Just think this one through with me. Insurance companies set their premiums so that on balance (if not on every contract) they’ll make money. At whose expense? Yours of course. Suppose you pay $100 a year over 10 years—that’ll be $1,000 in total. The insurer will have calculated that the odds are they’ll pay out less than $1,000 in total for whatever it is you’re insuring. In which case it would have cost you less to pay the costs of repairs/ replacement/medical care or whatever, than it was to pay your insurance premiums.
It doesn’t matter what you’re insuring, or who with. This is just the way that insurance companies make their money. Plus they have admin costs, overhead, marketing costs, and all the rest to cover, and they’ll have factored those into your premiums, too. In fact, most people don’t get back more than two-thirds of the money they pay in insurance, even long term. So it just doesn’t make financial sense to take out insurance on all your pets, property, washing machines, and so on.
Having said that, there are two instances where you are better off taking out insurance. The first is, of course, where it’s a legal necessity, such as auto insurance. You just have to swallow that one. The other instance is if you don’t have enough in your bank to pay out the lump sum if the worst happens. Say you don’t insure your pet, and then they need an operation costing $1,000—will you be able to find the money all at once? If not, what would you do? Maybe you’ll feel you’d rather pay out more over the years in insurance for the peace of mind it gives you. Then, if Fido gets a fishbone stuck in his throat when you’re having a particularly tight month financially, you can still afford the operation.
There are a few tricky ones, such as health insurance; but where you’re insuring property, pets, or appliances, it’s pretty straightforward. It doesn’t matter what goes wrong with your washing machine, you know the most it can set you back is the cost of a new machine. Could you afford that? If so, you’re wasting your money on insurance.
Have you added up how much you’re spending every month on insurance premiums? Well, why not? Go and do it now. Now think about what you could do with that money if you weren’t paying for all that insurance. If you just put it in a savings account, it would at least earn interest.
And that’s something that the shrewdest wealth-builders do. If they’re worried about losing the cash flow safety-net of insurance, they cancel their contracts and then sock that amount each month in a savings account. If they have a sudden problem with Fido or their washing machine or anything else, the money is there for just such emergencies. Meanwhile it still belongs to them, along with the interest, rather than to the insurance company. And that extra third most of us pay out and never get back—well, that’s still theirs, too, to spend or save as they want.
MOST PEOPLE DON’T GET BACK MORE THAN TWO-THIRDS OF THE MONEY THEY PAY IN INSURANCE, EVEN LONG TERM.
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