"I am Insurance poor."
You’ve heard that one, right?
It’s what someone says, when they feel like complaining about all the insurance premiums they pay. The clear implication is that the payment of the premiums is somehow causing poverty.
Actually, it’s the other way around. The payment of your insurance premiums is what keeps you out of poverty.
But you have to think about it.
The thousand dollars a year someone pays to the insurance company to protect their 300,000 dollar house is not going to cause poverty. Yes, I would prefer to have that thousand dollars in my pocket, but it won’t break the bank.
But what WILL break me is having the grand in my pocket because I refused to carry insurance on my house, and my house burns down. Now I have the thousand dollars, but I’m 300,000 thousand dollars poorer. That’s going to come much closer to causing poverty than my payment of that premium.
But you also need to know is the difference between “if” insurance and “when” insurance.
“If” insurance is the most common type. This insurance is designed to protect you against the negative financial consequences of an unlikely catastrophic event. While the possibility may be remote, your house might burn down, you might have a car wreck, you might need brain surgery, you might become disabled, you might get sued. Any of these events could cause severe financial consequences that could bankrupt you. So, you incur a guaranteed small loss, the premium, to avoid a potential catastrophic loss.
“When” insurance is different. It offers a different kind of risk management. “When” insurance deals with events in your life that WILL occur – but no one knows exactly when.
Take retirement for example. A pension plan knows its covered retirees will retire, but they do not know how long each one of them will live. So, when calculating reserves required to fund a retirement pool, retirement plan actuaries are able to average together a large number of people. This “law of large numbers” is very accurate. They can’t tell the actuary which of their retirees will only collect a few retirement checks, because they die early, but they can predict with great accuracy how many will do so, due to their experience making calculations with large numbers.
It’s OK to think of “if” insurance as an expense. It is a sure, small loss incurred to avoid a potentially disastrous large loss, therefore helping you avoid poverty.
You should think of “when” insurance as funding – a larger cash flow that pre-funds a larger amount of money that will come back to you or your family in the future either through retirement payments, living benefits, cash values or life insurance death benefits. Its predictability can also help you avoid poverty.
The purchase of any kind of insurance should always be made with help from an expert, licensed professional.
Insurance premiums do not cause poverty.
Are you premium foolish?