NEW YORK (MainStreet) Thanks to the Affordable Care Act, we have all talked about health insurance nearly to death lately. But America's insurance industry is immense and generally confounding.
In the most literal sense, insurance is a gamble, and in every casino the house always wins. By definition companies make a profit, because you pay more than, statistically, your policy will likely pay out. From a purely financial point of view, it's no better an idea than making a living off the roulette wheel.
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Instead, insurance makes sense when there's more than money at stake. Here are a few types of insurance, and when you should consider buying a policy.
#1. Health Insurance
When and Why to Buy: Always. Always buy health insurance.
Health insurance makes sense, because you don't have any choice about medical bills. You either treat the tumor or go broke trying, because saving money won't do any good once you're dead.
Your health is a zero sum game. Whether or not it pays out more over a lifetime than you'll likely consume doesn't matter. This isn't a product that protects your wallet. It keeps you alive, and that's worth far more than saving a few dollars.
#2. Renter's & Homeowner's Insurance
When and Why to Buy: When you've built a home.
A home isn't some fungible product that you can easily replace, and that's a good benchmark for when to buy insurance: don't try to save a few bucks down the road, protect against losing something that you can neither replace nor do without.
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Homeowner's insurance isn't about weighing the risks of buying a new house down the road; it's about the fact that buying a new house is not an option. You can get a new TV, not a new living room. Renter's insurance works by the same rules. Don't buy it to protect your Ikea table, because statistically you're better off just risking it. Insure the pieces of your home that you could neither replace nor function without. For everything else, wait on that first house.
#3. Pet Insurance
When and Why to Buy: When you have a large animal.
Pet insurance is less ridiculous than it sounds. For many people their dog or cat becomes a very real part of the family and veterinary science has come a long way. Today we can treat tumors and heal injuries that even ten years ago would have meant a death sentence for the family pet. It may sound ridiculous on paper, but when the doctor says he can save Monsignor Munchy's life for $5,000, most of us will reach for our wallets.
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There's much less the doctors can do for small animals though, so while insuring Captain Wigglebottom the schnauzer makes sense, maybe leave your pet hamster to his fate.
#4. Consumer Insurance (aka Extended Warranties)
When and Why to Buy: Never. Never buy extended warranties.
If the rule of thumb when purchasing insurance is something you can't replace and can't do without, consumer goods fail both of these tests. You can replace that TV and can do perfectly well without it for a little while at need. On the other hand, the math says that you will pay more for that extended warranty than you will ever likely get back for it. That's why companies offer them, warranties are a cash crop for the manufacturer.
If you're worried about that blender exploding midway through margaritas, buy another one. The warranty is just there to soak you for money.
#5. Life Insurance
When and Why to Buy: When someone else depends on you.
Life insurance means paying money for a product you tautologically will never use. Don't worry about it when the policy will simply generate a windfall for any potential heirs. Do get it as protection for a spouse, children or anyone else who would suffer without your income. Make absolutely sure to get it for them though. Leaving your loved ones unprotected and at the mercies of a careless bus driver is criminally irresponsible.
Also See: Life Insurance Settlement: Why It's O.K. To Have a Third Party With a Vested Interest in Your Death
#6. Disability Insurance
When and Why to Buy: Typically when working for yourself.
Most employers pick up either short- or long-term disability for their staff, but entrepreneurs and the self-employed enjoy no such protection. If you work for yourself be sure to get some. It's harder to find on the individual market, but the only thing worse than getting seriously sick or injured would be getting home from the hospital to find an eviction notice.
#7. Travel Insurance
When and Why to Buy: Rarely.
It would be excessive to claim that travel insurance is useless, but most policies cover very little. The average travel policy protects you against only extreme cases such as crippling illness and job loss. Although that would cause real problems, the odds of getting smote by real tragedy while planning that vacation are slim enough that your money's better spent elsewhere.
More thorough policies cover cancellations and unforeseen circumstances, but they're rare and more expensive. Buy these only if you have a specific reason to believe something might come up.
#8. Terrorism Insurance
When and Why to Buy: Never. Never buy terrorism insurance.
The odds of an American civilian getting hurt in a terrorist attack are about as likely as getting struck by lightning while holding a winning lottery ticket. Terrorism insurance makes absolutely no sense. These policies are bad products designed to make money off of people's fears.
#9. Alien Abduction Insurance
When and Why to Buy: Always.
They are coming. Be prepared...
--Written for MainStreet by Eric Reed, a freelance journalist who writes frequently on the subjects of career and travel. You can read more of his work at his website www.wanderinglawyer.com.