Why couldn’t somebody just put money in a savings account monthly instead of paying insurance monthly?
In: Economics
That’s called self-insurance and you can do that. The reason you wouldn’t want to comes down to cost of capital.
ELI5 version: you love skittles. They’re your favorite. You can buy them when mom takes you to the store but you can only get one small pack a week with your allowance. Or, you could save up 3 months worth of allowance, ride your bike to the store, and buy a giant bag of them yourself and have enough for a year. You consider doing this but realize in most cases you can only eat one pack a week and you don’t want to dedicate 3 months of allowance to something that you likely couldn’t use all at once anyway. In this case, you’re happy to pay more so you can spend the rest of your allowance on other things. Your money is worth more to you than the store’s money is worth to them, so you let them buy in bulk so you can preserve your cash. Insurance is similar: you pay more in smaller installments for access to a larger pool of money should you need it.
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