I worked for 5 years in the insurance industry and one of the important points in the theory of insurance is that you should not insure anything if you can afford to withstand a total loss.
Disclaimer: I am not a lawyer or a financial professional. If you take any of my advice just assume that you’ll be sued, you’ll lose all your money, end up in prison, your house will burn down and you’ll probably get a really mean case of athlete’s foot.
Now that we’ve weeded out all but the fearless, and those not afraid of itchy feet, read on…
A common insurance mistake illustrates the principle – many people have comprehensive and/or collision coverage on their cars. This is a good idea for the first five years you own the car, and if you have a car loan it’s required. The mistake many people make is not reviewing this coverage when the value of the car falls below $5,000. If you look up the blue book value of your car and it’s worth $2,100 because it’s 8 years old and has almost 200k miles on it maybe you shouldn’t be paying $200 a year to protect that $2,100. Now yes, it is possible that a tree will crush your car and your insurance company will give you the $2,100, but the odds are you’re going to do that for 3 years, and pay over $500 for peace of mind that your car was protected if it had been crushed. At this point, rather than feel content, you should picture yourself content and short $500, while your other self could risk the car and be enjoying a weekend at the beach with cash to spare.
The easy way out of this is Self-Insurance. You, as an individual, can use the same strategy used by many large corporations to avoid paying insurance premiums. Every time you get offered insurance coverage at check out (say from that store with the gadgets and the guys in the blue shirts), if you actually consider it, refuse it and put that money aside in a savings account. You can do it on a whiteboard if you want to see it in action, but it’s more fun to actually have the cash sitting in an account. What you’ll find is that just like a casino, over time you will win big. A co-worker of mine has been keeping track and by the time he got to his second big screen TV he had a pool of a couple thousand dollars ready for repairs.
You’ll get to a point where you have more in the fund than most stuff costs, with the exception of your car and house – the things you do need to insure. Everything else is giving it up to the casino.