How Much Insurance To Buy; From An Insurance Expert’s Perspective

The short answer: as little as possible

But don’t stop there. The short answer is really; as little as possible while still providing the right protection and priceless peace of mind. Let’s do a quick recap of what an insurance company is in its most basic sense; customers (insureds) pay money (premium) to insurance companies. The insurance company then keeps a portion of the money they receive to pay for expenses such as employees, commissions to agents, advertising, rent/real estate, taxes, shareholder dividends, toilet paper, etc… The remainder of the premiums received are paid back to insureds through claims.

It is estimated that on average about 25 cents of every dollar paid to an insurance company goes to expenses, leaving the remaining 75 cents of every dollar paid back to their insureds. Note that this can vary greatly by insurance company and type of insurance, but this provides an example showing how in its simplest form, it is not ideal to pay someone a dollar and on average receive 75 cents back in return.

This blog post is not going to be about insurance companies being evil and how we should all boycott buying insurance, BUT I do hope to help you re-think your relationship with insurance. After a decade of working in the insurance industry, I am as big of a believer in the need and value of having the right insurance as ever. Insurance plays an important role in overall financial wellness and peace of mind.

Insurance alongside saving, investing and planning; is a crucial pillar to everyone’s financial strategy. There are certain things in life that are real risks that you need to consider and plan for; insurance is the answer to many of these risks. I hate to say it, but the chances of something bad happening over the course of your lifetime are high and it is important to plan accordingly. Self-insuring is the concept of being able to independently cover these risks through your own means vs. lining the pockets of an insurance company.

General rule of thumb: Self insure for the bad things in life you can cover, buy insurance for the risks you can’t.

Extended warranties (aka insurance)

Yes, extended warranties are insurance. As a fellow insurance sales person, out of both respect and entertainment purposes, I always hear someone out regarding their pitch on why I should buy an extended warranty. I have heard some good pitches and sales techniques too. There is a place I buy tires from and you can tell their associates must receive some type of commission or bonus based on how many extended warranties they sell. The guy that helped me setup my order this time was smooth and even automatically opted me into the warranty program and explained the coverage that what was “included” with my order as I was signing the paperwork; it almost even worked on me before I realized what was happening. When I questioned why there was a charge for an extra $60 per tire, he explained that it was for the extended warranty he just explained.

I told him I was not interested and BOOM all of a sudden it was now half the cost at $30 per tire. I have had this exact same scenario happen at car dealerships where the cost of the extended warranty gets cut in half after the first “no” too. My hope is that after reading this post, most of you will decide that you don’t need most or any extended warranties, but PLEASE by all means DO NOT be the sucker that pays double what others are paying!! Also, don’t be pressured or scared into purchasing warranties. Use logic, not emotion.

Back to the tires, I politely declined the extended warranty (insurance). The $800 set of tires I was purchasing was something I could self-insure against if needed regardless of whether the cost of $30 or $60 per tire for the extended warranty. Yes, I did think to myself about how convenient it would be to just show up and get a flat tire replaced without having to pay anything out of pocket, but chances are that won’t be an issue and if it did, I would be better off paying for it out of pocket instead of purchasing the insurance.

Tip: Use logic, not emotion when it comes to purchasing insurance.

Insurance is NEVER a “good deal” financially speaking, in my opinion. No matter how they spin it, an insurance company or extended warranty is not going to pay out more in claims than money that it earns in premium in aggregate; if they did this they would quickly go out of business!

Every time you are presented with a decision of whether to purchase insurance, ask yourself “what is the worst case scenario that would happen if I did not purchase this insurance and could I afford it without it being catastrophic or having a significant impact to my financial situation?” You very well may need the insurance, you may not; be intentional about your decision. For example, if my house burnt down, it would be catastrophic for my financial situation; if I break my cell phone, it would suck, but I can afford the $800 to buy a new one.

I was reminded by wife that I recently broke my own rule about insurance. My daughter’s school was offering a $20 protection plan on the school issued iPads. For $20 over the course of the school year, we would be off the hook for any damage and be able to get a free replacement. I don’t care if this was a rip-off or not, for $20 it was well worth the convenience and peace of mind to not have to worry about. Plus, I’ve witnessed first hand how clumsy 5 year olds are; no brainer. You may decide to knowingly purchase additional insurance or an extended warranty out of convenience or peace of mind, but it is important to do it knowingly and understand the true cost.

We will cover a variety of different insurances and situations in this blog. Types of insurance that we purchase include homeowners insurance, auto insurance, disability insurance, life insurance, dental insurance, health insurance and liability insurance.

Call me a nerd, but I think the concept of insurance is pretty fascinating! The fact that humans have worked together to help coordinate and leverage each other’s risk in order to protect against individual financial catastrophe is impressive!

Being able to confidently decide which types of insurance you should purchase and how much starts with accurately managing your personal finances and understanding your risk tolerance.