Why People Have Insurance

For me, the future, even the near future, is unknowable.

I have been testing my ability to predict the price of gold on a daily basis.  I look at the KITCO quote in the morning, but before I do I decide if it will be up, down or about the same from the last close.  50% right will be a meaningful improvement.  I think I will be bad at market timing.  Reading all the learned commentary on the direction of gold prices adds little to my accuracy.

To be objective, whether I can guess the price of gold day to day or not is of little consequence, but I must notice that there are other financial things that matter to me and I expect I am no better at guessing those. How to proceed?

I am not alone.  Wayde Goodall has an interesting thought on this.

“The enemy doesn’t warn its target. Emergencies do not make appointments, and the greatest battles of life are often surprises.”

To defend ourselves, we check out tactics and establish context.  The theoretical background to the game is based on four parameters:

  1. What lets me win?
  2. What makes me lose?
  3. What need I do to break-even?
  4. Must I play?

Number 4) is the easiest to manage.

If there are unavoidable events that may be adverse in my future, I have difficult options to determine how not to lose my money.  Risk reduction is a common one, diversified investments for example, but zero risk is impossible.  It is not so  hard if I can refuse to participate in the potential catastrophe by creating a good parallel event that offsets the adverse one.

Insurance offers you that option.  Not because it prevents the event from occurring, but because it prevents the consequences of the event from occurring.  Fire insurance won’t prevent the fire, but it will build you a new house.  Life insurance won’t keep you alive, but it will replace your lost income and complete the financial plan for the ones you leave behind.

You make a mistake when you buy insurance for what it is.  If you buy it for what it does, decisions around kind, quantity, price, guarantees, deductibles, and convertibility become relatively easier.  Understand what it means and you can better see how to arrange it.

A well designed plan of insurance makes future decisions easier and it will make the present better, too.   A well designed plan lets you do things now that you could not rationally do without it.

Talk to a professional so you acquire what it does, specifically for you, instead of ending up with just a policy.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com 

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