Why do people pay for insurance? If they have the money to ensure protection in the case of damage or loss that isn’t guaranteed, why not save the money for when something actually happens?
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The point of insurance is to protect yourself from sudden, unpredictable, huge costs that have a low probability of happening.
Consider car insurance. If you crash your into somebody else’s car, the total damage may be, say, $100.000.
So, instead of risking having to pay $100.000, you pay insurance $1000 per year and contribute to the pool of money that is used when somebody crashes a car. The benefit is that now instead of having to pay $100.000, you paid several thousand, and the insurance covers $100.000. The downside is that you may end up paying insurance, but never actually crashing the car and thus never needing the money. But that risk is far more acceptable than the risk of getting into a situation where you have to fork out $100.000.
$1000 per year is a manageable cost. $100.000 all at once will ruin your life, so you’re insuring yourself against that.
If you wanted to avoid paying $1000 insurance and save these $1000 instead, it would take you 100 years to save up enough money to cover that $100.000 cost.
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