Should I Buy Insurance?

By Geoff Schaefer

Geoff is a Wealth Advisor with Intergy Private Wealth. He writes for The Steadfast Fiduciary to help people live with an abundant heart, open mind, and boundless generosity.

June 1, 2023

There are many types of insurance.  Insurance on your life, your income, for your health, car, phone, pet, household belongings, and the list goes on and on.

Constant marketing and insistent salespeople make navigating this fairly tough. The real answer is each of these coverages depend on your own financial situation and desired future state. Insurance is simply the transferring of a risk from you onto to a large group or organization.  Rather than saving to replace your home if it were to burn down, you pay a very small amount of its value every year in order for the insurance company to step in and pay if your home was destroyed in a fire.

There are two factors that play into this: 1) what is the value of the potential loss and 2) how likely is this to happen?

Insurance should be looked for if the value of the potential loss is very high AND if the catastrophic event has a small chance of actually happening. Another way to say this, if you cannot afford to write a check for it tomorrow, then find a way to insure it.

Here are a couple examples:

  1. A primary breadwinner earns $200k and has 20 years left of income prior to retirement. They are married, have three children, and their home is mortgaged.  They should absolutely obtain life insurance!  For a low cost, they can insure the 20 years of income as the probability of them dying is low and the financial implications if it were to happen is catastrophic.
  2. You buy a new cell phone worth $1,000. The plan costs $10/m and it has a deductible of $150.  Over two years you will pay $390 for the possibility of a new phone if your current one is damaged beyond repair.  You have an emergency fund of $30k.  The need for this insurance is fairly low, as the cost is relatively high to the value of the phone and you have the cash ready and able to replace the phone if it breaks.
  3. When it comes to long term disability, needs can vary greatly!  A worker in their late 50s with enough assets in their 401k to sustain their lifestyle in retirement probably does not need a lot of insurance coverage.  For a worker in their late 30s with decades of earning potential, a family to support and assets still left to accumulate, a robust long term disability policy is absolutely necessary.

Insurance is a very important part of any financial plan, but over too much insurance can lead to so much protection of the possibility of something bad happening that you can find yourself unable to take advantage of the good that is currently happening all around you and the opportunities that exists today. Like most areas of financial planning, insurance is relative rather than absolute.  The inly absolute is that insurance planning cannot be ignored.

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