> "never insure that which you would be able to pay out yourself".
This is silly as a rule, IMHO. I could pay out for all new stuff if there was a fire, but it's a damn site cheaper to pay a few hundred a year for insurance.
The point of insurance isn't that they pay out an individual less than they take in, but the group in aggregate.
Unless you know something the insurance seller does not that makes you more likely to be paid out than others, then it is a waste of money to buy insurance for a loss that you can afford.
Assuming you have no extra information that gives you an edge over the insurance company, insurance is only beneficial for a loss which you cannot afford. Otherwise you’re basically paying someone else to invest your money when you can do it for 3 basis points at Vanguard/Fidelity/Schwab.
This is also why whole life insurance is a waste of money, ignoring any tax advantages which don’t apply to most people.
Edit: This is also why states allow people with sufficient funds to self insure their vehicle. If you have a couple million liquid assets, you don’t need to pay someone else to pay for your lawyers and and healthcare costs, you can just do it yourself.
Surprised (or perhaps not) to learn that cars can be self-insured in the USA.
Where I’m from, the main objective of mandatory car insurance is to pay for the life of the people you might kill or seruously injure. Thst can be a considerable amount that I’m not sure anyone would be eager to pay out themselves, even if they’ve got the funds.
The compulsory insurance limits in most states are laughably/ludicrously low. In MA, I have to carry $40K bodily injury liability, and $5K property liability.
Literally, I could be responsible for an accident that totals a 15 year old car and gives the driver an ambulance ride and a couple day hospital stay and have my compulsory insurance not be enough to cover the entire liability.
Of course, nearly everyone carries a substantial (10-50x) multiple of the compulsory minimums in auto-specific liability policies, and if you have any amount of wealth accumulated, it's common to have an additional umbrella policy.
Like, it doesn't make sense. My insurance policy is about $600/year and covers up to 25 million(!!!) euro in 3rd party damages. Like, I'd need to crash into several Bugatti Chirons or a plane to actually exhaust my policy.
I guess the reason why US allows it is because the society is so litigious - if you have that amount of money to self insure you also have enough money to fight pretty much any claim against you.
> My insurance policy is about $600/year and covers up to 25 million(!!!) euro in 3rd party damages. Like, I'd need to crash into several Bugatti Chirons or a plane to actually exhaust my policy.
Or one crash where you injure someone so bad that they cannot work anymore for the rest of their life, maybe need specialized support and so on. The damages in property are usually the least important part of a car crash.
You can’t typically self-insure the liability portion, because you are playing with other people’s money. You can choose not to buy collision insurance, which would cover damage to your own vehicle. Even then, you can only do that if you own the vehicle free and clear.
>>Unless you know something the insurance seller does not that makes you more likely to be paid out than others, then it is a waste of money to buy insurance for a loss that you can afford.
That's....insane. Fires happen. Theft happens. Thunderstorms happen. Kids breaking things happen. Yes I can "afford" to replace most things in my house - but why would I risk all of my savings if I can pay ~20 quid a month and not worry about it??
I would change the qualifier to "comfortably afford" , but I do self-insure on most things.
Take an extremely poor insurance bet as an example. The electronics store will offer you an extended warranty plan on your new TV. An LG 55" LED TV (UK6090PUA) is $400 right now at BestBuy. 2 years of "protection plan" on that TV is $50. Do you think that anywhere near 1 in 8 TVs need any kind of service in 2 years, let alone something that would require the replacement of the TV? Sure, there are people who pay $450 for their TV instead of $400 and come out ahead. The vast majority don't and most people can easily shoulder the burden of buying a new TV when their current one breaks. (By the way, that insurance policy allows the insurer, at their sole discretion, to pay you the market value of your TV rather than repair/replace it.)
I self-insure against collision on our cars (meaning I dropped collision coverage). Collision insurance (covering repairing/replacing of our cars) was running around $1000 per year for 2 drivers and 3 cars. In 20 years, between insurance savings and investing the savings, I've banked about $40K by not carrying collision. Not only could I cover a collision now, I could buy 3 replacement cars outright and have money left over and don't have to deal with any insurance paperwork to do so...
