I used to question the wisdom or even the need for insurance in my life. Back when was young I really didn’t understand what the real purpose of insurance really was. Over the years I started to understand that insurance is really all about transferring my financial risks to someone else, an insurance company. When I purchased my first house the mortgage company required that I buy insurance on that house to transfer my and their risk of a fire, storm or something else destroying my house and their collateral. When I drive my car the State of Michigan requires that I transfer my risk of great financial costs due to serious injury in an automobile crash to an insurance company. I had to think about what do the mortgage company and the state of Michigan know about my risk that I don’t know? Well first of all the mortgage company saw my income and knew right away that if my house burned to the ground there was no way that I would be able to come up with the money to repay them for their generously loaning me all that money and still have a place to live without transferring that risk to an insurance company. The State of Michigan figured out that automobile accidents cause injuries that can cost the State and all those who pay taxes millions of dollars every year. They for sure know that if I am injured and unable to work I certainly won’t be able to pay those medical bills. Thus everyone who owns and drives a car must also have insurance on that car to transfer that risk to an insurance company.
What other financial risks do I have that I should or just want to transfer to someone else? I have a financial risk of losing my income if I am injured or very sick. I can buy disability income insurance. If I die my family has a significant loss of all my future income that would have supported them. Thus there is life insurance. When I travel there is risk. When I play on my boat there is risk that I might run into something. As I live there is risk that I might get sick or injured and need a doctor or hospital. All these things have a potential of financial loss to me and my family. I can use the financial tool of insurance to transfer that risk to an insurance company or I can keep that risk for myself by “self insuring”. Sometimes I might choose to share the risk with the insurance company by buying something like a higher deductible policy such as a Health Savings Account health insurance plan. This way I pick up the smaller risks, the deductible, and the insurance company gets the larger risk like the hospital stay or major surgery.
The bottom line is that you can transfer the financial risk for just about anything. Some risks are too large for the average person to reasonably take upon themselves and others are simply a matter of choice. The biggest problem I see is that some people never really think about the risks and responsibilities that they have and simply “self insure” their responsibilities and financial risks by simply doing nothing. Please at least take the time to think about it and act responsibly.
