This seems to be the age old question. This is also seems to be the questions we as agents get on a daily basis. So hopefully I can clear some things up with that. First and foremost you do not need insurance. Well that is of course unless a bank or mortgage company or landlord requires it. But for the sake of argument lets take those requirements out of the equation. Do you need insurance? The answer is no. Now that answer probably comes as a great surprise considering I sell insurance for a living.
Lets first explore what insurance is. Insurance is simply the transfer of risk. You have risk avoidance, which is simply avoid doing something that will cause a loss. You have risk reduction, which is simply do things to reduce your risk of loss. The other is to transfer risk. That is transfer the risk to an insurance company. Here is an example: You own a car. You can avoid risk by not driving it and leaving it parked in your garage. You can reduce risk by driving safely, following the laws, do regular maintenance on your car, etc. This wont stop you from having a wreck but it will reduce the chances of you getting in a wreck. If you are extremely careful, you may be able to avoid getting in a wreck and therefore you will not have to pay in the event of an accident. My best guess is, most people could not afford to total their car (and possibly someone else) and be able to pay for it. Most decent cars these days that are new (even a couple years old) are going to be $20k or more. Who has an extra $40-50k laying around they would like to use to buy them and someone else a new car? This doesn’t even take into consideration the liability that exists. Now of course there are people who can afford to do this. There are certainly people who have the means to pay for that out of pocket and not blink an eye. Even the liability portion. It may hurt, but they can do it. They are a prime example of you not needing insurance.
This is the part where we discuss why you WANT to have insurance. In the above example if you do not have the means to drop $40-50k on new vehicles then you want insurance to avoid the consequences that will follow. Possibility of bankruptcy (almost worst case scenario), being sued and having a judgement against you to pay it back or them seize assets to cover it, even simply having to take a loan out (if the bank will give you one) to pay for them. This also doesn’t take into consideration that you may have a loan on the first one that you still have to pay off. Simply put you insure what you can not replace. Let’s take life insurance. In simplest terms, life insurance is used to replace someones income in the event they die. For purposes of this example we are not going to get in to all the other things life insurance can do or be used for. If the breadwinner of a household dies, the remaining family still needs their income to maintain their lifestyle. You buy enough life insurance to make sure if they die, the lump sum could be turned into an income stream for the family. Simple. You want insurance so you can transfer the risk of loss of something happening to an insurance company. You pay them a premium in exchange for them taking on the loss in the event something happens. Insurance companies pool everyone’s money and they hope they have enough money when something does happen they can use other peoples money to pay the claim. Some people will have a claim while others wont. Think of the premium (and deductible and copay’s) as the amount of risk you are willing to bear. You are then transferring the rest to the insurance company. So why would you want insurance? Insurance is like a safety net. It allows you to predict what your worse case scenarios could be. You pay a premium in exchange for protecting you against the possibility of what might happen. In the life insurance scenario you use a small portion of your income to pay the premium so you can protect it. In the end it is all about risk management. How much risk are you willing to take vs putting it on someone else? Some will say that insurance is a waste of money. One could argue that if you never use it, you wasted all of that money on it and it never paid out. I do see that point. For me personally it is about peace of mind knowing that I’m protected just in case. But really no one likes paying for insurance until something happens. Then they LOVE it! Auto insurance is expensive, until you run into a Mercedes, life insurance is a waste of money, until someone dies, homeowners insurance is a monthly cost, until the house burns down, etc. I think you get the point.
Bottom line: If you cant afford to replace it on your own then you need to insure it. For those of you who think you cant afford to insure it, then you cant afford not to insure it.