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Is Insurance Ever Not Beneficial?

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Joel Ohman
Founder, CFP®

UPDATED: Mar 13, 2020

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Insurance Q&A: “Is insurance ever not beneficial?”

Ah yes, a common insurance related question and one that’s certainly on all our minds when shelling out our hard-earned dollars for that pesky monthly insurance payment.

But we can’t answer this one without first understanding why insurance is important. If you know the answer to the “why” of insurance, you’ll certainly have a hard time making an argument against insurance on any front.

Insurance and the State Lottery

Where are we going with this one? Millions of Americans pay for both insurance and lottery tickets each and every day and don’t get any real benefit…assuming you don’t get into an accident and don’t win the Powerball!

How are the two different? Without going into mind-numbing detail; insurance is designed to protect us against pure risk and playing the lottery is referred to as a speculative risk. Huh?

The difference between pure risk and speculative risk lies in what the purchaser expects to receive as a result of coughing up the money.

Pure Risk: There is no real “upside” to pure risk (insurance). Simply put, pure risk involves only the potential for “loss.” i.e. the financial loss that may result from owning property, operating a motor vehicle, health risks or the risk of dying…thus, property, casualty, health and life insurance (term, whole, universal).

You cannot expect to “win” anything by purchasing an insurance policy. Rather, only to be indemnified for a “loss” you suffer – either your own loss or a loss you negligently caused to another party (bodily injury and/or property damage you cause to someone else in a car accident that was your fault).

Still, insurance is technically a “win” by trading a small insurance premium for potentially huge losses that don’t come out of your own pocket in the event of a loss.

Speculative Risk: The lottery, on the other hand, is speculative risk. You are speculating on winning a million dollars and leaving your crumby job. There’s a perceived up-side to spending that money.
What does that mean to you?

The reality is; you have a MUCH HIGHER chance of being in a car accident (your fault or someone else’s), owning a piece of property that’s damaged (tornado insurance), becoming ill at some point in your life (health insurance), or the ever popular, 100% chance of dying, than ever winning the lottery.

All of which are events that are easily insured against…if you buy the right coverage. That said, if you will never be in a car, never get sick, never own a single piece of property and live forever, then yes, insurance may be a waste of your money.

If the opposite is true, insurance one of the most beneficial things you can ever purchase, even if it’s no fun at all.

Can I Beat “The Game?”

Probably not. Hopefully, you realize you need insurance.

And if you’re newly convinced about obtaining a policy, be sure to get insurance quotes online or visit a local independent insurance agent to ensure you get the best deal on this necessary evil.

Read more: Why is insurance so expensive?

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