Managing risk with the right amount of insurance

Ask people to think of buying insurance and for many people, the stereotypically sleazy and unscrupulous door-to-door salesman comes to mind. This person might sell you insurance, sure.  But they’ll probably sell you more than you need, fleece you with unmanageable premiums and add so many conditions and stipulations that you would never be able to collect your money at all!  Right?  Well, maybe not.  Maybe consumers just need to be more aware of what they actually need.

Car Crash

From Wikimedia Commons: http://en.wikipedia.org/wiki/File:Car_crash_1.jpg

Insurance is a necessary evil for managing risk.  When you buy insurance and pay for premiums, you’re paying to transfer risk from yourself to the insurer.  In return for your premiums upfront, the insurer allows you to hedge against a potential loss that is much greater.  And that’s why insurance is necessary for many individuals – we can’t always simply save for the catastrophic disasters, health issues or unexpected events that may befall us.  So instead, we insure against it.  Yes, for many people, it will cost them money that they’ll never use.  But, that is the price you pay for the exchange of risk.

However, it’s important to make sure that you have the appropriate level of insurance.  Consider, why are you getting insurance – Yes, it is to protect yourself against risk, but what does holding onto that risk actually cost you?

For example, tenant insurance is generally cheap but can add up depending on what you want to insure against.  A basic plan might cost a few hundred dollars a year and protects your belongings in case of theft, fire, or other mishaps, minus a deductible.  If you start adding protection for things like jewelry or insuring against certain types of natural disasters, like earthquakes, it can quickly become pricey.  But paying $200 or $300 a year for this kind of insurance doesn’t seem like a lot of money for the level of protection that you get, right?  Well, it depends.  If you’re using free furniture from Craigslist and have little to no attachment to your rented home, why not forgo insurance or at least get the very minimum?  In this case, perhaps the risk that you carry is so little that you would be better off holding onto that $200.

Similarly, life insurance can vary widely in price.  The coverage depends on a multitude of factors, some of which include the age, health and family history of the individual.  Like tenant insurance, life insurance offers add-ons that offer additional protection for higher premiums.  Again, the plan that makes the most sense depends on the individual.  If you have a family or dependent parents, your insurance needs are a lot different from the requirements of a childless couple.  While insurance companies will often try to sell clients on the piece of mind that life insurance provides, it is up to the individual to decide for themselves what constitutes piece of mind.  If you have confidence that your spouse will be financially okay in the event of your passing, your insurance needs are probably less than an individual with dependants.

Insurance serves a purpose – to protect and mitigate unpredictable risks.  What is important is that you consider your reasons for purchasing insurance.  Ignore the car salesman pitch – instead, figure out what risks you need to protect against, and get coverage appropriate for your situation and your needs.

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