Insurance is paying – a certain small loss – a premium in exchange for recovery of a large potential loss. Most people try to calculate how they can turn insurance into an investment. Unfortunately, the insurance industry sometimes confuses the real goal with the profit-to-payer goal; in other words, an investment where you get something back.
Kitces has a great post that helps put insurance into perspective:
“While no one likes to pay more in insurance premiums than they have to, an important fundamental principle of insurance is that in the end, there must be enough premiums (plus growth) to cover potential future claims (plus overhead and profits for the insurance company). Insurance coverage that is “too” cheap is actually risky, and coverage that is “expensive” is actually the most secure!”
Basically you spend money for the benefit of certainty your loss will be covered to the extent of the amount of insurance you purchased. There are many types of insurances for many different kinds of losses you may experience. You may pay for small losses out of pocket (budget); called “self-insuring.” When that amount becomes to great to possibly bear, that’s what insurances are for.
Please read more at Kitce’s post here.
Moral of the story: Insurance is insurance, not investing … and don’t confuse the two. There’s a purpose for it – to recover from large unrecoverable or catastrophic losses.
Photo: By ML5 (Own work) [Public domain], via Wikimedia Commons