Why couldn’t somebody just put money in a savings account monthly instead of paying insurance monthly?
In: Economics
The purpose of insurance is to collectivize risk against an unexpected loss. If you self insured your house and then it get demolished by a tornado, you’re probably not going to have enough saved up to cover it. Or multiple events happen in a short period of time and you won’t have enough time to replenish your savings. An insurance company with many customers is able to statistically determine how much each person pays so that each person can get covered. Some people will have more claims than they ever pay in, and some will pay in but never make a claim.
But it doesn’t have to be one or the other, that’s where the *deductible* comes in. A deductible is where you pay the first $x in a particular loss yourself. The insurance company likes this because you’re less likely to make a claim at all if you’re taking some of the risk and then they’ll have to pay out less in the event there is one, so you’re going to be offered much better rates. You’ll come out slightly more ahead the higher your deductible is, but you expose yourself to paying more out of pocket if you have claims.
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