Insurance, you can't live with it and you can’t live
without it. It is perhaps one of the most frustrating expenses in your budget.
You pay good money for this “thing” that you don't want to use. And worse still,
after a few years of paying for it, you start thinking that you could have saved
enough money to just cover any expense yourself. And with a good amount of
luck, you might just be right.
You see, with life’s risks, you have four choices:
- Accept – Pay for
all of the costs associated with all of the losses.
- Avoid – Foresee
and fix all possible causes for all possible losses.
- Mitigate – Foresee
and reduce some possible causes for some possible losses.
- Transfer – Pay
someone else to pay for all of the costs associated with all of the losses.
The first three (Accept, Avoid, & Mitigate) require
that you financially/materially prepare in some way for all possible risks.
The problem is that we cannot foresee the future and as a result cannot prepare
for all types of risk. Eventually, a customer, employee, or mother-nature is going to
do something that we didn’t expect and cause some type of loss that we didn’t
foresee.
Transferring the risk, through insurance, is the best way
we can cover ourselves; after doing all that we can do to eliminate risks.
However, insurance companies will only cover those risks
that we specifically pay them to cover. This results in us still accepting some
risk. We must then choose to Accept, Avoid, or Mitigate any remaining risks. Of course, we can always look to another insurance company
to cover these other risks and Transfer them as well.
But Transferring risk is not necessarily always possible.
Waiting periods or the cost of COBRA & GAP insurances can make Transferring
risk impossible. During these situations we still need to be financially
prepared to pay for some costs ourselves. In other words, you still need to “self-insure.”
Self-insurance is an idea were you take some personal
responsibility for the risks of life and prepare to handle them yourself. Such
as:
- Avoid obvious
risks (Don’t participate in inherently dangerous
activities).
- Mitigate
possible risks (Use snow tires during the
winter months).
- Transfer large
cost risks (Buy Home Owners/Renter,
Auto, Health, and Term Life insurance to cover the cost of items ten-thousand dollars
or more in value).
- Accept smaller
unforeseen costs (Have a Savings account
of at least $1,000 to $10,000 to pay for “life” expenses not covered by
insurance).
While its not fun to see money spent month after month on something you don't want to use, ultimately, the financial safety and security is worth the costs. Then again, if you feel like you are paying too much, it's time to shop around for better rates.
