Why You Want Insurance Part 1: Insurance Transfers Risk
Throughout civilization, people have created tools to transfer risk, protecting themselves from negative circumstances. This is the core function of insurance: to transfer risk. It’s what makes insurance not only something you want but something to love.
However, many people have a misguided and negative view of insurance, being inadequately insured or uninsured altogether. As a result, they live with more worry, fear, and doubt because of the possibility of loss. Consequently, they limit their potential.
Let’s open up the dialogue and approach the topic from an abundance perspective, to learn why the wealthy value protection, and why you should too.
Spoiler alert: it’s because the benefits of protection extend far beyond the coverage itself.
Podcast: Play in new window | Download (Duration: 36:07 — 33.1MB)
Subscribe: Apple Podcasts | Google Podcasts | Spotify | Android | Pandora | RSS | More
Table of contents
Where Transferring Risk Fits into Your Whole Personal Economy
Let’s zoom out for a moment to remember where and why insurance fits into your Cash Flow System.
Your foundation starts with keeping more of the money you make. Second, you protect what you’ve built. Finally, you increase your income to create time and money freedom and expand your legacy.
Insurance fits in the protection stage. With it, your livelihood is no longer at risk, but secure, regardless of the life circumstances you face.
Your protection is like a roof on your financial house. When the shingles are sufficient and cover the whole house, it keeps storms outside your house, preventing them from getting inside and destroying your belongings. Similarly, when you have adequate insurance protection, your income and assets you’ve built are safe from financial storms that may occur in your life.
In this series, we’ll show you the 11 reasons why you want to protect your money, and answer:
- What does insurance do?
- Why does it matter?
- Why protect my money when I could just make more instead?
- Is the cost worth it?
- With limited resources, how do I prioritize paying for protection?
- What protections are important and why?
Today, we’re exploring the topic of risk, our relationship to risk, and the ideal timeframe to transfer risk.
Why Most People Hate Insurance
Health insurance, auto insurance, disability insurance, life insurance, homeowner’s insurance, professional liability insurance, umbrella insurance, worker’s compensation, business overhead expense insurance, business owner’s insurance, long-term care insurance, gap insurance, key man insurance, critical illness.
Feel like you need a shower yet?
If you’re like most people, the thought of insurance brings up feelings of dread. The desire to escape all the horrible things that could happen, along with their consequences has us succumbing to spending hundreds of dollars that we don’t want to spend.
Insurance seems like a labyrinth of confusion, where you pay exorbitant premiums, get nothing in return, and the insurance company always wins.
Many weigh the risks and decide the event is unlikely enough that they forgo the insurance altogether.
Protection through insurance and legal planning is often seen as a necessary evil. You want it, but it’s expensive and time-consuming, and there are so many other things you’d rather be doing with that money.
Why We Love Insurance
Let’s address the elephant in the room for a moment, shall we? You might be thinking, of course, you love insurance because you sell it!
Here at The Money Advantage, we educate people about how to keep and control more money, increase cash flow, and protect their wealth.
Insurance is a vital part of that. Yes, we sell insurance, specifically life and disability insurance, and receive compensation for the sale of those products.
The reason we love insurance is that we use it and see the value in our own personal economy, as well as its role in maximizing the personal economy of the clients we work with.
We were believers and consumers before we were educators and advisors. We don’t love it and teach about it because we sell it. Instead, we sell it because we own it, love it, and want to share it.
In this article, we want to share with you how insurance protection matches our values and mission.
Armed with this empowering perspective about protection, you’ll enjoy making decisions about how to protect your money, instead of feeling bullied into fear-based decision making by scare tactics.
Reasons You Want Insurance
Let’s dig into the reasons why you want to have insurance.
#1) Protection Allows You to Transfer Risk
What Types of Risk?
There are infinite types of risk in the world, as we live our daily lives. It could be as simple as tripping on the sidewalk, or as large as a fire. There’s not only the risk of a disruptive event but the long-term emotional and financial impact of the loss as well.
There’s the risk of death, disability, income loss, injury, illness, medical diagnosis, auto accident, house fire, flood, wind damage, someone becoming injured on your property, your property injuring someone else, lawsuit, the loss of your business at the death or disability of one of the owners, the loss of business income if you lost one of your key employees, the cost of long-term care, the costs of a work-related injury for one of your employees, the inability to pay business overhead costs if business income were lost due to death or disability of an owner or key employee.
As we enter into this discussion, it’s important to note that acknowledging the risks that are present does not mean we have to worry about them. We have options for how we will position ourselves in relation to these risks.
Options in How to Approach Risk
The most obvious thing we can do with risk is to accept it.
While no one welcomes the unfortunate circumstance in their life, the person who accepts risk acknowledges the presence of the risk and does nothing about it.
The result of accepting risk is that you bear the full responsibility for the negative event and its costs in your life.
This is also the same position as someone who is oblivious to risk or ignores it altogether.
This is the position of a person who has no insurance. Whether or not they’re aware of it, they have accepted the full financial responsibility of the event.
