When it comes to insurance, my approach is that insurance protects you against catastrophic events that would otherwise leave you broke. It’s for covering your car against being totaled, covering your home against that one big earthquake or fire or tornado that’ll level it, and for covering the unforeseen medical emergency where your life depends on you pulling out all the medical stops. It’s like the backstop or net at a baseball game. The ball has to get past the batter, catcher, and umpire before it’ll hit the backstop. In most games it’ll never gets that far, but for the one time it does, I bet those fans are glad that net is there.
How does this affect my insurance policy decisions? High deductibles. The deductible on our cars is $1000 (eagle eyed readers will note that my own car has no deductible because I don’t carry comprehensive or collision insurance). The deductible on our house is $2,500 the value of the home, the maximum allowed based on the value of the home (in the state of Maryland). This doesn’t really affect our medical insurance though, but I’d raise the deductible on those if it proved to be cost beneficial.
This isn’t a good approach for everyone. For example, if I lived in the city of Baltimore I would have comprehensive insurance on my car. The incident of vehicle theft and vehicle break-ins is significantly higher in Baltimore than it is out in the suburbs. That’s not to say we live in a peaceful, crime-free, idyllic utopia but it’s, in general, safer out in the suburbs (fewer people spread farther out is one contributing factor). The actuaries know this, of course, because the premiums for comprehensive coverage in Baltimore are more expensive than out in the suburbs, but you are buying peace of mind.
This also forces us to boost our emergency fund. The standard advice for emergency funds, which can range from 3 months of expenses to a year, exists for the standard situation. If you plan on self-insuring, which is what you’re doing with a high deductible, you need to account for the added risk. If you shifted your auto insurance deductible from $500 to $1000, pad your emergency fund with an extra $500. One good way start is with your insurance premium savings.
I’m not advocating any particular approach to insurance. We each have our own risk tolerances and varied life situations. In our particular situation, given our financial picture, a high deductible self-insuring plan works for us. Perhaps in a few years that will change.
What’s your insurance philosophy? Are you more of a “stop the headaches and the heart-attacks” kind of person that relies on insurance for the small and the large? Or you in my camp of high deductibles?