Insurance is something all of us have. Some, like auto insurance, are mandatory. Others, like life insurance, are optional. We see the potential benefit, but don’t always buy it because of the cost.
But what if you were in the third stage of wealth building? Would you buy more insurance because the premium isn’t a big deal, and you could afford it? Or would you look at insurance as something you no longer need?
At Stewardship, we work with people in all stages of wealth building. Since our views on products (like insurance) often depend on where we are financially, let’s explore how wealthy people tend to think about insurance.
Three ways the wealthy think about insurance
The overarching idea is that wealthy people understand the time, energy, and effort it took to build their wealth. To them, finances are bigger than saving money on monthly insurance premiums. Because of this, wealthy people understand what insurance is and why they have it.
Wealthy people buy insurance to protect their wealth.
First, they see insurance as not just a bill—insurance is protection. By definition, insurance is the transfer of risk. We all live in a fallen world. At any moment, your life can be changed by an accident, illness, or death. These things can financially ruin you and your family.
Because of insurance, we can transfer many of these risks from ourselves to an insurance company. By pooling your risk with thousands of other peoples’ risks, the insurance company gives us the ability to avoid financial disaster in exchange for an affordable monthly premium.
Is buying insurance to protect against disaster unique to the wealthy? Not necessarily. However, I do see more people trying to build wealth by purchasing insurance for small, insignificant items while keeping their major risks uninsured.
This is the difference. Someone buys insurance for their cell phone that can be replaced for $500 while neglecting to buy good auto insurance that can cost them hundreds of thousands of dollars if they get in an accident.
Insurance is there to protect your wealth (no matter how much of it you have) and save you from financial ruin. It’s more than just a monthly premium.
Wealthy people don’t buy every insurance, but they value the ones they have.
Second, just because some can afford it doesn’t mean they buy every insurance. So which ones are worth it? The common thread is buying insurance that protects your wealth and keeps your family from experiencing a major financial disaster.
- Home and auto insurance: auto insurance is required, as is home insurance if you have a mortgage. But wealthy people understand that saving $25/month on auto insurance isn’t worth it if it means having $100,000/$300,000 limits. The peace of mind that comes with that extra $25 is worth being properly insured.
- Umbrella insurance: an umbrella policy provides an extra $1 million or so of liability on top of your home and auto coverage. The best part about umbrella insurance is that it’s cheap! You can usually get coverage for a couple hundred dollars a year.
- Life and disability insurance: insuring yourself and your ability to earn an income is the spirit behind these two insurances. Multiply your annual income by the number of years until age 65. This is what you are insuring when getting life and disability coverage.
- Health insurance: health insurance isn’t there to pay your small doctor bill. It’s there to protect yourself from financial ruin if you wind up in the hospital.
- Long term care insurance: extended care is another risk that can cost hundreds of thousands of dollars. Thankfully, even this risk is insurable.
Wealthy people don’t always self-insure.
Lastly, you might think that once people get a certain amount of wealth they no longer need insurance. Yes, some insurances might not be needed. But wealthy people still use insurance. Why? Compared to the potential loss, insurance is cheap!
But it’s only a potential loss, whereas an insurance premium is a guaranteed loss. This is why some people have a hard time purchasing insurance. The premium paid is money out the door without any assurances of a benefit.
Again, insurance is there to protect your wealth and provide peace of mind. Even though there is adequate wealth to cover any losses, insurance is valuable because of the protection it provides.
Furthermore, some insurance policies are looked at by wealthy people as a way to leverage their wealth to provide a much larger benefit. A great example of this concept is long term care insurance. I have clients with adequate amounts of wealth to pay for future care costs that could arise as they age. Some of these clients still buy insurance. They do this because they can pay a relatively small amount now and leverage it to provide a much larger benefit if they need extended care. Since it’s likely that most people will need some type of care, this opportunity to leverage and protect their wealth is an opportunity they are willing to take.
Review your insurance policies
Insurance provides peace of mind. It’s the one product you buy and hope not to use. But it’s an expense I will gladly pay.
If you have more questions about insurance, click here to schedule an appointment with one of our wise and loving insurance advisors.