This is the riskiest and most expensive position to be in. The risk is closest to you, and you bear the full cost.
In this position, the risk is still very real and present, but you choose to stay away from what could cause harm.
This is impossible in most cases, unless you never drove a car, invited people to your home, walked, or owned a business. However, in that case, you might increase your risk of dying from a lack of purpose.
Mitigating risk is acknowledging the risk, but taking measures to reduce its impact to you, or the probability of it happening to you.
Maybe you’ve mitigated your health risks by taking charge of your health, and have excellent nutrition, optimal exercise, and sufficient sleep. You’ve lessened the probability of life-threatening illnesses, but still are open to the problem and its costs.
When you transfer risk you are assigning the burden of risk to someone else, who contractually accepts your risk, usually in exchange for a premium.
Buying insurance is the easiest way to transfer risk. You transfer risk to an insurance company who accepts the financial cost of your risk in exchange for your premium.
At the basic level, insurance passes the risk to the insurance company, transferring it away from you.
While we can’t necessarily minimize or prevent risks from happening, we can transfer risk and its financial impact, freeing up the mental energy to be more productive.
If the negative situation were to arise, you could focus on the emotional healing without the weight of the financial stress.
The History of Transferring Risk
Throughout time, civilizations have found ways to transfer risk, even before insurance existed. The history of insurance can be traced back to the ancient world.
In the 3rd and 2nd millennia BC, Chinese traders would sail five or six ships to spread the risk of sunken cargo.
Even prior, when Babylonian merchants looked to secure capital to finance their shipments, the lenders would add a surcharge to hedge against loss.
The earliest known life insurance in America began over 250 years ago.
Beginning around the 1760’s, the Presbyterian community pooled their resources to help their members cope with death in their families. This helped the family focus on being productive, instead of spending all their energy on replacing lost resources.
Today, we have many specific tools of insurance to transfer risk. But the benefits extend beyond the terms of the contract and the coverage itself to the intangible benefits. One of the greatest of these benefits is your peace of mind.
#2) Protection Creates Peace of Mind
Transferring risk gives you peace of mind, ensuring that no matter what happens, the financial burden will be taken care of.
Peace of Mind Is Linked to Certainty
Peace of mind comes from having some degree of certainty for the future. The further out you can project that certainty, the more peace you’ll have.
Imagine walking blindfolded. Your immediate next step is uncertain. There may be solid ground to support you as you take the step, or you may be stepping off a cliff, into a pothole, over a large rock, or into a fence. In this position, you’ll lack the peace of mind to walk with confidence. Your steps will be tenuous and hesitant because you don’t have certainty for the immediate future.
Now imagine driving 70 miles per hour on an open highway in Nevada on a sunny day. You can see for miles in any direction. Your certainty that solid ground will be beneath you extends far into the future, allowing you to drive fast and confidently.
Life Is Uncertain and Fragile
But lo and behold, the circumstances of our lives are anything but certain! Nothing we have now is guaranteed. Our health, our physical mobility, our home, our loved ones.
I’ve personally had four people in my circle of influence lose a sibling in the last few months. Lives, full of potential, lost way before their time, leaving a heart-wrenching void in the hearts of families and communities.
I’ve seen at least ten diagnosed with cancer, and others fighting through disabling accidents.
It’s a sobering reminder that our time on this earth is finite, that we’re not invincible.
What we have now is a sacred gift. We have a responsibility to honor, nourish, protect, and care for what we have.
Protection Creates Financial Certainty
We can care for our life by creating as much certainty as possible for the future. We can do this by preparing in advance to handle the financial consequences of a potentially tragic event and limiting its ability to impact us.
If you know that the money will be there to catch you, you don’t have to worry about what you would do if something happened. Taking the responsibility to transfer risk up front means that you won’t be responsible for the financial outcome.
Instead, you know that you’ve contractually given up the role of carrying the financial burden, and the insurance company has contractually accepted your risk in your place.
Because of this, you have financial certainty, despite an uncertain future. You may not know what will happen, but you know you’ll have the financial resources to respond to the crisis.
You can have certainty that if you died, were disabled, lost your home, or any other crisis occurred, the money would be there for your family to rebuild.
Simply transferring risk gives you the peace of mind that you won’t have to bear the financial burden, should an unforeseen event occur.
Risk is a heavy load. Whether or not you’re consciously aware, risk is a cognitive thief, taking up mental capacity worrying about the potential of something bad happening.
When you transfer risk through insurance protection, you don’t have to think about the infinite things that could go wrong. Instead, you protect your mental space and peace of mind, allowing you to enjoy life and bring your best self to every moment.
Our Personal Insurance Journey
When Lucas and I were first married, we didn’t think we needed much insurance. Lucas had a $50K term life insurance policy, no disability insurance, and I had no life or disability coverage. We were young, healthy, and invincible. Or so we thought.
Although we weren’t aware of it, we were also trapped in a lot of scarcity thinking. We had tremendous untapped potential and weren’t looking for ways to increase our production.
