Many people ask me if insurance is "worth" it and how much they should spend for it. Insurance is simply transferring risk from yourself to someone else. The first insurance policy ever negotiated probably started when someone bet someone else an event would or would not happen. If you buy insurance you're betting that it will happen; the insurer is betting it won't. If you don't buy insurance, you're betting it won't.
What Are The Things That I Should Insure?
Simply put, you need to buy insurance for the things that have value to you; if you don't care about losing them, or you could easily replace them, then you probably don't need to insure them.
- Do you have the money to replace your health should you get sick or injure yourself accidentally? I knew of someone who spent three days in intensive care and the cost was $78,000. And that was over five years ago.
- If your home were to burn, could you replace it, or the contents in it? If you have a mortgage, you're probably required to have insurance. Are you aware of everything you own? Most people aren't; and they're startled to find out how much it would cost to replace everything they own.
- If you were in a wreck, could you replace your car, or the Rolls-Royce you ran into? What about the bodily injury that often happens when there is a car accident?
- What about your life? If you were to die, would you leave behind loved ones who're currently relying on your income?
Can You Run The Risk Of Not Having Insurance?
This means that you need to have the money safely stashed in a liquid account (cash) to replace the items mentioned above, except for your life; this is called self-insurance. (Non-liquid investments are generally fine if you're self-insuring your life.) Don't forget that Rolls you just smashed; they probably have non-insured motorist insurance. Regardless, their insurance company will go after anything and everything you own.
The reason you need to have the funds in a liquid account is because you'll need those funds immediately to replace what was just lost, stolen, destroyed or stolen because you'll need the use of that item immediately. If you've socked money in a market that's currently depressed, you wont have the luxury of waiting for the market to come around to sell your investment.
Also keep in mind, only the most disciplined are the ones who can self-insure. Would you be able to keep your hands off your own self insurance account if you saw something you just couldn't live without and had to buy?
How Much Should I Pay?
Okay, so you know you don't have the discipline to self-insure and you know if you did, you'd probably end up spending it anyway.
Usually 5% to 10% of gross income is adequate to cover your car and your house and its contents. As far as health insurance is concerned, if you get it from your employer, and if most of it is paid by them, you're lucky. If you have to purchase your own individual health insurance, a policy can cost up to 10% of your gross income.
It all sounds like a lot of money to pay for something you cannot see. I always remember what my father once told me about insurance: "Insurance is something you can never have enough of, but hope you never have to use it."
Are you covered with insurance?