I do carry liability insurance (at high limits) for auto. I have our home insured. I have a high-deductible medical insurance plan. I'm not anti-insurance in general; I am anti-insurance for losses that can be easily weathered.
The TV insurance thing is effectively a scam. Your home insurance likely covers accidental damage, and your consumer rights cover any breakdown in that sort of time (depending on where you live).
I agree it's a scam but even if my HO insurance would coverage accidental damage, I'm not making that claim. I have to pay the first $500 no matter what, then my rates will go up.
Worst case, my insurance company drops me and I have to scramble to find another company since lapses in coverage lead to all sorts of issues.
Still, I'm not buying the store's insurance on a TV. I might buy it on my teenager's phone or laptop depending on price and coverage.
Getting a new TV is the kind of thing most people on HN would barely think twice about. At which point the cost benifit simple. But, move up a few rungs to say a 5,000$ massage chair and you could replace it or do without but most people would feel it. Further, the policy is likely to be closer to 1/20th the price at something like 250$.
It’s still a bad deal, but you can feel better about your overall purchase knowing it will last at least X years.
What a weird question. I sometimes feel like people on this website are super ultra rich. Like $100k+/year salaries rich. I feel like anything up to say $300-400 I can "comfortably" replace - but more than that and it's starting to eat into my savings, which obviously I don't want to do. Like, my $800 TV is not expensive by most peoples standards, yet if I had to replace it it would be two months of my savings. That's not trivial or comfortable in any way. Maybe I wouldn't buy a $5000 massage chair, but I own a ~$2000 solid oak table and chairs specifically because I want it to last few decades, it's a really solid table. But I couldn't "comfortably" afford to replace it. That's what insurance is for.
You also rarely need to replace TVs, massage chairs, and solid oak tables.
The other aspect is the need to replace. You can live without a TV while you build up savings, you can live without a solid oak table, but you can't live without a vehicle to get to work, or a home to live in.
This is context you might find interesting, I make less than 40k a year. This is a choice that I have made, and I understand that it has implications for the lifestyle I can afford.
Mostly I am just using it as an example of a durable good.
Let’s say it’s going to last ~5 years on average then that’s a little under 20$ per week you can set aside for the next one. For something used regularly providing 20$ a week in value is a minimal hurdle, but that does not mean they can drop the full cost on a whim. Making the extended warranty a more understandable choice.
I've seen worse insurance bets than that: mobile phone companies offering insurance at fees and excess levels where you'd have to lose or break two phones a year for the insurance company to return more in claims than you pay in premiums!
It must not happen that often, otherwise insurances would not make much money.
Those events likelyhood, the cost of them, and what the insurance will actually pay you back are probably way off what you think it is in your mind.
Now I do think insurance is important for catastrophic events: low likelyhood, but incredible cost, because you can't take this chance at the scale of an entire society.
But for theft or kids breaking things, I'm not so sure.
The insurance company is taking your money, and investing in an index fund, and returning it to you minus their payroll and profit margin.
You can take the same money, and invest it in the index fund, and if and when you need it, sell your assets to pay for the loss. But you get to avoid paying the insurance company's employees.
You wouldn't buy insurance for the bag of rice you buy at a grocery store in case you drop it outdoors, the bag splits open and the rice is ruined. Why? Because you can easily afford buying another bag of rice.
The same reasoning applies to a car. If you have sufficient savings, you can buy yourself a new car if and when you need to. Until then, just invest the savings and reap the investment rewards, exactly like the insurance company will be doing.
But suppose you can afford to buy a new car (like many higher income professionals in the US), but you can't afford to pay for someone else's $500k to $1M medical bills (like almost everyone). Then you would forego the collision insurance for the vehicle, but still purchase the bodily injury liability and personal injury protection insurance.
