Insure Only for the Big Stuff

Insurance is an inconvenient necessity. There is nothing fun or exciting about paying for insurance, yet you want it to be there when you need it. It’s like electricity. We pay for it every month, we are constantly using it, so we want it to be there, but there is nothing fun about spending our hard earned money on it. We would rather spend those dollars on something more enjoyable.

Right now, your car is probably sitting outside or in your garage (I hope you are not driving while reading!). You are using your insurance because it is providing you protection. The same way that having a fire extinguisher in your home or the airbags in your car are being used. They are there to provide you the opportunity to not have to worry about large repairs or in the case of the fire extinguisher or airbags, to hopefully keep what may be a small problem from becoming a disaster. The protection is what you are buying and using every day. But like an airbag, you hope it never needs fully deployed.

So the purpose of insurance is to protect against financial catastrophe. You don’t need to insure for the $400 TV in your bedroom, you don’t need to insure for the $40 toaster or the $60 blender. Instead, insure the big stuff. We want to insure the car, the boat, the house, all the large assets that we have that would be difficult or impossible to replace. We even want to insure our income and our health. The goal is to guard you and those you care about from financial hardship. You want to be able to replace your car or home should it be destroyed. You want to replace your income should you become disabled. You want to be able to pay large medical bills should you become ill. You want to protect your most valuable assets from loss. That’s why you buy insurance.

See, if you can afford to pay for it out of your pocket, you don’t need to buy insurance to protect it. Insurance is not there to smooth out all the bumps of life. The rule of thumb is if you can pay for it without it causing too much financial heartburn then do not insure it. Only buy insurance to replace those things that would cause financial ruin if they are lost or destroyed. It’s when you try to get to where insurance covers every little thing that it becomes prohibitively expensive. There is significant savings to be had by only insuring the big stuff.

You want to buy coverage that protects you no matter what the circumstances. Insurance policies that have multiple restrictions and few opportunities to redeem the policy or only cover very specific circumstances should be avoided in most cases. For example, why would you buy flight insurance? Are you any more or less dead depending on how it happens? Of course not! Your family still needs to replace your income no matter the circumstances so buy life insurance that protects your family no matter how you die! There are thousands more deaths resulting from drunk drivers than from plane crashes. Would you then buy insurance in case you die from a drunk driver? Then buy a policy if you die from cancer? Then buy a policy if you die from a heat attack? This could go on and on and you would spend a fortune. Just buy an insurance policy that pays your beneficiaries no matter what the circumstances are of your death.

So remember, insurance is there to protect our assets, our wealth, our health and our income from major losses. It’s there to protect us from losing the big stuff.

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The three authors, Bill Pratt, Mark C. Weitzel, and Len Rhodes, are industry leaders in personal financial education. Together, they have a combined 75 years of experience in banking, economics, and entrepreneurship. Now, they teach thousands of students personal finance concepts and decision making skills, author textbooks and public press books on personal finance, and help schools develop innovative personal finance literacy programs. Recently, they were instrumental in developing a personal financial management certification program for leaders in higher education. The other books in The Money Professor series include The Graduate’s Guide to Life and Money and Extra Credit: The 7 Things Every College Student Needs to Know about Credit, Debt & Ca$h. Their books, lectures, and programs give students, parents, and educators the tools and knowledge to make good financial decisions all their lives.