Don't buy insurance!

Insurance: the ins and outs of why I believe that it is not always a good thing to purchase insurance. Have a read and let me know what you think in the comments box below.

I realize that the title of this post is fairly controversial. This was partly to draw in the reader and partly because in some circumstances I truly believe it is not wise to purchase insurance (unless of course it is a legal requirement).

Insurance Market Scam

I believe that insurance is bad for your finances. Insurance markets exist to make money. This means that they need to take in more money than they ever pay out. To do this they need to work out on average how much each person will claim, add on a premium, and this is the price that insurance companies charge each person. Due to this (simplified) set up it is clear that on the average, a person will probably pay more into an insurance policy than they ever claim back over their life time. This is why I advocated third party car insurance over fully comprehensive (assuming the car is of a low enough value).

Some people may argue that "it's all well and good talking about the average person, but I am never the average person!". Furthermore they may point out that insurance may be useful if there is suddenly a large amount of damage that they would need to pay for.

However I would rebut this argument. Even if you find yourself needing a large settlement from an insurance company, you will eventually lose out in the long run as you will be charged higher premiums in the future. Over the years the insurance market will get their money back, like it or not!

Scam Solution: Insurance Investigation

So if insurance companies will always make more money off you than you will ever get back then should you ever buy insurance?

For some people who are totally risk averse I would suggest that for peace of mind they should buy insurance. For others who are not in a position such that they have contingency funds and emergency cash stored up then I would also recommend purchasing insurance as you don't want to find yourself in a situation where there needs to be a large payout and the cash isn't available and so you may have to take on debt, which is never good! (click to find out how to reduce your debt).

Build savings as a substitute for insurance

Finally, if you're in a position like me, and you have savings (click to find out how to build your savings) then you may wish to take an alternative route. Obviously in the case of car insurance it is a legal requirement to purchase insurance. Therefore I strongly advocate purchasing car insurance as you can find yourself in all sorts of trouble otherwise. However there are some forms of insurance such as phone insurance where I would suggest to you: don't buy it. Instead save the money that would have been spent on insurance each month. That will eventually be your contingency fund.

Readers, is there something wrong with my logic? Am I foolish for not purchasing insurance?

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Unknown said...
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Steven J Fromm said...

You have a point here. If you can self insure for certain contingencies then there is no need for insurance. For example, long term care is not needed where a large amount of personal wealth exists. Property damage on a very old car is usually not warranted. Life insurance for people with a large net worth may not be warranted if estate taxes are not a consideration.
In some cases as you point out insurance is a must. In the case of a young family where the parent(s) are earning a lot, life insurance is a must to replace income in the event of a premature death.
The point is that each situation needs to be analyzed to determine whether insurance is warranted.

Mr. Moneybanks said...

I think that's an extremely sensible way of looking at it Steven. I realise the title of the article seems extreme but in reality as I hope I made clear in the post, each case is individual. If, like me, you're a person that wants to focus on leading a monetarily efficient life then each individual transaction needs to be carefully considered in the contexts of your needs (and not wants). Appreciate your comment Steven