Does buying insurance makes sense for someone with very frugal money habits? I always feel like I’m losing out by buying car insurance. I am extremely frugal, only spend about 25% of my after-tax income, and rest are invested in low-risk bonds and index funds. I also maintain 2 years worth of living expenses in a savings account.
So my question is, what does an insurance buy me? I can afford to pay off in cash if something bad happens. Isn’t it a waste to pay insurance premiums?
In: Economics
> So my question is, what does an insurance buy me?
An auto accident can EASILY cost upwards of $100,000. At an insurance premium of $150 a month if you have that accident more than once every 55 years you come out ahead.
Insurance is you paying a little every month so if shit goes very wrong you don’t end up broke.
First, depending on where you live it’s likely the law to have insurance coverage. Second, if God forbid you were in a serious accident with another vehicle, you absolutely don’t have the cash to cover catastrophic medical expenses for yourself, any passengers, and the other car’s passengers.
States generally require liability insurance for drivers since it’s very easy to cause hundreds of thousands of dollars in damage from an accident, and most people just don’t have that much laying around in liquid assets.
Well, let’s say you get in an accident in which two people are killed and three more are seriously injured and will suffer life-long disabilities. You’re found to be at fault. Unless you’re able to fork out several million dollars in compensation, you’ll be glad to have insurance.
> I can afford to pay off in cash if something bad happens. Isn’t it a waste to pay insurance premiums?
Yes, if you will always have the cash on hand, there is no point in insurance. Unless you’re trying to commit insurance fraud, it’s always just gambling in the house’s (insurance company’s) favour. Insurance on electronics and stuff you can replace is a complete and total waste. Don’t buy insurance on your cellphone or video game or whatnot. If you can’t afford to replace your cellphone, you’re buying way too fucking of expensive phone for your financial situation.
> always feel like I’m losing out by buying car insurance
I highly, highly, highly doubt you can just write off a two million dollar check to the victim of the car crash you caused that is now paralysed. This is why car insurance and house insurance are basically mandatory. Very few people have the cash on hand to buy a new house, or pay for causing debilitating injury and destroying property with a car. This is where insurance is useful. The house always wins still, but it’s insurance to make sure you aren’t completely and totally ruined by bad luck. Also, car insurance is often legally required (unless you’re really rich and basically tell your lawyer to set up your own insurance in essence), so you can afford to pay others. Not having car insurance is horribly immoral and selfish, beyond being illegal.
And if you did have two million dollars, I’d hope you have it invested so it’s still not on hand anyways. Investing it would pay out more than any insurance costs. Even if you could afford to pay for something, it’s not always a good idea to keep your assets liquid. Having to sell your house to pay for a lawsuit from a car crash you caused is obviously not ideal, better to pay the insurance.
Now, do you need collision on your own car to repair damage that you did to it yourself? Well, that depends. Do you have the cash on hand to replace your car? Then no. If you have a junker, don’t bother. If you have a nice car but a lot of money, don’t bother. Unless you like predictably, then maybe a fixed insurance payment is better than a surprise large payment even if you know it will likely cost you more. If your car being totaled would ruin you, maybe get collision. Also, maybe don’t buy such an expensive car.
Many states have an insurance waiver program if you can prove that you have a minimum level of liquid assets. Check with you local dmv.
But in the event of an at-fault accident, you’ll be on the hook for it out of pocket.
Car insurance there’s generally laws about, because car accidents can cause much damage to OTHER people. And now there’s laws about health insurance, plus assistance available from the government, in the USA (“premium tax credit”) if you’re low-income… which is good, because “health insurance” SHOULD instead be “basic health care provided by government”, which went way astray in the US due to rampant capitalism.
But in general? Insurance is basically you betting that Something Bad WILL happen _before_ you’ve paid enough money to the insurance company to match what they would pay out when this happens. Life insurance, for instance, is you betting you’ll die before sinking too much money into the life insurance.
Whether this is worth it to you depends greatly on whether you’d need the money to repair, replace, or get over the Something Bad, and not be able to afford to right then.
–Dave, who is pretty sure the other comments won’t be taking exactly this tack
A thing that hurts a lot of people – you can do everything right when you’re driving. BAM! Some rando just caused an accident and now your car is totaled.
Insurance is both the law and makes sense because:
* If you’re at fault, at least you don’t have to fork over lots of cash. Insurance is a cushion if you make a mistake and the other party decides NOT to sue and instead take a payment from your insurance.
* If you are not at fault, you have a way to at least get a ride now that your car is totaled.
* An uninsured motorist hits you? You can buy extra coverage so that you are protected since there is a low likelyhood that the other party can pay.
* Injured? Whelp, litigation (at least in the US) takes time. The insurance company can offer a policy (for an increase in your premium) so that they pay some or all of your medical bills after the wreck.
As my father put it “You’re gambling that you will get in a wreck and an insurance company is gambling that you won’t”.
Unless you live in an extremely rural town with very little traffic, having even the minimum coverage is better than nothing.
> I can afford to pay off in cash if something bad happens
Liability insurance typically pays out $100,000 – $1 million. You must be rather wealthy, if you can afford a $1 million expense without having serious financial trouble.
> I always feel like I’m losing out by buying car insurance.
In a lot of states, if you get pulled over for any reason and don’t have proof of insurance, your vehicle can be impounded. You may also lose your driver’s license.
All of this applies to legally required liability insurance (covering lawsuits for injury / property damage).
If you want to save money, and you’re able to take the financial hit of needing to suddenly replace your car if it’s, say, destroyed in an accident, you could go with liability only coverage. That is, you could skip collision insurance (which pays to repair / replace your vehicle if it’s involved in a collision) and comprehensive insurance (which pays for non-accident-related problems like weather damage).
You’d still pay something (liability insurance) but it may be a lot less.
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