Why do you buy insurance? Does everyone need insurance?
Usually people don't think about this. Most of the time, the discussion is led by the financial adviser, cos basically, most people don't know much about insurance to even comment.
So why DO you buy insurance?
Insurance companies say to PROTECT. Sounds nice right. That's why some people mindlessly buy insurance. Cos they feel they are protecting something.
Insurance is there to cover the estimated financial loss due to an incident.
So when people buy insurance when they buy a car, they are protecting themselves against financial liability if they meet with an accident.
Or fire insurance for the house, is there to cover the losses incurred if there is a fire in the house.
So when we buy life insurance or term life insurance, what are we covering for?
Losses due to the death or total permanent disability (TPD) of someone?
What happens when someone dies?
Well, that's usually the end. There's some funeral expense but for the individual, there's no further loss.
However, there is the loss of future income, IF the individual had not died.
So in the case of death, the insurance is to help the living family cover funeral expenses and to help out with living expenses as though as the person had not passed away.
Basically, the family lost a money making asset.
There's further complication when the case is TPD. Cos there will be living expenses for the disabled person. So the family might lose the income of the individual AND incur more expense cos the person now needs extra care to live the rest of his/her life.
In this case, the idea of insurance seems simple.
Similarly, critical illness (CI) insurance also provides the same kind of protection.
If someone gets a CI, they may not be able to work and thus, the insurance pays out a lump sum to help the person with living expenses for a period of time. Essentially, protecting against loss of income.
CI is different from hospitalization and surgery (H&S) insurance, this is even more simple. A person gets admitted to the hospital, they can claim the insurance. I'll not talk about deductibles/co-payments. So in this case, the insurance is to protect against the cost of treatment.
These 3 are the most basic type of insurance which I feel most people would require.
But does everyone need insurance?
Take for example, life insurance, it is meant to protect against loss of income.
But what if the individual is a housewife?
There is no income lost. Does the housewife require insurance as well?
There's a few ways to look at this.
If the wife passes away without kids, then the husband would not have any additional expenses besides the funeral expenses. Is insurance required?
But if the wife is TPD, then how? The husband might need to hire someone to take care of her? This would serve a good case to buy insurance.
Then what if they have kids? If the housewife passes away, then the husband may need to hire someone to take care of them? So another reason to buy insurance.
How about a very rich person who has retired?
It's easy to decide for a rich person who has not retired, cos since he/she is still working, there will be loss of income if the person dies. So even though he is rich, insurance is "theoretically" still needed, cos the purpose of insurance is to compensate the person or family to the extent as though the incident did not happen. So getting insurance for a working rich person serves to protect the future income. It's up to the family to decide whether they really need it or not, since they are already very rich.
But for a retired rich person? Does he need insurance?
He's no longer protecting income. He isn't working anymore.
Once again the concern comes about during TPD or CI. Cos the surviving family may need to hire someone to take care of him. Yes, he may have the money to hire that person already if the family is very rich. But remember, insurance is to compensate the person/family as though as the incident did not happen. So theoretically, they shouldn't need to be spending "their own money" to hire a helper to take care of the TPD rich person.
In this case, the insurance purchased may not need to be for millions. Cos the protection isn't for income. The protection is for the expense of hiring someone to help take care of the individual for the rest of his life.
The point about this post is ... do you know what you are protecting? Cos most people don't know and don't think about it. Usually, people just go along with the "story" painted by the financial adviser. These "stories" help in their sales and they use it well.
But in truth, insurance is an expense to compensate the policy holder for an incident as though the incident did not happen.
Insurance is not there for people to hope to make money out of it. And there is such thing as over-insured. Basically buying insurance for no real purpose.
Insurance isn't like buying chicken on discount. If you buy 1 chicken it's $5, but buy 2 and get it for $7.50 for both. Cos in the case for chicken, you can eat them both.
For term insurance, if you buy $1 million coverage at $100 per month, and you are offered $2 million coverage for $150 per month. It may not be necessary to upgrade the insurance to buy the $2 million coverage. Cos it just isn't needed, (for some people). You aren't hoping to claim the insurance and likely you won't want to enjoy getting that $2 million anyway. It's not necessarily a good deal just cos it's cheaper to buy in "bulk".
I'm not saying it's not a good idea. Rather, it is for the individual to think whether they need $1 million or $2 million worth of coverage. If they need $1 million then buy the $1 million, if need $2 million then by all means buy it. But the "good deal" concept is not the same as buying chicken.
Of course there is also intangible compensation... the loss of a family member is so painful such that the compensation needs to be a lot. This is why there is no limit to life insurance. Cos who can determine how much an individual's life is worth? By right, in general insurance of cars and property, this isn't looked at. But cos we are all humans and have feelings, this cannot be quantified so... if people/families need financial compensation for the loss of a loved one, then I suppose insurance is a way to achieve this.
It's like loss of a loved one (-100 points of happiness) but gain $5 million insurance payout (+1000 points of happiness).
If that's the case then if we look at the same concept of "as though the incident did not happen", then the person should only insure $500,000... Cos only need to compensate (+100 points of happiness).
Unless we multiply by the total number of family members involved. Then maybe 5 family members felt sad, so total loss of happiness in the whole family would be (-500 happiness points). Then to adjust the sum insured accordingly.
Ok enough jokes.
This post is pretty much about do you know what you are protecting?
What incident are you concerned about? And what insurance is required to make it as though "that incident did not happen".
Cos more often than not, most people just buy a bit of this a bit of that, and whatever the financial adviser recommends without really thinking about the scenarios in detail.
Personally, I think insurance is really just a compensation. It's not always more is better. And it's not about protecting against every possible scenario. It's about finding the key risks which you are not personally willing to absorb and getting adequate compensation IF that incident occurs.
Adequate compensation, this means fair compensation in relation to that incident. We aren't supposed to be trying to make money FROM that incident.
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