Taking a Chance
Life is full of risks. There are big risks, like getting hit by a train and little risks, like head lice. Careful people manage risk to avoid real disasters as much as possible. Other people bungee jump off bridges. In a free society, people are free to take many risks, so long as they don’t endanger others. In a responsible society people plan events so no one else has to suffer due to avoidable risk. That means not driving 100 miles per hour if there is any chance that someone else is on the road and not sky diving if you have young children.
There are three ways of managing risk. One is to avoid risky situations. Two is to prepare for problems by having medications, spare keys and a savings account, among other things. Three is to pay someone to take part of your risk. We call that insurance.
It isn’t practical to pay someone to protect us against the risk of head lice, so we just keep $19.95 on hand to buy the special shampoo. But there is no way most of us could save enough to cover the cost of a high speed crash on the highway. Damage to cars and people can easily run into hundreds of thousands of dollars so we pay a hundred dollars or so each month so that someone else will be responsible for much of those costs.
This all sounds simple enough, except that we have to decide how much protection we want to buy. Your state probably requires a minimum amount of auto coverage and that is all you must buy. But if you cause an accident that costs $100,000 more than the coverage you purchased, you are personally responsible for that debt. If you don’t have the money, you are likely ruined financially. So you must decide, how much insurance should I buy?
The Budget Doctor’s prescription for purchasing insurance is:
1. Start with amounts you must have. This includes the legal minimum for auto insurance, the amount of your mortgage for homeowner’s insurance, catastrophe only health insurance and enough life insurance to cover your final expenses.
2. Prioritize your risks. If you have dependents and never had a traffic ticket, you probably need life insurance more than extra auto insurance. If you have chronic health issues and a house worth less than your mortgage, you probably need extra health insurance more than extra home owner’s insurance.
3. Shop for the coverage you want. Go on line and get quotes for all the insurance you want to buy. Buy the least expensive policy from an insurer licensed in your state. Buy only term life insurance and check for discounts from companies that want to insure your home and your car.
We buy insurance hoping we never have to use it. It is not sad to realize that you paid premiums for 40 years and never had a claim. It is very sad to have a claim and realize you don’t have insurance. You can’t buy enough insurance to protect you against every risk so choose both your risks and your insurance coverage carefully.