It’s easy to turn insurance into your largest monthly expense. If you’re on a quest to mitigate all risk, just start with the basics – health, home, and auto. Then add in the extras - life, disability, long-term care, credit card, and travel. Don’t forget to tuck it all under a tidy umbrella policy. And, just to be extra secure, insure yourself against automobile repair expenses, the loss of your mobile phone, etc. Soon you’ll be taking on a second job to pay for all the risk you’re avoiding.
Insurance is an industry fueled by our aversion to risk. There are plenty of other risks those companies would happily insure if they could just figure out how to make money from it. We don’t have insurance for portfolio risk, but what if we did? Would it be wise to invest in such policies?
More to the point…is it wise to try to eliminate all risk?
Emphatically no. First, from a practical perspective, no one can afford to insure against every eventuality. Second, avoiding all risks won’t necessarily help you reach your desired destination. And finally, every financial decision, even the one designed to minimize risk, carries its own risk.
Consider life insurance. If you are a young family, life insurance is an important part of getting your family where it needs to go unscathed. But if you are nearing retirement and the kids have finished school, paying for a life insurance policy seldom makes sense. Since you no longer need to replace earned income, you may only be hurting your standard of living by paying for life insurance during retirement. It won’t help you reach your financial goals.
A similar argument can be made for long-term care insurance. Even as you grow older the risk of languishing for years in a nursing facility isn’t as high as you would think.
Outside of the insurance realm the story is much the same. Avoiding risk comes at a cost, as anyone who’s tried the money-in-the-mattress trick can tell you. Worse, your gut can lead you down the wrong path when it comes to risk.
A real-world financial plan accepts a measured amount of risk. It’s when we let risk manage us, rather than the other way around, that it becomes a four-letter world.