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, at an additional cost.
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 where 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). Seriously, it's time to grow up!
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). You are surrounded by "idiots" out there and they don't care about your personal property nearly as much as you do!
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 it's 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, you can always shop around for better rates (should be done at least every two years anyway).
1. What are some ways you could help your parents/guardians "Avoid" and/or "Mitigate" risk in your lifestyle?
2. What are some risks that you expect you will have to "Accept" as a result of your lifestyle?
3. Read this article on self-insurance. Write a synopsis (explanation) on the four suggested ways that you could self-insure and where to put this money.