Do you or do you not take out insurance?
Imagine a person named Joe whose house and contents are worth US$300,000. To be adequately prepared for his house burning down, our fictitious personality Joe needs to have at least the same amount of money on hand if he wants to be able to get his house rebuilt or repaired. He must have more if he wants to be able to provide for his and his family's living expenses while the rebuilding or repairs are underway.
Let's say that Joe does not want to take out a homeowner's insurance policy. Joe wants to be prepared for such a calamity but he prefers to do it his own way, not through homeowner's insurance. Thus, Joe who earns US$50,000 annually sets US$5,000 aside every year for his "personal house insurance fund." In this scenario, it will take Joe approximately 60 years to come up with the amount of money that he is aiming for. By that time, the event he has been saving up for - namely his house burning down - may have already happened, in which case he wouldn't have been fully prepared for his misfortune.
On the other hand, let's say that Joe gets homeowner's insurance. Joe takes out a US$300,000 home insurance policy that requires him to pay a monthly premium of US$34. Joe, being the conscientious person that he is, never misses an insurance premium payment. One year after taking out the policy, his home burns down. In this scenario, Joe's insurance company will reimburse him for his loss as per the terms of his insurance plan.
Let's look at the particulars of this second "insured" setting. After only one year of paying insurance premiums, by which time he has only made payments of approximately US$408, Joe is reimbursed for the full amount of his policy or US$300,000. This means that by getting his house insured, Joe obtained home protection that is immediately effective. If his house burns down, therefore, he will not need to have US$300,000 on hand to get his home rebuilt or repaired. The insurance company will pay him the money.
Joe's insurance company will have money to cover Joe's loss because it has a large pool of funds. These funds have been collected from other insurance policyholders. The money that the insurance company will pay in this example is, in actuality, not going to come from Joe's meager US$408 contribution but from the collectivity of insurance premiums contributed by Joe and other people like Joe.
However, if Joe's house does not burn down in his lifetime, Joe will not be able to get a refund of his insurance contributions. By agreeing to become an insurance policyholder, he gives the insurance company the right to use his contribution as recompense for other policyholders' losses when these people's houses burn down. In this case, therefore, Joe loses his insurance premiums to the insurance company.
In this given scenario, Joe loses a considerably large amount of money. In 60 years, for instance, he will contribute a total of US$24,480 in insurance premiums. Since Joe's house does not burn down (a good thing, of course), the insurance company lays claim to his contributions. On the other hand, if Joe does not get insurance and saves his own money as mentioned above, he will be able to save US$300,000 in 60 years. Thus, if his home does not burn down, Joe will end up with US$300,000 to enjoy.
Of course, the question will always be, "What if?"
If you can't stop worrying and you need peace of mind, then you'd better get insured. Your insurance contributions will give you such peace of mind. If your house burns down, you are covered. If your house does not burn down, you may lose your contributions but this is not such a bad deal when you consider the fact that while that you are paying your small insurance premiums, you are insured for full damages all the time.
Consider, too, the fact that alone, a person will find it very hard to shoulder the financial burden of protecting himself against a calamity or a disastrous event. Through an insurance policy, many people contribute to a general fund so the financial risks are spread to a multitude and are thus minimized. In effect, an insurance policyholder shoulders only a fraction of the total cost he will need if the calamity he desired protection against actually happens.
So, do you or do you not take out insurance? I'd like to think the answer is obvious.
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