We talked about some of the costs of health care in my previous post. But there are still more. Some of them are related to insurance so maybe we should take another look at what insurance really is.
In life there are risks. Everyday you take many risks, calculated ones and impulsive ones. Sometimes the risk is part of making a decision and sometimes the risk is part of just being alive. Some risks are so large that if things go wrong you could end up with a disaster on your hands. Insurance is a financial tool used to manage risk.
Let's take life insurance as an example. I have a small family. My wife stays home to take care of the kids. We rely on the income I bring home to sustain our family. If I died, apart from emotional concerns, my wife would have a problem. How would she obtain the money necessary to support our family? She could go to work, but then someone else would have to take care of the kids. She could try to find work that would allow her to stay home; that might be hard. She could turn to relatives or friends for help. She might even turn to the government and go onto welfare. Personally, I don't like any of those solutions. That's where life insurance comes in. There is some risk that someday, before our kids are grown, I may kick the bucket. For that reason we purchase 8-10 times my salary in life insurance so that if I die, my wife can invest the money and live off the interest. We pay some money now hoping that we'll never need the insurance, but the colossal risk has been managed (and term life insurance is relatively cheap).
How does this work from the insurance company's point of view? I've shifted the risk to them, they assume the risk of me checking out early, and then spread that risk out over lots of other people that also sign up for life insurance. The idea is the company needs to take in more money than they pay out in benefits when people die. So they set the premium (what I pay) to some level that they calculated will keep them from losing money. There's a lot of information that goes into that calculation and for the insurance company to be viable they have to be good at it. I don't want them to lose money. If they lose money long enough they'll go out of business and my insurance won't be effective anymore. I want them to stay in business.
In summary I've transferred the risk of a catastrophe and by spreading that risk over lots of people the insurance company makes money. "That's all well and good" you say. "But what about the person that can't get insurance?" Someone that can't get insurance needs to make a different plan. They need to work toward being self-insured. They should make their decisions in life through the prism of the risk they're taking. Say my twin couldn't get insurance and did die, leaving a family...they would need to make those hard decisions about finding work versus staying with the kids. Hopefully they prepared in a way to make it less of a disaster.
But before all that I would ask why can't they get insurance? Did they procrastinate getting insurance until it was too late? Do they have an occupation or play a sport that makes them uninsurable? Is it because they say they can't afford it? Given the risk of not insuring shouldn't you work out a way to afford it? Do you need to live cheaper? Do you need to get your income up? I believe there is a lot we can do for ourselves before looking for a solution from someone else. But they should also be free to say, "We want to take the risk ourselves. We're not going to buy insurance."
In part three we'll look at health insurance.
