Insurance is not risk management

An insurance policy is to wealth protection as a mortgage is to home ownership.  There are no inherent benefits to owning an insurance policy or owning a mortgage.  But in both cases they are funding mechanisms that accomplish the goal with the real value – protecting your wealth and owning a home.

A common mistake among consumers is that they believe insurance is somehow protection against risk, or some transfer of risk.  It is neither.  And this mistaken belief can lead to the bad choice of not creating a more comprehensive plan to deal with losses before they happen (for example, I’d be rich if I had a dollar for every time in trying to settle a lawsuit I heard someone say “I should’ve had that in writing”).  In my experience, the most devastating financial losses have occurred because people assumed their insurance would address it – when it didn’t.

So instead, make a comprehensive plan for protecting wealth that incorporates how you’ll control risk, how you’ll find someone to whom you can transfer risk, and how you’ll finance risk with insurance and/or some other source of funds.  The more complete your approach in this regard, the less likely you’ll come to learn first-hand how many holes there are in an over-reliance on just an insurance policy.

Photo: Rachael McGraw, Gullfoss, Iceland