To Insure or Not to Insure?

By Leigh Guth, Lincoln County Extension Agent

That is the question most everyone is asked when they buy a new phone, computer or any electronic gadget these days.  Usually it is at the checkout counter with little time to ponder the pros and cons.  There are five people in line behind you, or you have a 7-year old with you.  It doesn’t sound expensive, and you would hate to have this new coveted gadget broken by said 7-year old, so, you sign on the dotted line.

There are several basic concepts when it comes to insurance, a financial tool to guarantee against risk of loss or harm.  As a consumer, you have five choices.

1. Cross your fingers and do nothing more.
2. Avoid loss by avoiding risky behaviors or dangerous locations.  Examples would be not taking your electronics to the swimming pool, not smoking, or giving up sky diving.
3. Reduce your chance of loss by taking certain actions like wearing safety gear, keeping your computer in a protective case, or using a smoke detector at home.
4. Accept risk knowing that you can afford to pay for the loss. The most common example is an insurance deductible.  You agree to pay the $500 deductible because you can afford that amount, and it will lower your annual insurance cost.
5. Transfer the risk by purchasing insurance.

Keep in mind the large-loss principle when choosing what to insure.  Purchase insurance with the extent of the loss in mind and not the likelihood of loss.  For example, you have lost or damaged several cell phones in the past; the potential of harm or loss is high for subsequent phones.  However, the cost to replace a phone is $200.  This is not a large loss; therefore, do not purchase insurance but reduce your risk or accept the risk.   Take the $7 monthly insurance fee and put that into an emergency fund to help pay for the phone if it is lost or damaged.

Let’s apply this concept to disability insurance.  The likelihood that you will have an illness or injury that keeps you from working may be low.  However, if individuals depend on you for income or for caregiving, what would happen to them if you were no longer able to function in that capacity? How much income would they need to replace your lost wages?  Replacing just $1,200 a month for 18 years would amount to $259,200 in lost income.  This is a substantial amount and justifies insurance based on the large-loss principle.

Make sure that you do not purchase insurance that duplicates other coverage. For example, do not purchase insurance when renting a car.  Check with your current auto insurance; you are probably already covered or can add a rider for less than the policy at the rental counter.

Based on the concepts of large-loss and non-duplication, most people need health/medical; disability; life; property, and auto. 

Agents, what insurance-related questions do you hear most often?

Resources:

http://www.extension.org/pages/16131/meeting-your-insurance-needs

National Financial Core Competencies Discussed in this post:

Protecting, Saving