Your Favorite Financial Topic

We are on an 8 step path as we systematically fill up our financial tanks. Just as there are 8 marks on your fuel gauge for a full tank, there are 8 marks on your financial fuel gauge that indicate if you are financially healthy. 

Here’s where we have been: Step 1 - Balanced Budget; Step 2 - Give 10%; Step 3 - New Zero in Checking; and today, we are beginning Step 4 - Adequate Insurance. 

Today, I’m going to discuss the subject you have probably been most excited about! Yes, you guessed it, I’m talking about INSURANCE! Oh, come on! Who doesn’t like a good lesson on deductibles and coverage limits? I’m obviously kidding. Insurance, what a snooze fest!? But I promise to make it fun and I promise to give you some good information that I believe will fill in the gaps of your financial foundation that you’re working hard to lay. 

Here’s my definition of insurance: taking a small financial loss now, so that later, you don’t have to potentially take a larger financial loss. Yes, my definition of insurance is taking a financial loss, but let me explain. 

If someone's house were to burn down, do you think that most people would be able to afford to rebuild their house again with cash? Probably not, right? There were a bunch of boat owners in England who were having a similar problem. They were in a gentleman named Loyd’s coffee shop, this is a true story, and they were sharing their woes of losing ships and not being able to replace them after they sunk to the bottom of the sea. They realized, as they were sitting there, that only a couple of them would have this problem in a given year and the rest would be scot free… until it was their turn, at which point they would need to pay the piper. A light bulb went off and someone suggested that instead of being sunk by their lost ship figuratively and literally, they should pull their money together and all agree to take a small financial loss each year so that when their year came and their ship sank, they wouldn’t have to take a massive financial loss. Loyd’s coffee shop became Loyd’s of London, which is now one of the oldest insurance companies in the world.

We now call these small financial losses premiums and the same principle applies. Some people CAN afford to not have insurance. Those people are called “independently wealthy” and have so much money that their house burning down is no more than an accounting error. But for the rest of us, we CAN’T afford to NOT have insurance. Like the sailors, we can afford a small consistent loss spread out over years and years, but we can’t afford the blow that a one time catastrophe could cause us. 

This principle of insurance is extremely important. If you CAN afford the potential blow, then it’s not necessary to purchase insurance for that risk. For instance, I was in the self checkout line not too long ago at a store which I won’t disclose. As I scanned my item, an item that cost around $50, I was asked if I would like to purchase insurance protection for this item by clicking a simple button. First, not only will this item be covered on any homeowners policy or renters policy as personal property, but second, it was $50! I didn’t need to purchase the protection because I can absorb the potential risk. The worst thing that could happen is I could lose $50. In this case, you can see how me being able to absorb the potential loss negates the need for insurance. 

But let’s think about the other side of the coin. Unfortunately, I have to witness very tragic events in my insurance agency as people call us when things go bad. A couple years into my career, I received a call from a mother who had recently purchased insurance through our agency. She was crying on the phone, not because her or her family were hurt, but because her daughter had accidentally hit a motorcyclist. It was dusk, she was turning left and didn’t see the oncoming gentleman on his motorcycle. The motorcyclist was killed instantly. And the mother was calling me as her daughter could hardly speak from what had just happened. In the months that followed, our client was sued and understandably so. The settlement was over $1,000,000. 

Next week, with your new understanding of insurance, I will begin helping you make good choices on what insurance to purchase and how to best purchase it!

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Zach Santmier is the owner of Trumble Agency, Inc. and the author of the personal financial course, Increase. He focuses on helping families escape paycheck to paycheck living so they can freely pursue their ideal future.