Saving More vs. Insuring More

A few weeks ago, I asked my readers to weigh in on an important choice facing many families – the choice between putting more aside for savings or expanding and improving insurance protection.

Here is the actual question I posed: “Given the choice, would you contribute more of your financial resources toward more, better or expanded insurance products, or would you stash away the money and “insure yourself?”

The Case Against Insurance (Pro-Savings)

Those who lean on the side against insurance seem to fall into two camps – people who despise insurance companies and people who think they simple don’t need insurance for a variety of reasons.

Ellen, one of the commenters from last week, takes the approach that “you should save the money that you allocate to insurance…there’s no need to get extra [insurance], just save an extra 50 bucks a month and you’ll see how quickly that adds up.” She goes on to question “when has it been ‘healthy’ to live on the what ifs!”

I agree with Ellen in certain respects, because I do know the power of regular savings and how quickly small amounts can add up to a comfortable stash. But I fear that rejecting insurance entirely simply to avoid living on the ‘what-ifs’ toys with the laws of probability. (One of my 6 mistakes to avoid, after all, was expecting a smooth ride through life).

Jason (Automatic Finances) has a similar philosophy. He writes – “I’d rather control my money and manage risk than pay toward something I may never use.” His example, and a valid point for many young and healthy individuals, was “switching to a low premium, high-deductible HSA plan” to save a lot of money each month.

One point that Ellen uncovered was the way that insurance companies treat you after a pay-out event. This is where the horror stories from the anti-insurance camp begin. Stories about not being able to get their company to pay, or stories about how their company dropped them immediately after an event and they were hard-pressed to find insurance elsewhere.

It’s a valid point with no real answer…after all, insurance companies are a business and in trying to protect themselves will anger a lot of people.

Bayah shares Ellen’s sentiment – “It has been instilled in us that insurance translates to assurance that everything is safe. In reality we pay a lot of money monthly to cover things that never occur.”

But she also sees the value in avoiding anecdotal evidence in trying to make a rational decision – “I guess until you have had something happen to you [that] you need to use your insurance for, you don’t see the value in it.” That’s a fantastic point when it comes to insurance – hindsight is always 20/20, but once something happens it’s already too late.

Bayah also points out how many of us feel about insurance salesmen – “I think of people that make really decent incomes selling it. So therefore it seems like a money making scheme that they are being well-compensated for.” Whose interests does an insurance salesman have at heart – yours or his? It’s a fair question without a straightforward answer, just personal faith that you’re not getting cheated by someone you put your trust in.

Thankfully, with the proliferation of the Internet, I dare say that the days of the traveling insurance salesman may be numbered? We have way too much power and information at our fingertips!

The Case for Insurance (Anti-Savings)

Those who fall on the pro-insurance side of things tend to view life through the “What If?” glasses and primarily argue two things – you can’t save enough money to cover yourself, or you have too much money not to insure it.

Peter’s take (Bible Money Matters) is to use a little bit of cost-benefit analysis. He writes – “I think you need to weigh what you’re insuring against, the likelihood that the event will happen, and then decide if you want that type of insurance based on what it costs and how much insurance you’ll receive.”

I really like Peter’s approach – instead of considering emotions and anecdotal evidence, it takes apart hard data and uses logical thinking to arrive at a solution that’s best in your own situation. Emotions and money don’t mix – silly things can happen.

Peter’s wife racked up $250,000 in medical bills last year. Do you think he could have saved that amount in preparation? Could you? Here’s the kicker though – would you want to? Would you want to give up a quarter of a million dollars because you weren’t insured, when the alternative is a reasonable monthly premium for almost unlimited protection? That’s where his cost-benefit analysis is really…well, beneficial.

One interesting question that came out of Peter’s comment was something I pointed out in the comments as well – we may need insurance when we don’t have a lot of money so that we can protect ourselves against big-ticket catastrophic events. But what happens when we do have a lot of money? Don’t we then need to protect that money with insurance? Are we really ever free from insurance? If the cost makes sense, does it ever pay to be completely free?

Des pointed out that the choice between savings and insurance often lies in our personal circumstances and means. For example, “I don’t carry full coverage on our car because if it’s totaled, it’s rather inconvenient but I would manage just fine.” It’s true – many of the older vehicle owners I know still carry collision insurance on cars worth $2,000 (with a $1,500 insurance deductible). Is it worth the $300 yearly premium to continue that coverage? Probably not.

Des takes a similar approach to Peter in determining a cost vs. benefit – “…you need enough insurance to pay relatively likely evens that you cannot afford out of pocket. I can afford to replace my car, but I cannot afford to provide for my family if I am unable to work. I have health insurance with a high deductible because I can afford small medical bills, but cannot afford a medical catastrophe.”

