Auto insurance, health insurance, life insurance, dental insurance, homeowners insurance…it seems like you pay and pay and pay and never get anything in return from all those premiums you’ve thrown on the window. Ideally, you would only buy insurance you will eventually actually need. The problem with that, of course, is for that to work you’d have to know the future. Since nobody knows the future, we are forced to buy insurance to protect ourselves from a variety of disasters that probably won’t actually happen, such as an earthquake, flood, or maybe an auto accident.
That said, the fact that insurance exists for a given disaster will save you money over the long run. How? Because insurance allows you to pool risks with tens of thousands of other people, reducing risk and costs for everybody.
Risk Pooling Leads To Higher Efficiency
The chances of any given disaster happening to you are pretty slim, be it totaling your car in an auto accident, losing your home to a tornado, or getting cancer; however, the chances of at least one of those disasters happening to you within your lifetime are relatively higher. Since you figure you will probably suffer from at least one major disaster in your lifetime but you don’t know which one, you have no choice but to insure against all of them. Meanwhile, millions of other people all over the country come to the same conclusion and purchase insurance coverage accordingly.
Any one of the above events would probably devastate your finances beyond your ability to recover if you weren’t covered. By purchasing insurance, you have effectively shifted the risk of disaster from yourself to the insurance company in exchange for paying them a small monthly premium. The great part about this is that the insurance company, by virtue of being better-capitalized and having greater financial resources than any one individual, can better afford to handle these risks. The result is that the total cost of all the insurance premiums you will pay over your lifetime is going to be less than the cost of paying all those expenses out of pocket, on average. Clearly some will benefit more than others from their insurance coverage, but in the end you are more likely than not to save money.
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