Insurance: Necessity or Nuisance?Joan Koonce, Ph.D., AFC®

Associate Professor and Extension Financial Planning Specialist

Old ‘Wise’ Saying

• What exactly does this mean?

• Is it true?

Purpose of Insurance

• Protects against financial losses due to some type of risk.

• What is risk?– Risk is uncertainty.

The uncertainty of incurring a financial loss and the uncertainty about the size of the financial loss.

– Pure versus speculative risk.

How to Handle Risks

The most typical response from people is

– You can buy insurance for risksthat you will never encounter.

– Insurance may not be necessary to cover all risks.

How to Handle Risks

• Risk Management Process– Identify and evaluate your risk

exposure and sources of risk.– Determine what the possible

financial loss would be if you encountered each of the risk identified and how often you may encounter each risk.

– Determine how to handle each of the identified risk.

How to Handle Risks

• Risk Management Techniques– Avoid risk– Retain or accept risk– Reduce risk or

control loss– Transfer or share

risk

Risk Management Techniques

• Avoid Risk– Don’t own items or expose

yourself to activities that will cause a financial loss.

– Some examples:• Not parasailing.• Not owning a

vicious dog.• Not owning a

swimming pool.

Risk Management Techniques

• Retain or Accept Risk– Accept that if the financial loss

occurs, you will have to cover the loss.

– Some examples:• No collision coverage if your car is

old: pay out-of-pocket for any damages.

• No insurance to cover lost or stolen credit cards: liability limited to $50 per card.

Risk Management Techniques

• Reduce Risk or Control Loss– Reduce the frequency and/or size of the

financial loss.– Some examples:

• Lock your doors on your car and home. • Wear seatbelts.• Install security systems and fire alarms.• Exercise and eat healthy.• Buy insurance with deductibles, coinsurance,

co-payments, waiting periods, etc.

Risk Management Techniques

• Transfer or Share Risk– Pay someone else to cover your

financial loss.– The most common way of

transferring risk is to pay an insurance company.

Types of Insurance

• Insurance that all or some people need:– Health– Disability– Life – Homeowner’s– Automobile– Long-term care– Personal umbrella liability

Types of Insurance

• Insurance that all or some people don’t need:– Rental car and towing– Dental and vision– Flood– Private mortgage– Credit life and disability– Dread disease and accident health

and life– Children’s life

Necessity or Nuisance?

• What insurance should you purchase?

• You have to decide for yourself.

Insurance should be purchased when the likelihood of the financial loss occurring is small, but the size of the financial loss is large.

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