Insurance is the transfer of risk. Nothing more, nothing less.
Insurance has been around for hundreds of years.
It started when merchants wanted to mitigate their risk of moving merchandise over land and especially overseas.
They would pay wealthy businessmen a sum of money, and in return, if the boat with their merchandise sunk, the businessman would pay them for their loss.
Today, insurance has evolved, but you are still paying a company to take a portion of your risk should something tragic happen to you (life insurance), your car (auto insurance), your home (homeowners insurance), your business (commercial insurance), etc.
Today, having adequate insurance is probably more important than it’s ever been before.
Why you ask? Because we live more on credit than we ever have before.
We buy a car that costs half a year’s salary. We buy houses that are worth three to five times our annual salary, and we buy it all on credit.
We start businesses and owe hundreds or thousands of dollars in business loans. That’s everyday living in our present world even if we are living frugally.
I’m not making a comment on whether it’s good or bad, it’s just the way things are done.
Let’s say you owe $30,000 on the car and $300,000 on the house, what if they were destroyed in a fire?
The simple answer for most people today is they can’t afford to replace these items out-of-pocket.
They’d spend a lifetime paying off that debt.
That’s where insurance comes in.
The Right Coverage
If you have the right coverage, you don’t have to pay off those things.
The insurance company does it for you.
Now, it’s important to note that insurance is a risk mitigation strategy, NOT a maintenance policy.
A lot of the modern-day breakdowns in our insurance systems are because we’ve tried to make them into maintenance policies (see current healthcare crisis). Insurance was designed to protect you from catastrophes, and in that form, they work very well as long as the coverage is adequate.
To form an official insurance contact in the state of Texas, you give the insurance company your hard-earned money called a premium and then sign on the dotted line (that’s your part), and they give you the policy with the promise to pay (that’s their part).
Once those two things have been exchanged, you now have a binding legal contact in the state of Texas.
Also something to note in the state of Texas is you pay your insurance premiums UP FRONT, and you slowly use them up over time.
Not all states are this way, but that’s how we do it in Texas.
So if you cancel your insurance before the contract is over, your insurance company will owe you some money back.
If you paid it up front for a whole year, they might owe you a lot. If you pay by the month, they might owe you a little.
You can cancel your contact at any time, you’re never locked in. Sometimes, there are minimum earned premiums (like 25%), but all you have to do is stop paying the premium and the contract cancels.
There are some instances where insurance companies are allowed to drop you, but for the most part if you continue to pay your premiums, they are required to insure you to the full extent of the contact you signed.
In the state of Texas insurance is also a requirement in many instances.
You have to have a minimum amount of insurance to drive; if you have a lien holder on your car, they will require you to carry more.
If you have a mortgage, you’re required to have insurance on your home.
If you have a business, many leases require insurance to lease a property.
To contract with specific companies, they’ll require certain insurance.
Why? Because people are trying to mitigate risk.
Insurance companies even mitigate the risk they carry by reinsuring with other insurance companies they compete against.
I know, it makes the head hurt a little doesn’t it?
The bottom line is insurance is worth every penny you’ll spend on it if the coverage options you choose are adequate.
The right insurance can give you piece of mind and go a long way to protecting your investments.