The Case for Balance and Situational Awareness

As I mentioned in my original post, we rarely have the choice to simply be insurance-free, or savings-free.

Certain forms of insurance are required in order to function legally – car insurance, professional liability insurance, etc.

Without savings, we wouldn’t be able to pay insurance deductibles or cover all of the small emergencies that come up. Could we also save enough to truly insure ourselves against any likely catastrophes? And as I pointed out before – would we want to?

With the understanding that the choice lies somewhere in the middle, we still have options – hence, the whole point of this discussion. Given an extra $200 a month in our budget, we can either enhance our insurance protection or begin saving. Which will it be?

My philosophy is summarized in two words – Balance and Situational Awareness.

  • Balance – Understanding first that insurance and savings work hand-in-hand and each has its benefits and downfalls. Finding the optimal insurance-savings tipping point where additional insurance would be cost-prohibitive, but less insurance would endanger savings and other assets.
  • Situational Awareness – Being consistently aware of changing internal and external conditions that affect the balance discussed above and adjusting my response accordingly.

Insurance may be a necessary evil, but I think it’s a useful one and one we can control. And that, my friends, is my take on insurance vs. savings.

Throw In Your Two Cents

If you didn’t get a chance to comment the first time around, here’s your chance to share your opinion. No worries – my readers don’t bite.

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10 thoughts on “Saving More vs. Insuring More

  1. Pingback: Personal Finance Buzz
  2. As you mentioned above, I believe you have to do a bit of cost benefit analysis for your situation and figure out whether or not it makes sense of you to save up and self-insure, or if it makes sense to pay monthly premiums to insure.

    When you pay for insurance you’re basically paying to transfer the risk of having a catastrophic event to another party. If that event happens, you won’t be financially ruined. In many cases the cost of that insurance coverage is minimal compared to the possible charges you could have if you didn’t have coverage – like in my wife’s case with our medical coverage. On the other hand, some types of insurance may not be as important, and if the event it’s insuring happens, it might not ruin you, it would just be a nuisance. For example if you’re driving an older car with only liability insurance. The car isn’t worth that much, so insuring it to replace it in the event of an accident doesn’t make financial sense. You can probably just save up and pay for a new car. You can afford to self-insure.

    Analyse your situation, decide what level of risk you’re comfortable with, look at your financial situation, and decide based on those things. Great discussion!

    1. I’m totally down for cost-benefit and we are thinking alike. However, your comment made me realize that I think, in the end, most cost-benefit analysis will yield similar results. Think about it – lower premiums mean less of a chance that something is likely to happen. Higher premiums reflect a higher probability.

      So if probability of occurance (i.e. “risk”) is usually tied to premium price, the cost-benefit is already built into it, don’t you think? In other words, you pay “per probability” of event X happening – the task remains dedicing which “events X” you want to be protected against.

      Okay, so that’s a perfect world. I think in the end, public preception of an insurance’s value, market conditions and semi-monopolies, and different profit and overhead requirements of companies affect the real price of insurance. And that’s a much bigger headache to try and decipher…

  3. While this post mostly dealt with health insurance, it’s always worth checking to see if your other insurances are really worth it.

    For example, we were paying an extra $400/year for collision insurance toward replacing our 10 year old car that’s only worth around $1000. If the car becomes mostly unusable, we’re going to have to shell out the cash for a new one anyway – so having that extra money to save toward that makes more sense than insuring against it.

    1. The car is a perfect example. Most people’s deductible is about $1,000 anyway – so unless I’m missing something, if your car is worth $1,000 or less, you are getting nothing. Far better to save in that case and put the money to good use!

  4. The great thing about insurance is that your savings plan has a higher likelihood of success if you are properly insured. Sure it might take longer to reach your goal if money is going to insurance rather than savings, but at least you know you will reach your goal. If you skimp on insurance you may find yourself financially behind after a few years if there is an unexpected incident along the way.

    1. That’s a great point for the “save more” camp! Insuring can, in fact, protect those savings you’re trying to grow so quickly. Again, I think balance is key in deciding how much protection to get and if it’s worth the expenditure.

  5. While I am uninsured at the moment it is not because I don’t value insurance but because there is just no room in our budget for it. The last insurance policy that I had was a high deductible policy and I put money into an HSA to cover the deductible. It was the best of both worlds. Yes, I had to pay for any doctor’s visits during the year but the cost came out of my HSA. Since I don’t go to the doctor often, most of my savings stayed intact in a tax free HSA account. It is the policy that I would choose again.

    1. Thanks Cindy. It seems that a lot of people have had luck with the same type of insurance policy as yours.

      I’m curious to see what results of the current health care debate in Washington and how that will affect insurance in the U.S…

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