Why couldn’t somebody just put money in a savings account monthly instead of paying insurance monthly?
In: Economics
I pay $200/m on car insurance. That is $24k in 10 years. If i hit an expensive car 1 year from now and im at fault, i could have to pay $50k or more
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.
You can do that and maybe later in life it will work, but what happens if after 3 years you have an event that requires $200k? Then you got unlucky and now you are digging into your friends and family life savings. If you and your extended family all did this over generations, then it would work fine. An insurance company is basically this process but including tens of thousands of people.
For one thing, the premium you pay is likely much smaller than the liability insurance you are buying. For instance, maybe you pay $1000/year to get covered for $1M of liability. You can do this because hundreds of thousands of people are paying $1000/year and not making any claims, so the insurance companies have tons of cash.
So say you crash and hurt someone and they sue you for $500,000. If you have insurance, they will pay that $500k, and probably increase your premium to say $2000/year. Well that’s still way way way less than if YOU saved $500,000 in the bank and then had to pay it!
ie; You can make your own insurance savings … but are you willing to give all of that money away? OR do you want to pay a small amount of that every year instead?
Just a following note… almost every must pay for LIABILITY insurance, meaning if you hurt someone, or if you crash into property, the liability insurance will pay the damages. OR you have enough to cover the minimum required liability in your state.
BUT a lot of people don’t have COLLISION insurance. If your car is pretty old, it might not be worth it to pay out hundreds a year to have insurance that only pays for damages to your own car. If might be worth it to you to drive around with a giant dent in the fender rather than have insurance to cover it. If you bought a brand new Tesla, then sure, get collision insurance. If you are driving a 1985 Hona Civic, then maybe not. Collision is to cover YOUR car, you still MUST carry (or cover) liability which would cover damage to other people’s car, property or person.
In Pennsylvania you can. If I remember right you need to be able to prove you have access to the $15k in minimum liability.
Most things insurance covers would require too much savings that the average person would struggle to cover, so banks and governments just do a blanket mandate in some instances. A bank won’t safely assume you will self insure your home or your car even. Even if you provided them proof of the money, that money isn’t guaranteed to stay there in the event you need it, so they require to have coverage before they give you a loan.
Having said that, most finance professionals highly recommend an emergency fund in savings that acts as sort of a universal insurance policy for things insurance doesn’t cover or for things you can cover and save yourself the premiums.
So you can self insure for things like your home appliances replacements, pet medical coverage, job loss, home repairs, car repairs among other things.
So you should have a savings.
Many (most?) individuals don’t have the cash set aside for that. Larger corporations and government institutions can be self insuring so they are their own insurance companies.
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.
If you can prove to the government you have, I believe, $50,000 to put into an account, you don’t have to have insurance.
It’s just that is either too much for the average person and rich people aren’t dumb enough to put that kind of money into something that makes them zero.
I don’t believe banks allow this. You have to have insurance specifically as a condition of your loan.
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