsible for the remainder.

Corporations typically set high levels of self-insurance because it lowers the cost of the insurance they purchase, since smaller and more common events will be eliminated from what the insurance company will have to cover. You should always ask about the availability of coverage with a higher deductible, and compare the cost of the insurance.

If you own any sort of property, insuring the improvements (buildings, home, car or truck, etc.) against fire, theft, wind, and other common weather events is always a safe move. If you have a loan secured by property, you can almost be assured that the lender is going to require you to acquire at least enough insurance to cover the loan, if not the estimated value of the property.

Health insurance is an entirely different game than most other types of insurance. Property and casualty insurance companies use a set of standardized contracts across the industry, so when you purchase that type of insurance, you have a good idea of what you are getting, no matter the source. The health insurance industry seems to be dead-set against standardization, and offer teaser rates to get companies and individuals to sign up for the first year of coverage and premiums.

It is almost always important to carry some level of liability insurance in our litigious society. Nearly every state requires liability insurance for operating a motor vehicle, but having a personal liability policy, in the event someone trips and falls on your sidewalk, or you accidentally dump a cup of scalding cappuccino over someone’s head occurs.

It may not be fun to purchase insurance because it makes you think about all of the possible pitfalls awaiting us on a day-to-day basis, but it is a necessary evil to protect yourself against the uncertainties of the world.