Everything Is Insurance

If you have questions about this article,?I would be happy to help.

There are many types of insurance. We have life insurance, car insurance, liability insurance, critical?illness insurance, disability insurance, and so on. The simplest definition of insurance is that it is a tool to eliminate or mitigate risks and/or to spread risks from individuals to a larger community.

Insurance is a very old concept. Some early forms of insurance were monetary and others non-monetary. They might have been to protect against famine or loss of goods. There are examples that go as far back as ancient Mesopotamia. Later on in Europe, monetary insurance was used by ship owners to protect against vessels being lost at sea (for the ship and the goods inside). Modern day insurance is commonplace.

Almost all forms of insurance have a cost and a benefit. The benefit is the security in case of the negative event that was a concern. The cost is the requirement that was needed to hold the insurance. The simplest example is the money we pay to put in place a car insurance policy that will protect the owner/driver financially in the event of a car accident.

Sometimes, there are things in life that we all do that are, in fact, insurance. We don’t think of them as insurance – there’s no money exchanged, no contracts – but they are nonetheless a means of mitigating risk while at the same time giving something up in return:

• Mountain climbers use ropes. The ropes are annoying and slow the climber but will protect them if they lose their grip. COST - slower ascent. BENEFIT - lower risk of death.
• Car passengers wear seat belts. They are annoying, easy to forget, sometimes uncomfortable, but will protect the passengers from being thrown into the windshield. COST - discomfort. BENEFIT - lower risk of death.
• Motorcycle riders wear helmets. Helmets are annoying, hot, and they mess up our hair but they protect against head injuries. COST - messy hair. BENEFIT - lower risk of death.
• Stair banisters, speed limits, reflective clothing, winter tires, sunglasses, winter clothing, sunblock, life jackets, knee pads, dental floss, good diet….

The list is endless. This is why this article’s title suggests that everything is insurance.

All of these examples have a benefit (i.e. lower probability of drowning when out in a boat) at a cost (i.e. looking silly in a puffy vest). Their use doesn’t eliminate the risk, but they lower the probability or reduce the severity of the event of concern.

The theme of all insurance is that it provides protection against a very serious event, but where the cost of the protection is much less than the potentially serious event.

This brings us back to today’s realities of insurance. The most commonly discussed type of insurance used in financial planning is life insurance. Life insurance is used for many reasons, the most common being:

• Protecting one’s family against the financial catastrophe if a breadwinner dies prematurely
• Enhancing a family estate
• Reducing tax losses at death
• Protecting against the loss of a pension plan
• Charitable donations at death

In these examples, the dollar cost of the insurance is far lower than the financial problem that might occur if the insurance policy were not in place. For example, where one’s family’s financial wellbeing hinges on the breadwinner being able to keep working until age 65, a term life insurance policy can replace the lost income between today and then. The same logic applies to disability insurance and critical illness insurance.

You don't have to like insurance. I don't like colonoscopies, but I get them anyway. Insurance isn’t perfect. “Perfect” isn’t on the menu.

Financial planning is a lot like mountain or rock climbing. The climb itself is like your retirement investments. It takes perseverance and energy to climb, as it does to continuously contribute to a retirement plan for 30+ years. The ropes are the insurance in your financial plan. No rock climber would ever dream of climbing without safety ropes. Virtually all financial plans need some type(s) of insurance. If one has people who are financially dependent, then life and disability insurance are essential. If one is single, critical illness and disability insurance will help to remain independent without needing help from friends, family, or GoFundMe.

I’ve heard people suggest that if they have some type of insurance (e.g. critical illness insurance) and they end up never suffering an event, the insurance was a “waste of money”. Hokum. No rock climber would ever say at the end of a successful climb “in retrospect, I shouldn’t have bought ropes”.

Some people say they don’t believe in insurance, such as life insurance. I ask them “what part of life insurance don't you believe in?” It is not a religion. Whether you believe in it or not, it is a financial tool used to flatten risks that investments alone can’t. I’ve never heard of anyone declining a life insurance benefit cheque when their loved one died and named them as beneficiary. If you have insurance when you die, your family will consider you a hero or a genius (or both!) for having put it in place. The question is - can you obtain any?

Let’s talk, and I’ll listen.