The Intelligence of Insurance
It’s been said many times in many different ways for those aspiring to be wealthy; “Go where the money is” or “Find out what the wealthy are doing, and then go do it”. Why do successful and or wealthy people have insurance policies? I mean if they have the reserves to replace items in the event of a loss, why buy insurance?
360 Degrees of Financial Literacy, The American Institute of CPA’s puts it this way.
“When you drop a quarter into a slot machine, you know that your chances of winning are pretty slim. But risking a quarter (or perhaps much more than a quarter) may be worth it to you if the potential payoff is great enough. Insurance is a lot like that. You pay premiums not because you expect to die today, get into a car accident next week, or lose your home in a fire next month, but because the peace of mind it offers and the financial protection it could provide are worth it. You don't have to bear the risk of financial loss alone. Insurance is all about risk and financial protection.”
Well said; the key being “You don’t have to bear the risk of financial loss alone”. Very few people are able to withstand a major medical expense let alone a million dollar law suit. Of those that are able they are not likely willing if there is a policy able to bear the risk for them.
Imagine if you will that you have $500,000 in the bank free and clear. You live in a house that would cost $300,000 to rebuild if you had a total loss, say from a fire. You have the choice to “self insure” or buy a Homeowner’s insurance policy for around $800 a year. If you “self insure” you would have enough money easily to rebuild the home. However you would not have enough for a $900,000 slip and fall settlement, or any other myriad of things that could go wrong and cost you out of pocket.
The wealth builder / success oriented mindset would say; buy the insurance and let the policy absorb the risk. In the event of a covered loss the insurance policy then activates and pays the claim, leaving you and your large stack of cash safe and sound.
Most folks don’t think of an auto insurance, home owner’s or commercial insurance policy in terms of finances or an asset. We usually think of them as a necessity and give little more thought to it. The truth is, insurance policies are all about protecting your assets and financial future. There are several factors that go into determining your liability risk when planning for your insurance needs, which we won’t go into them here – we’ll save that for a future blog. But one of them is future earnings – what you will potentially make for the rest of your life. This is an asset few even consider but it’s out there and it can be subject to a settlement should you not have the right coverage in place if you are held responsible.
What do insurance companies know that you and I don’t? I’m sure there are many things but we do know this - even insurance companies have insurance companies! If a company worth a couple billion dollars has an insurance policy to cover their losses when they have them, it must be a good idea for you and I!
Consider your options carefully and work with your insurance agent to find the right coverage at the best price for your situation.
By Bill Adams
Kennedy Nemier Insurance Agency
360 Degrees of Financial Literacy, The American Institute of CPA’s