When you have a shelf to install, or a carpet stain to remove, you might go to Ace Hardware or Home Depot to look for a product, or tool, to help you resolve the problem. When you know what problem you’re trying to solve, you can choose the product, or tool you need to address it.
Insurance companies like to advertise their various policies as “Products” and then try to scare you into thinking you need that product. But insurance is really just a financial “tool”, and until you identify the financial risk you’re trying to protect, you cannot really decide if you need insurance or not.
For example, consider these different solutions to dealing with the cost of long-term medical care.
The problem we are solving here is how to pay for eventual long term, or end of life, medical expenses.
There are many tools available but they include Long Term care insurance, Life insurance, annuity agreements, or just being wealthy enough to not worry about it.
Each of these tools will work to address this problem. But let’s apply this to an actual request by two different clients.
The first client has money in a CD account that would provide more money than most Long-Term Care policies would provide. The CD is returning over 4%, and would not impose restrictions that would be required with the Long-Term care policy. This client does not have a financial risk that would necessarily require a long-term care insurance policy.
However, the other family is facing eventual care for their parents who did not create a strong financial base when they were working. None of the three siblings could afford to potentially pay between $4,500 and $10,000 a month, per parent, for a care facility. It made sense for this family to get all the brothers and sisters to contribute to buying Long Term Care coverage for the parents.
The point here is that in every case where you are considering insurance, you need to first understand the actual risk you face, and then use the best financial tools to cover that risk.
In many cases insurance may not be the best answer.