So it’s been a long time since I’ve posted on here, but thought I’d try to get back on it. One of the main reasons, I’ve been struggling to write is that I’ve debated on what I can add to the personal finance forum that hasn’t already been discussed. As I’ve been reading through multiple sites, there has been a lot of discussion on how to save, how to cut cost, and how much people make through their blogs. But I haven’t really seen much discussion on the topic of “Insurance”. I’ve seen a lot on healthcare insurance, but what I’m talking about is more related to personal insurance (Home/Renters, Auto, Umbrella, & Flood).
A lot of people view insurance as a waste of money, but I view it as peace of mind. From a pure math perspective, it rarely pays off for the average person. The insurance companies have tons of actuaries that have been able to calculate the statistics for them to cover costs and make a profit. But don’t think of insurance like that. View it as a way to buy peace of mind and risk mitigation.
If you’re reading this blog, you’re probably the type of person who focuses a lot on saving and building up wealth. Well how would you feel if I told you there was a slight chance you could lose it all? Spending all of your time and energy to save up to one day retire, to have it all taken from you because of an accident. Well that is why you buy insurance, consider it a way to diversify your risk portfolio. Much like you buy different types of stocks, mutual funds, & ETFs to reduce your risk of something bad happening. Buying insurance is your way to diversify your risk of a life altering event causing you to lose it all.
So let’s talk about the different type of insurances out there, without getting too much into the details
Home/Renters: The main reason for getting home or renters insurance is to protect yourself if something bad happens to or inside your home. What are the odds that a fire strikes, a burglar strikes, or someone injures themselves on your property? In a particular year that could be pretty low, but over the course of your lifetime the odds start to become very probable. When I was a little kid, my house was burglarized while we were out on vacation. Has anything bad happened to you before? Also if you have a party at your place and someone falls and injures themselves, you could be sued. Thus Home/Renters insurance provides you coverage there as well.
Auto: There are 2 major types of coverage, liability & comprehensive. Sure there are varying degrees of coverage. Liability is the most basic and virtually required by every state to drive. With liability it covers you up to a certain dollar amount to pay for the bills of the person you get into an accident with. It doesn’t really cover any of your bills. Comprehensive covers all of your bills and usually the cost to get you back to where you were before. Have you ever gotten into a fender bender before? I have and still have a pending case against me for something that happened almost 10 years ago. The biggest issue with Auto insurance is that it caps out at a $300,000-$500,000 in damages per accident. But if you get into an accident where there are multiple people involved and they can no longer work, the money disappears quick and you could be on the hook for the rest. So make sure you have the appropriate level of coverage based upon what you think you afford to deal with.
Umbrella: This type of insurance goes on top of your Home & Auto insurance. It’s essentially a policy that kicks in after you’ve hit your maximum with your Home or Auto policy. You can get an umbrella insurance policy for a couple hundred dollars a year premium for a million dollars in coverage. Because the odds are low that this will be needed, the rates are pretty reasonable. But the peace of mind benefit in knowing you have the additional coverage is totally worth it in my opinion.
Flood Insurance: Not many people ever buy flood insurance, because they don’t live in a flood plain. But many people don’t know that you can buy a pretty cheap policy if you don’t live in a flood plain for a few hundred dollars a year. This is something to seriously consider if you live near any body of water. If you didn’t know this, Home owner’s insurance does not cover any damage associated with water damage that comes from outside. About 10 years ago, we had a historic flood happen and the water from a nearby river that was about 30 feet below where I live and about 100 yards away came up to my doorstep. Ever since then I’ve bought flood insurance. As I’ve been reading more and more about why floods seem to be getting worse, some theories have brought up the fact that with more and more roads have been paved and parking lots built, this has caused water to flow to places they never have before because it has reduced the number of drain-off locations.
The purpose of my writing this isn’t to persuade every person that they need to buy all of these insurance policies. But it is something that should be evaluated by each person, especially if you’ve started to accumulate some wealth and are starting to plan for FIRE. What types of insurance do you have? Have you done the math on what self-insuring is worth to you by not buying these various policies? What is the craziest accident that has happened to you or someone you know?