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The Rational Approach To Buying Insurance - The Money Habit
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Insurance Is A Bet
Generally, insurance is understood as a bet. We pay a premium and are secure about some uncertain future costs which may be substantial for us.
If we check the calculations of our monthly insurance payments, it would seem we are losing money, and this bet is only profitable for the insurance companies.
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The Insurance Calculation
The calculation for insurance runs like this: The company is profitable when the cost of premiums that we pay is greater than the future claim that we may ask for (having a certain probability).
Cost of Premium > (Cost of claim) x (Probability of claim)
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Reasons We Buy Insurance
- We believe that the probability of us experiencing the event that we are insured against is high.
- The claim that we may get in event of something happening is substantial with the cost of premium being on the lower side (basically a bargain).
- To offset substantial costs by paying less. This is when we know it's a bad deal, but the potential risk can be catastrophic and severe, so we are happy to pay more to avoid a probable calamity later.
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SIMILAR ARTICLES & IDEAS:
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Key Ideas
Save On Transport Without a Car
You’ll save far more if you don’t buy a car or sell it if you already own one but can go without it.
If you can use public transportation, you can save quite a bit of money on ...
Save On Transport While Keeping a Car
Carpool to work if you can to significantly reduce wear and tear on your car, save on gas, and take advantage of carpool lanes that might make it easier to get to work.
Check at least once a month to keep the tires on your vehicle properly inflated. Doing so can improve your gas mileage.
Save On Debts
Refinance your home or automobile at a lower rate to save money over the life of the loan and lower your monthly payment.
If your student loans are locked in at a high-interest rate, figure out whether it makes sense to consolidate all or some of them.
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Key Ideas
Single-Cup Brewing
It is more efficient to brew one cup at a time and you can choose from a great variety. However, it can be very costly. The excess packaging also causes environmental problems.
Microwave Popcorn
Popcorn is a great, healthy snack.
Instead of buying popcorn in microwave bags, one can also pop corn at home for much less than the bagged kind.
Bottled Water
Bottled water drinkers give 3 main reasons for their choice:
- Taste: Many claim their tap water tastes bad, but a simple pitcher filter can probably fix it.
- Safety: Bottled water is not necessarily safer than public water sources. A high-end filter can remove impurities from tap water.
- Convenience. A decent filter and a reusable bottle or stainless-steel flask can replace bottled water.
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Key Ideas
Build a team
Growing older without a spouse or adult children means you'll need to build support who can help with your finances, make medical decisions and prevent you from becoming isolated as you grow ol...
Create an income safety net
Many singles don't have a strong enough backup plan to cover the costs of a major illness or other problems.
Ensure you have enough cash on hand to cover emergencies. For singles, the aim is between nine and twelve months of living expenses in a savings account. As you near retirement, consider bulking up to at least two years of living expenses.
Long-term disability policies
Group long-term disability policies offered by employers typically replace up to 60% of your income.
To ensure you have enough coverage, aim to bring your total coverage up to 80% o 90% of your take-home pay, including bonuses and commissions.