Why couldn’t somebody just put money in a savings account monthly instead of paying insurance monthly?
In: Economics
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.
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