There is no end to the questions and misconceptions people have about insurance. One of the most common misconceptions is that insurance is intended to be a discount for needed services. Indeed, many people never have reason to question this idea. After all, a visit with the general practitioner costs about $150 without insurance, and $5 or less with insurance. They measure the quality of insurance based on the perceived discount they gain.
However, this confusion drives many people to make bad decisions about insurance due to the fact that they are fundamentally wrong about what it is. Insurance is not a discount service. It is a risk management service. No one sells you insurance for events they know will occur. They sell you insurance for events they believe are less likely to occur. Insurance companies need you to pay them more money than they pay you. The house always wins. When it doesn’t, it goes bankrupt.
That is why life insurance generally costs less for people who are young and healthy. Coverage for lightning strikes is inexpensive in places that don’t have many electric storms. But in Tornado Alley, you might not find a company that offers it at all. It is primarily about risk management. Here are some other factors that will help you decide what insurance you really need versus that which you can do without:
You know you need car insurance because most places require a certain amount of it before you can legally drive. But what about insurance for a car you have that you don’t drive? Do you need insurance on a car that doesn’t run? The answer might surprise you. It is more of a maybe than a yes. But it is more yes than no. Confused? Good. It is a confusing issue.
What happens if your undrivable car is stolen? Do you still expect it to be covered? If so, you are definitely going to need insurance on that parked car. What happens if it gets whisked away Wizard of Oz style? It might not be an act of any god you believe in. But insurance can still cover it. If you don’t want coverage for those things, it still might not matter. If you are paying for the car via a loan, the loan holder determines whether you can end coverage. Hint: You are going to need to keep that coverage. Remember, insurance is about risk management. The loan holder will not be taking a risk on that even if you want to. There are things you can do to reduce your insurance burden on a car that doesn’t run. But at the end of the day, you are probably going to have to carry some type of insurance on it in most states.
Everyone has heard of homeowner’s insurance. It is advertised in TV commercials. Not everyone knows about renters insurance. Only 41% of renters opt for renters insurance despite the price of renters insurance hitting average lows of $15 per month. It is clearly a type of insurance people don’t think they need. They will have a very different notion of what they need if they find themselves a victim of burglary. Your neighbor can set the building ablaze leaving you holding the bag for losses. Renters insurance might even cover accidental damage of items like smartphones and laptops.
It should go without saying that everyone needs life insurance even when they are young. The problem is that young people feel invincible. So they never consider what will happen to their family if they died unexpectedly. It is even more of an issue if children are involved. When young couples get together, they blow the budget on elaborate rings. Instead of an expensive ring, insist that your partner buy life insurance instead. That is a much better sign of love and responsibility than jewelry.
Insurance is complicated and confusing. The thing to remember is that it is less about discounts for things you know will happen and more about risk management against things you don’t expect. Whether it be auto, renters, or life insurance, ask plenty of questions. And don’t stop until you get the answer you need to make a good decision.