By: John A. Shega/Owner/Aspire Insurance Agency
In two separate college classes, we were asked to define what seemed at the time to be two easy topics. In an Interpersonal Communications class, we were asked to define the term love. In a Philosophy class, we were asked to define a chair. Due on part to these classes, I am neither a counselor nor a philosopher.
That said, these classes did cause me to step back and try to explain some basic things in life. What exactly is insurance?
To answer that question, one must first understand risk. A common definition of risk is “the chance of losing something of value.” For many, some may say their home, their life, their income, their health, a boat, or a ring may be something they value or has value to them. Others, things may be lost of destroyed – a pair of shoes, a tennis racket, a lawn mower – but they have little or no real value to the owner.
There are three major ways to manage risk. They include:
- Avoidance- Simply avoid the risk. Worried about your house burning? Sell your home and live in an apartment. An extreme example, but you get the idea.
- Control- Worried about hitting a deer with your car? Drive less at dusk or after dark in the fall during rutting season.
- Transfer- Give some or all of the risk away. Herein, is the definition of insurance. Transferring some or all of your risk to another party.
Let’s use a common item many people might consider of value that they would not want to lose- their personal assets. This might include money in the bank, their car, their boat, etc.
Avoid Your Assets- This is difficult to do. To borrow a common phrase, “assets happen.”
Control It- Drive less during a blizzard, use sunscreen, put valuable papers in a vault, don’t use gas near open flames, wash your hands, select a deductible that fits your risk tolerance and budget.
Transfer It- Have someone else pay for the assets of greater value. That is, explore the cost (premium) to have someone else pay for the things that cause you worry or potential financial burden if they were damaged, stolen or otherwise lost or destroyed.
Finally, purchasing insurance is generally either required by law or contract (car insurance if you drive, house insurance if you have a mortgage) or voluntary on your part (you want a new cell phone if the current one is stolen). Either way, insurance is a way to transfer your risk from you to someone else. It can make life less stressful and that is why insurance is often called “sleep insurance.” It can reduce the stresses and worries that may otherwise keep you up at night.