PLANNING FOR THE (POTENTIAL) IMPACT
I remember this silly episode of The Simpsons I saw a long time ago. A hurricane comes and blows down the neighbor’s house. Because he was very religious, he didn’t carry insurance. He saw it as a form of gambling and therefore, sinful. He then goes insane, checks into an asylum, and recovers all in the span of 20 cartoon minutes.
I’ve been known to say insurance is a racket, especially when it comes to health insurance, but I don’t agree that it’s a form a gambling. Their paths diverge at intention.
Gambling is all speculative risk, meaning you took on the risk voluntarily hoping for some form of gain, but accepting the potential for loss. Most insurance products exist to cover a pure risk, like a fire in your home.
You’re not meant to profit from these policies, only cover losses, and you’re not usually in control of the circumstances surrounding pure-risk events, insurance fraud aside. Life, health, property, and casualty policies all fall in this category.
Financial planners should be looking to cover these risk exposures. For instance, if you’re working, your planner should be looking to protect your income in the event of disability. The same holds true for death. Mortgages still have to be paid in the wake of your passing.
Could your survivors manage the debt or live comfortably without you and your income? Further down the line, what would happen if one or both of you need long term care? What if death or disability occurs in the near future versus the distant?
The great part about planning is that you don’t have to wonder! Your planner should be able to model outcomes for a variety of scenarios and see their impact to your plan’s success. And if your plan can tolerate self-insurance in these cases, congratulations! You are one of the few.
Most of us are going to need to hold our collective noses and buy policies that will make us whole or reduce our financial burden in the wake of these events if they ever happen. That said, we’re going to recommend low-cost coverages wherever possible, and make sure you’re not paying for coverage you don’t need.
Few things are as irritating as paying premiums for insurance policies you never end up needing. You will feel like you’ve flushed your money down the commode. That’s just the hindsight talking, and the conversation would be very different if you’d needed the insurance and didn’t have it. Consider that before writing off insurance as a scam, sin, or form of pseudo-gambling. It may be your saving grace.