A Different Way to Think About Insurance
Many people believe that purchasing insurance is tantamount to gambling. Perhaps this is a consequence of the way it is often explained to potential buyers. For example, an immediate annuity might be explained as, “you are betting that you will live past your life expectancy while the insurer is betting that you won’t”. While clearly there is an element of probability in both insurance and gambling, that is not the complete picture.
Consider a visit to a gambling casino. The casino and bettor are on opposite sides, that is, either the casino will win or the bettor will win. That’s not the case with insurance. For instance, with auto insurance, both sides are hoping that nobody wins, as an auto accident will never be considered a positive outcome. When the insurance company has to make a payout, it means that both sides have lost!!
So, insurance customers should view their purchase as “hedging”, not “gambling”. Insurance is a tool of risk management, as are risk avoidance and risk retention. Transferring risk via insurance represents something of real value. When viewed as a tool to mitigate the downside of a catastrophic loss, it becomes much easier to mentally justify parting with those premium dollars.