Why couldn’t somebody just put money in a savings account monthly instead of paying insurance monthly?
In: Economics
You can, but for something like automotive liability insurance, not many people are able to have hundreds of thousands put away in easily liquidated assets.
The purpose of insurance is to pay for catastrophic damages that are above what you could possibly pay from savings. What if you crash into somebody’s Range Rover tomorrow, or your house burns down next week? Would you have the $100k to replace their vehicle (on top of whatever damage was done to yours!) or pay to have your house rebuilt and replace all your belongings? That could easily run $500k or more. But if you have auto insurance, they’ll make the owner of the Range Rover whole by paying to replace his vehicle. Your insurance company will pay for your house to be rebuilt, pay to replace your stuff and pay for a place for you to live during the time that your house is under construction.
You absolutely can do this. For many of the minor issues covered by insurance, like dental visits for health insurance or a small water leak on your home insurance, this is probably fine.
Consider, however, the major catastrophic risks that are covered by your insurance. What if your house burns down and you lose everything? What if you get cancer, or heart failure, or some other very serious illness? Insurance is there because most of us don’t have the savings necessary to rebuild if our whole life gets pulled out from under us.
Insurance companies do plan not to spend more money helping people than they take in through their premiums, so you’re right that in very large numbers, most people could do what you’re suggesting and be fine. But the insurance doesn’t exist to cover small ordinary expenses; it exists to cover life-changing catastrophes. The few people who suffer those, won’t have enough in their savings account to cover them.
It depends on where you are and what kind of insurance and why you’re carrying it.
If you’re talking about auto insurance, some states will let you post a surety bond instead of carrying insurance. It leaves a bunch of your money tied up and untouchable, but you don’t need insurance. If you ever run into a public liability or property damage claim that needs to be paid out, the money can come from the bond.
Of course you can, but most people don’t have the financial reserves to protect themselves against the kinds of damages that insurance typically covers, especially in privately-funded America.
Most people in the US are exactly one paycheck away from hitting serious financial trouble. In other words, they have less than $10,000 (and in many cases, less than $1,000) available to cover an emergency.
But wait! You say. What if they took what they were paying in insurance premiums and saved that instead?
Ok, let’s look at that. I pay about $200/mo for my car insurance. I pay about $80/mo for my homeowner’s insurance. And we pay about $600/mo for my wife’s health insurance (I get mine through my employer, so we won’t use that number). All told, about $900/mo. In a year, that’s $10,800. That seems significant.
Let’s say that I get into an accident that I am personally liable for. Both cars are totaled, I break my leg, and the two occupants of the other car break an arm. All of us have concussions. We all miss at least three weeks of work recovering, and all of us are facing months of physical therapy to recover functionality.
The cars alone will likely cost $40-$60,000 to replace. That’s four years of saving. My broken leg could cost somewhere around $50,000. Broken arms, probably $30,000 each. Concussions? Anywhere from $1,000 – $10,000 each. Physical therapy? At least $10,000 for all three of us, possible more. Additionally, if any of us becomes disabled as a result of the accident, I’m then on the hook for disability payments for the duration of the disability – possibly for life.
In total, my accident could cost me close to $200k *before* we talk about disability payment. I’d better hope that I’ve been scrupulously saving for the last 20 years in order to cover that.
Or, I could pay a couple hundred a month into an insurance plan, and have all that covered in the unlikely event that I cause a catastrophic accident. And that’s the point of insurance – it protects against the dangers of unlikely but catastrophic loss. We socialize the risk by pooling money together ahead of time, and we socialize the benefit by taking care of the unlucky person who experiences a catastrophic loss.
You can in many cases, it’s called self insuring. You do it according to the level of risk that you’re willing to absorb. I can’t afford to pay out hundreds of thousands of dollars in the case of a car accident where I and my passengers get horribly maimed, so I carry car insurance to cover that. But that TV I just bought? I can afford to replace that if it breaks. So I don’t buy the protection plan for it.
That’s the same reason why term life insurance is a thing. I need life insurance while I’m young and don’t have a whole lot of assets to my name. But when I’m 65, only a couple years from retirement, and have a couple million dollars in my retirement savings? I don’t need life insurance anymore. If I die, my wife will do just fine with the money that we have.
Some areas you can deposit money with the government and not worry about automobile insurance. Do you have a million dollars that you can leave with the government just to save a couple of hundred a month. Some of them pay very little interest on the deposit.
Many government agencies are self insured but still use an insurance company to settle the claims but the insurance company just send the bill to the government.
what will you do if after 1 year you have a 100k insurance claim?
For home and car insurance, you technically can, but let’s just say that sometimes you are legally required to be insured. If you finance your home with a mortgage, the bank will want it to be insured.
Another thing is that you need the money to actually replace those assets.
If you can afford to rebuild your home or buy a new car outright, I mean, go nuts as long as the law doesn’t require insurance.
In a nutshell, it will work, but only if you’re very wealthy.
Because if you get one fuck up, you lose. You aren’t ever saving enough for an extended hospital stay, total car accident, home burning down etc. Sure, for minor stuff you’d be out ahead but home insurance is like 2k a year. Your house is 200k+. That’s 100 years to pay for a house.
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