Why couldn’t somebody just put money in a savings account monthly instead of paying insurance monthly?
In: Economics
So say you buy a new car. You took out a loan to buy it and are paying it back, no problem. On top of that, you are putting some money away. A few months later, a big storm comes through and blows a tree over and smashes your car.
So now your car is gone, and you still have monthly payments, but you don’t have near enough to pay off the loan.
You don’t make enough money to make two car payments, What are you going to do?
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.
Insurance savings would work if you only ever had incidents at the end of your life after saving for years and years.
Insurance is optimal when you don’t know when a catastrophic event will happen, and when the event is so extremely costly that even saving for your whole life will not cover if (some med bills)
Like if you’re a 25 year old who’s been driving for 7 years and you total your car, it’s unlikely that your insurance savings will be enough to replace your car.
Insurance basically gives you the ability to access the money up front.
You can do that but the thing is that the things insurance covers for cost an ungodly amount of money. If you find yourself in that situation you might spend all your money and still not have enough. Insurance is scummy and they’ll absolutely try to shaft each and every one of their clients, but unfortunately it’s the best option aside from being super rich.
That’s what I do for my phone. Fuck paying $18/mo plus a deductible. Out of the gate, I can afford two phones. I’m quite careful and save money every month which could cover anything that comes up.
But for a vehicle? How many folks have the money on hand for the one they’re buying and one to replace it? Then there’s the liability portion of things. Imagine how much you’d have to keep on hand for that!
Health insurance? I thought I would have paid way more in than I’d ever get as a benefit until my dying days. Nope! Freak accident, helicopter, intensive care, facial reconstructive surgery, dental surgery (I ended up footing that bill). Thanks to health insurance I paid $3,000 for everything plus I settled the dental work debt for like $1,600 out of pocket.
It is an option in many states, and it’s kinda the last option for truly reckless drivers when insurance companies refuse to insure them. It’s not cheap, but it’s an option
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