24 September 2013 0 Comments

When Do You Need Insurance?

time for a check upWhen do you need insurance?  To many, that depends on what type of insurance we’re talking about.  You need car insurance when you register your car because the state most likely requires proof of insurance.  You need insurance on your home when you apply for a mortgage loan.  But no one requires that you have life insurance and—until now—no one insisted that you have health insurance.  But, now that “Obamacare” is coming to fruition we are hearing all sorts of complaints, mostly from young people, about being required to carry health insurance, or pay a fine.  The rationale?  I’m never sick; I don’t need health insurance.

Sure, that’s a great plan.  Wait until you’re sick—maybe even diagnosed with cancer—and then buy a health insurance policy.  And as for life insurance, wait until right before you are about to die to purchase your policy.  Why pay premiums before they’re needed?  You think???

With so many people coming up with this rationale prompted by the requirements of “Obamacare”, we probably need a fundamental course on just what insurance is.  In a nutshell, insurance is an organized process whereby people pay a premium into a common fund in order to pool the risk of a loss that would be too severe for any individual to bear on their own.  There must be some equity in the pooling arrangement so that individuals can’t select against the pool by waiting until right before they are most likely to experience a loss.  Insurance provides protection for unforeseen loss that we could not afford to pay for on our own.

The key word here is unforeseen.  With life insurance, that is why insurance is less costly for those who are younger and whose health and family history is unblemished.  In order to maintain fairness for the entire pool, life insurance premiums increase with age and for those with less than pristine health.  This reduces the possibility of selecting against the pool.  And that’s why some people can’t buy life insurance at any premium.

So, the answer to the question of “when do you need life insurance” is when you are young enough and healthy enough to get it at the best possible premium—unless you are not likely to ever have people you care for who would suffer a financial loss at your death.  For those it may never be needed.

Coming up…the answers to more questions I’ve been asked.

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