There are a tremendous number of different types of insurance. It can be difficult sometimes to decide which types to buy. Here I describe the way I think about insurance and how it guides my choices. I encourage my readers to come up with their own ideas to guide them when it comes to insurance.
The core of my thinking about insurance is that it is a way to protect myself and my family from low-probability events whose costs would be devastating to our finances. This means I specifically exclude high-probability events and low-cost events.
An example of a high probability event is needing dental work. As it happens, my employer gives me “insurance” to cover this, but I don’t consider it insurance because it is capped at a low level. It’s just extra pay because it’s not protecting me against a large loss.
After I retire, I would never buy typical dental or health insurance. Insurance companies employ smart people. They would never let me buy coverage that costs less than the expected benefits I would get. They’d also add extra to the cost for their own overhead and profits. I’ll be better off just paying directly for dental work. If I could get insurance that covered high-cost dental work or health costs, that could be useful to me.
An example of a low-cost event is when some consumer item like a television breaks. I never buy extended warranties. For one thing, retailers often find a way to avoiding honouring them. But, even if retailers did honour warranties, I wouldn’t buy them because I can afford to replace a broken item. I was once even offered an extended warranty on a $5 battery! What a waste of time.
So, what kinds of insurance make sense? Liability insurance for your car and home come to mind first. Getting sued for a couple of million dollars would certainly be devastating for almost all of us.
Insurance against damage to my home also makes sense. I wouldn’t want to have to pay for a rebuild if my house burned down. However, I choose a very high deductible. I wouldn’t make a small claim anyway, so paying a higher premium for a low deductible makes no sense. The same applies to deductibles for collision insurance on cars. I don’t even bother with collision insurance on my car once it’s worth less than $10,000, but I do keep the liability insurance.
Life insurance makes sense to protect anyone who depends on your income. However, I look for the cheapest term life insurance I can find that has the term length I need and is convertible and renewable. I’m not interested in the various forms of permanent insurance such as whole life and universal life because they just bolt an expensive investment component on top of term life insurance.
Disability insurance makes sense as well. Most of us are more likely to become disabled than we are to die. However, this is a tricky area. It can be difficult to determine whether a plan has reasonable coverage for its cost.
Many of us have various types of insurance through our employers. Health insurance is just extra pay because it won’t pay for anything truly expensive. Disability insurance through an employer can work well, but life insurance may not. If you get cancer and decide you don’t want to spend your last reasonably healthy days working, you may find it difficult to convert your employer life insurance to an individual plan because you’ve become uninsurable. Some employer plans offer convertibility, but there are deadlines and the insurance company is motivated to make such a conversion difficult for anyone with an elevated chance of dying.
I never link insurance to a financial product like a mortgage or credit card. Few people realize that the underwriting for mortgage life insurance doesn’t take place until there is a claim. This means the insurance company doesn’t check whether you’re covered until you die. You can bet they’re willing to put some effort into finding a reason to deny your coverage.
So, there you have my personal philosophy on insurance. I look for ways to protect my finances from devastating losses. I ignore all forms of insurance that cover losses I can handle. Your mileage may vary.