To insure or not to insure?
That is the question most everyone is asked when they buy a new phone, computer or any electronic gadget these days. Usually, it is at the checkout counter with little time to ponder the pros and cons. There are five people in line behind you, or you have a 7-year old with you. It doesn’t sound expensive, and you would hate to have this new coveted gadget broken by said 7-year-old. So, you sign on the dotted line.
Insurance is a financial tool that we use to protect ourselves against risk of loss or harm. When deciding whether to purchase any type of insurance, you have five choices:
Do nothing and cross your fingers.
Avoid loss by avoiding risky behaviors or dangerous locations. Examples would be not taking your electronics to the swimming pool, not smoking or giving up skydiving.
Reduce your chance of loss by taking certain actions like wearing safety gear, keeping your computer in a protective case or using a smoke detector at home.
Accept risk knowing that you can afford to pay for a certain amount of loss. Common examples are copayments and deductibles. You agree to pay the set amount of a copayment or deductible, which is less than the total cost of the loss because you can afford that amount.
Transfer the risk by purchasing insurance.
The key concept is deciding how big of a loss you can accept. Keep in mind the large-loss principle when choosing what to insure. Purchase insurance with the size and impact of the loss in mind and not the likelihood of loss. For example, you have lost or damaged several cell phones in the past; it is likely that you will lose or damage this one. The cost to replace a phone is $200. This is not a large loss; therefore, do not purchase insurance but reduce your risk or accept the risk. Take the $8 monthly insurance fee and put that into an emergency fund to help pay for the phone if it is lost or damaged. Over one year, you will have $96 saved for replacing the phone or for other uses.
While many people purchase cell phone insurance, Americans are underinsured when it comes to disability insurance. Apply the large loss principle to your ability to work and make money. It may be unlikely that you become unable to work due to illness or injury. However, if individuals depend on you for income or for caregiving, what would happen to them if you were no longer able to function in that capacity? How much income would they need to replace your lost wages? How much would your family need to pay someone to complete the tasks you do to manage your household? The impact of this loss is high: replacing just $1,200 a month for 18 years would amount to $259,200 in lost income. This is a substantial amount and justifies insurance based on the large-loss principle.
Based on the concepts of large-loss most people need health/medical, disability, life, property and auto insurance. These types of policies cover the largest losses, which would impact an individual or family. The other potential losses can often be managed by developing an emergency savings account.
Insurance decision-making is just one of the topics that will be covered in the Money Talk for Women classes starting on Tuesdays in April. There are morning and evening classes available. Contact Leigh Guth (704-736-8462704-736-8462) or email@example.com at the Cooperative Extension office in Lincoln County to find out about upcoming classes. Or check these websites for more researched information from Cooperative Extension nationwide: http://www.extension.org/personal_finance.
Leigh Allen Guth is Family and Consumer Science Extension Agent with the NC Cooperative Extension Service.