For many of us, insurance is not our favorite subject. It is not uncommon for someone to say to me, “I hate insurance!”
We don’t have to have insurance for every risk. We can choose to self-insure. However, for most people, insurance is a necessity.
Laws require us to have auto insurance when we own a car. Banks will require homeowner’s policies and sometimes flood insurance if we have a mortgage on our home.
Our employer might offer us a menu of employee benefits that frequently include health, disability and life insurance, so we might take some of these benefits.
Despite its unpopularity, many of us choose to buy insurance to cover the unexpected losses that can occur. In its purest form, insurance is paying a small amount of premium for the protection that a large loss will be paid by the insurance carrier.
We don’t always think of the premiums as small, but relative to the potential losses, they typically are quite small.
Buying insurance is a form of risk management. Having money set aside in a “rainy day fund” is also a form of risk management. In some ways, they go together.
Even when we buy insurance, we generally have the option to self-insure part of the risk by having deductibles before coverage activates.
Having a fund to cover the smaller losses, allows us to have higher deductibles in our insurance. Higher deductibles can lower premiums. Each type of insurance has a different form of deductible.
Insuring for only catastrophic losses is a strategy that reduces premium while making sure your finances are not devastated by an unexpected loss.
For home, auto and health insurance, the deductible is a dollar amount. For disability and long-term care insurance, it is usually expressed as a number of days, such as 30, 60 or 90 days before insurance coverage begins to pay benefits.
Life insurance does not have a deductible, but we choose how much of it to own and for how long. Term insurance is designed to cover a specified period of time such as 10, 20 or 30 years and permanent insurance is designed to be kept until it pays a claim.
Determining what losses you can afford to absorb and what losses need protection is part of determining your risk management strategy. Determine what you can afford to lose and buy insurance accordingly.
Scott Vincini is a licensed agent with Callen Insurance Services, LLC. scottv@ callenins.com, www.callenins.com