> You wouldn't buy insurance for the bag of rice you buy at a grocery store in case you drop it outdoors, the bag splits open and the rice is ruined. Why? Because you can easily afford buying another bag of rice.
> The same reasoning applies to a car. If you have sufficient savings, you can buy yourself a new car if and when you need to. Until then, just invest the savings and reap the investment rewards, exactly like the insurance company will be doing.
But it's not the same reasoning. I can afford to buy hundreds of bags of rice every month if I need to, without stretching my budget significantly. Rice for me is pocket change, so yes insurance would make no sense.
For the vast majority of people, a car is not pocket change. Sure high income people might be able to buy another and not go bankrupt, but there's a big difference between being able to afford something, and considering the expense pocket change.
If you can't afford to replace it, then you purchase insurance for it.
Replace "it" with whatever you want. Just because a car is not pocket change, doesn't mean you can't afford to easily replace it. And maybe if you feel that it will cause you stress or stretch you thin, then it doesn't fit the definition of "afford to replace it". Auto insurance company has way more data than you do on how likely it is that they will need to replace your car, so they will charge you appropriately, plus their salaries. So if you have a sufficient emergency fund, then you don't need the insurance, just like you don't need it for the bag of rice.
If it happens once on a lifetime and you can afford it: You just calculate how much it'll cost in insurance policy vs invested in government bonds.
The other point: I think most people here are concerned with the insurance paying up once the real deal happen. Most of the time the insurance will: 1. take a lengthy legal path to exhaust you 2. pull some article that you didn't notice from the contract to get away with it.
So you are screwed twice. ouch.
I'm not claiming insurances are a scam and you should avoid them. I'm using them. But I can understand why some people are frustrated.
You seriously underestimate the cost of a significant wreck in the US. The medical bills alone could reach into the hundreds of thousands. The pain of paying $100/mo for insurance vs having to come up with $250,000 all at once makes insurance a no-brainer.
My state used to allow drivers to self-insure (I think they removed the option for individuals recently). I was a really bad deal though, since you had to give the state a minimum $50,000 deposit interest free. It's cheaper to just pay for insurance and earn the returns on your cash.
Not many people can afford the loss caused by a catastrophic fire, in which case it does make sense to purchase insurance. But if you are a millionaire and have a $200k house, then you don't really need to buy insurance for the house since you have ample funds to purchase or build a new one if the need arises.
Insurance is putting the risk of a loss onto someone else. Millionaires absolutely buy insurance because it is often the smart thing to do. It is no different than buying/selling options to hedge your stocks during a down turn.
> if you are a millionaire and have a $200k house, then you don't really need to buy insurance for the house since you have ample funds to purchase or build a new one if the need arises.
Unless that fire spreads to someone else's property or kills/seriously injures someone, in which case you'll wish you had insurance.
That still makes no sense at all. If you are millionaire with ample funds, you'd still be down massively compared to if you took out the insurance.
Example - The average UK home contains £35K of stuff. The average annual contents insurance premium is £139. You've been paying for ten years and "Oh no! A fire destroyed all my stuff". You're better off by £33600. In aggregate the insurer makes money, but they don't necessarily make money from every individual. This is where the model makes sense for the buyer and the seller.
Your assumptions are massively overestimating the probability of loss. If insurance premium is only $139, then the probability of loss must be correspondingly low such that the insurance company can make a profit (on aggregate) before having to pay out $35k.
Ok. If you are a millionaire who really would think nothing of shelling out $35,000 tomorrow, what's the best case scenario of going without insurance? 30 years saving $139 a year means you've saved $4200 by going uninsured.
$4200 is noise to someone like this. Meanwhile, if you do suffer a loss, you will be down far more.
This is silly as a rule, IMHO. I could pay out for all new stuff if there was a fire, but it's a damn site cheaper to pay a few hundred a year for insurance.
The point of insurance isn't that they pay out an individual less than they take in, but the group in aggregate.