Common Cents # 26 Insurance

 

 Insurance

 

Edward Lloyd had a coffeehouse in London. His clientele included a lot of merchants and seaman. In 1686, due to a large number of ships being lost at sea, they began writing the names of vessels at sea along with the names of merchants who had cargo on board on a blackboard. They would put money in a fund that would be used to reimburse some of the losses from ships that were lost, sunk, or looted by pirates. This is generally considered the start of the modern insurance industry, though this idea of pooling funds to cover unexpected losses had been around in some form for a few thousand years.

Today we can buy insurance to cover just about anything from our house and car, to a business, or even our voice if we are an opera singer. The idea is the same, a large number of people pay in money that can be used to reimburse a small number who have a major loss.

It is best to think of insuring things we can’t afford to lose. For example, if our house burns down, we still need a place to live and at the same time that we would still be making payments on the house that burned down. The solution is homeowner’s insurance that would pay for the house and other property in this type of emergency.

There is a wide variety of insurance solutions for about every purpose, but the bottom line should be, is the premium reasonable for the risk of losing the property. Should I pay for earthquake insurance if there has not been an earthquake in my area for a hundred years? How about flood insurance? If earthquakes are rare, the insurance will be cheap, but if we live in a flood zone or along the coast, flood insurance will be very expensive or unavailable.

Real world questions come up about auto insurance. The difference in cost between insuring a $50,000 car and a $500 car may not be that much, but does the old car really need insuring at all, especially if we can afford another car if something happens to this one? Obviously, we would likely want insurance on the expensive car and maybe not on the cheap car.  Insuring the person’s car we ran into in the form of Liability Insurance should not a decision.  We must have that in the event that we are at fault.

Should we buy travel insurance for our vacation? I think the question should always be, what’s the worst that can happen? If the worst thing is the airline cancels the flight and won’t refund our money, or the country we are going to refuses to admit Americans, can I afford to lose the airfare, hotel deposits and the price of the activities to which we had purchased entrance?  If not, then travel insurance that covers the loss would be important.

How about our life? If I should die today or in ten years, would it present a severe financial hardship on my spouse and family, or will they be financially secure without me. The answer to that question tells us if we need life insurance and if so, how much.

The United States is a very litigious society with lawyers advertising on billboards and television, looking for people to sue. Anyone can suddenly find themselves owing thousands of dollars for seemingly insignificant things like somebody tripping on a garden hose. For that reason, everybody needs liability insurance. If we get sued, the insurance company will step in, handle it and pay the claim if it is covered. Without liability insurance in today’s culture, we would be held accountable personally for the outcome of the lawsuit.

Insurance is one of those odd things where the people who need it most can afford it least. Very wealthy people probably don’t really need insurance but probably have plenty. People with resources that are stretched or minimal need good insurance because any loss can be significant.

We need to stay aware of what insurance we really need and what risks we face everyday to protect ourselves and family from financial setbacks. It’s a bit of a tightrope, but worth the effort to evaluate often.