Many people are unsure when they should investigate buying insurance. While it is best to discuss all your insurance needs with an individual insurance professional, there is one rule of thumb I advise my clients to keep in mind. Buy insurance for catastrophic, common risks to your financial interests.
1) Insurance is meant for catastrophic losses. If you can easily pay for the cost out of pocket, the transaction cost usually makes buying insurance a waste of time. This often applies to buying various forms of insurance on small consumer products. Will you keep track of the policies you bought? Will you bother to file a claim and make sure you get paid? If the answer is no, then don't buy it! There is no point in buying something you will never use.
2) Insurance is meant to diffuse risk among a large number of insured interests. If you are the only person with that particular risk, you are unlikely to find an insurance market for what you need. An example would be something like having an intense allergy to a rare form of mold. You are not likely to find an insurance market to insure your home against an infestation of that particular type of mold. A more generalized risk of uninhabitability is more common and more likely to have an insurance market.
3) Insurance is meant for risks, not certainties. Often, people think that they should buy insurance to pay for an inevitable occurrence. For example, some people will shop for life insurance policies because they want to cover their funeral costs. It is usually far preferable to simply make funeral arrangements for yourself and pay for them. This is a very complex issue regarding insurance and hard to adequately summarize. Before you buy insurance, however, you should ask yourself how much it would cost to just pay for whatever the insurance would cover.
4) Insurance can only get you money. While there are repair and replace provisions in some policies, insurance companies deal with cash. Think of a family heirloom with little value in terms of money and lots of value in terms of sentiment. While it would be nice to be able to protect it in some way, insurance simply cannot give you protection. Buying a safe may be a much better idea.
5) It is sometimes a paradox that some things we think are very important are not really part of what counts as being "your interest." One of the most commonly bought and least needed insurance products is life insurance for children. Parents instinctively want to buy every sort of protection possible for their babies. While the loss of a son or daughter is a horrible experience, money does nothing to help that pain. Life insurance should only be bought for the financial benefit of dependents, not to insure their lives.
For more specific information about your individual needs, please contact me directly.
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