Why couldn’t somebody just put money in a savings account monthly instead of paying insurance monthly?
In: Economics
You absolutely can, except where insurance is legally/contractually required.
In fact, you’ll come out ahead… on average.
And that’s the crux of the matter. If your mortgage, say, requires you to insure, that means that they don’t trust that you’ll have enough if things go wrong or you’re one of the unlucky few. Thus they often insist that you insure the house through an organisation that they KNOW will be able to payout if the house burns down and they lose all THEIR (and it is their money while you’re still paying the mortgage) investment.
Sure, they could insure the mortgage, and they actually do. But if they covered everything like that, your mortgage would be double what it is.
And car insurance – you’re not paying for the dents and bumps of other people’s vehicles. That’s relatively minor. You’re paying the medical costs of that guy you crippled for life and who will require 24/7 care for the next 50 years. Because if you didn’t insure, that guys gets fuck-all, and you just declare yourself bankrupt to avoid giving them anything. Hence why car insurance is often legally mandated.
And, again, the government could operate an insurance that covers all cars (some countries have this). It just shifts who has to insure and raises the price for EVERYONE rather than just those are more risky (e.g. younger drivers).
But, mathematically, insurance is a crock. On average you’re just wasting money compared to saving yourself. And you’d “insure” far more things that way than a policy would ever cover because it’s you who makes the decision when to pay out.
But, also mathematically, you might also find that you literally never have enough money to pay for replacements, repairs, etc. that you spend 100 times as much as you expected, and that all starts on day one so you never financially recover from it. Risk is a combination of the *probability* of something happening and the *impact* of something happening. The chance of your house burning down is probably 100,000 to 1. The impact if it happens could cost you far, far, far more than £/$/€100,000 – to the point that it actually puts you into life-long debt, homelessness, etc.
Insurance is a mathematical gamble, played through a “trusted” 3rd party (not by you, by the people lending you money or liable if you cripple someone). On average, most people will lose money paying for literally any kind of insurance whatsoever. But that’s not what insurance is about. Insurance is about lowering the impact of that rare, unlikely event so it doesn’t ruin your entire life.
Latest Answers