When we decided to start a family and a business, our thinking began to expand. Children would be financially dependent on us. Our ability to grow our business would depend on income from an outside job in the early years. We wanted the certainty that our daughter would be taken care of, no matter what happened to us. Even if Lucas were disabled, we wanted to be sure we could replace Lucas’s outside income. And we wanted the ability to fund everything we’d dreamed of together, even if one of us wasn’t there to financially support it.
As our eyes became open to the security net of protection, we maximized our coverage in every area. We maxed out our liability protection (auto, home, umbrella insurance, etc.), as well as life, and disability insurance.
It’s given us the confidence and peace of mind to build our business. And instead of the fear of loss keeping us from pursuing our most productive endeavors, we’ve freed up our mental energy to become producers and creators. We are fully vested in using our unique abilities to build a business that uplifts and serves others.
Our story illustrates the truth that one of your greatest resources is your mind. When you are relaxed, confident, and at peace, you are more freely creative, and you provide more value. Protecting that mental space ensures that you can produce.
#3) The Best Time to Transfer Risk Is When There’s No Imminent Risk
If you’re like most people, you don’t enjoy thinking about future problems. Maybe you’re young, healthy, and have been shielded from dealing with personal loss.
When You Need Insurance
When there are no immediate problems on the horizon, it’s easy to discount the value of insurance. You don’t need it now because you’re comfortable. Comfort and ease are something to revere and be grateful for, but not to depend on.
When the problem arises out of nowhere, that’s when you’ll need insurance. You’ll wish you had it, and as much as you could get. But it will be too late, because now your risk is certain, and is too high for the insurance company to agree to bear the weight.
From the Insurance Company’s Perspective
For example, when a life insurance company insures you, their actuaries consider your age and health and calculate your statistical life expectancy. They determine the probable time frame they will need to pay out a claim and set a premium that they will charge you to cover that risk level. The life insurance company recognizes the statistical likelihood that a person aged 72 with poor health has a shorter timeframe before a claim would be paid than a 25-year-old in excellent health does. For the same amount of coverage, they will charge the older person more to transfer that risk.
Further, a person diagnosed with a terminal illness, or a combination of medical factors that could lead to premature death, may not be insurable at all. The insurance company has determined that there is no premium high enough that would warrant accepting that person’s financial risk. It’s not an agreement they are willing to make.
If an insurance contract is to be enforceable, where both parties uphold their end of the contract, it must be put in place before the risk is imminent.
When You Can Get Insurance
When you’re comfortable is when you have the greatest potential to secure your certainty and peace of mind. And for life and disability insurance of insurance, the younger and healthier you are when you become insured, the lower rates you will pay throughout your lifetime.
Protection is power. Without power, you become a victim. With power, you become a producer who can weather difficult circumstances with a much greater degree of certainty.
Instead of being subconsciously concerned whether you’ll be able to weather the unknown, consciously prepare to make sure you can.
In this article, we’ve discussed how insurance transfers risks, creating peace of mind, and why the time with the least risk is the best time to put your risk transfer in place.
Consider your approach to risk in the past:
- How has it impacted your peace of mind?
- What risks are you currently open to?
- How would protecting yourself from those negative circumstances give you more peace of mind?
- What opportunities exist for you to transfer risk in your life?
Leave us a comment below about how this challenged or confirmed your perspective of protecting your wealth.
Here’s What You Can Expect Next
In Why You Want Insurance, Part 2 – It Protects Your Human Life Value, we’ll lay out why protecting yourself as the producer and creator of your wealth and assets is the #1 priority of all insurance.
The Whole Series on Insurance Protection
Check out the rest of the articles, podcasts, and videos in the series on insurance protection here:
- Why You Want Insurance – Part 1: Insurance Transfers Risk
- Why You Want Insurance – Part 2: It Protects Your Human Life Value
- Why You Want Insurance – Part 3: It Costs More to Self-Insure
- How to Shop for Insurance – Part 1: 7 Tips to Save on Insurance
- How to Shop for Insurance – Part 2: Home and Auto Insurance
- How to Shop for Insurance – Part 3: Life, Health, and Disability Insurance
Create Your Time and Money Freedom
If you’d like to evaluate your personal economy and find out where you can become more efficient and plug money leaks, book a strategy call to find out the one thing you should be doing today to optimize your personal economy and accelerate time and money freedom.
Success leaves clues. Model the successful few, not the crowd, and build a life and business you love.
Money is Spiritual, with Rabbi Daniel Lapin
Money is often confused, misunderstood, and classified as part of our basic, natural, carnal human nature. But money is spiritual. Understanding, earning, using, managing, and growing money is a part of our lives that is deeply spiritual. Rabbi Lapin knows this, and shares his wisdom about money far and wide. Today, Rabbi Daniel Lapin explains why,…Read More
Seven Deadly Economic Sins, with James Otteson
You have heard of the Seven Deadly Sins: pride, greed, lust, envy, gluttony, wrath, and sloth. Each is a natural human weakness that impedes happiness. In addition to these vices, however, there are economic sins as well. And they, too, wreak havoc on our lives and in society. They can seem intuitively compelling, yet they…Read More