How much insurance should I buy? Probably one of the most common questions received by any insurance professional, so let me dive in.
Decision making in insurance is focused on a fully informed individual identifying the best alternative to take. Unfortunately most decision makers cant estimate, calculate, or predict with accuracy what type of events will occur on a day-to-day basis. Therefore we make decisions based on an "expected value" of alternatives and choose based on the one that incurs the lowest cost. What derives the expected value?
1. Identifying all possible outcomes
2. Assign a negative or positive value to all outcomes
3. Calculate the probability that each outcome has of occurring
4. Multiply the values and probability to determine an expected value of each outcome.
Simple Right? No.
Insurance professionals use probability to calculate risk but there are 1000's of factors that can be taken into consideration.So what can we conclude about how much insurance to buy?
1. The best insurance covers losses that have the lowest chance of occurring ( Your house is cheaper to insurance than you car on a relative basis)
2. Never expose more than you can afford to lose. (Simply said, if you cant absorb a large loss you should probably insure it)
3. Never expose a lot for a little. (If you under-value your exposure you will only hurt yourself. Co-insurance is designed to discourage under-reporting insured values)
Talk to an insurance professional about what type of risks you face. Chances are they can help you determine how much insurance you should buy.
What do you think?
The Base Team
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