Why do you need insurance?
Some people, particularly young people, think they’re invincible. Well, sorry to break it to you, but you’re not. Everybody faces unpredictable events that cause everything from minor setbacks to years of irreparable damage. Insurance is there to provide a lifeline in case the worst comes to pass. It’s all about managing risk.
What are the risks?
A risk is a situation involving exposure to danger, harm or loss. People face many risks in their everyday life, both physically and financially. There are countless examples of risks people face, medical emergencies, losing money on a bad investment, getting into a car accident, and flooding just to name a few. The fallout from one of these could be having to pay for repairs and even hospital bills. On top of those bills, you might also have to miss work and risk losing out on a paycheck or two. What do you do in these cases? If you don’t have insurance or a safety net, it may already be too late.
How to manage risk
A contingency is a negative event that may take place in the future. It can be anything from losing your phone to a house fire. These events and their costs are unpredictable. To lessen the negative effects, you might put together a contingency plan, which involves setting aside some money to deal with these events if they happen. Contingency plans usually include insurance policies. Insurance is something people buy to protect themselves from losing money. You might pay an insurance company some money every month and, in return, if something bad happens to you or whatever you are protecting, the insurance company will pay for some or all of the damages.
Developing a contingency plan usually involves creating a fund to set aside some money for emergencies and purchasing insurance policies (paying an insurance company for protection against losses). For example, you might buy auto insurance so that the insurance company will pay for the loss if your car breaks down.
Specifically, risk management is how people control the risks of financial losses through the following techniques: avoidance, acceptance, control and reduction, and transfer through insurance.
- The easiest way to manage an identified risk is to avoid it altogether. For example, if you know an investment is risky, you might choose not to invest in it at all.
- Acceptance is another form of risk management. It might be in a person’s best interest to take on some risk if the expected profit is much greater than the anticipated risk.
- Risk control involves identifying risks and then taking steps to reduce or eliminate these risks. If there is a risk that can’t be fully eliminated, a plan must be created to reduce the potential impact of the risk. For example, a building holding flammable chemicals may buy more fire extinguishers to mitigate damage risks from fire.
- It is also possible to transfer risk away from yourself by paying an insurance company in exchange for protection against financial loss.
Essentially, if you have insufficient insurance, or no insurance at all, you are assuming a lot of unnecessary risk that could have serious financial consequences. If something were to happen, you would have to pay for everything yourself out-of-pocket. So buy some insurance! Your future self and bank account will thank you.