🛡️ The Guiding Principles of Insurance: Safeguarding Wealth, Not Generating It 💰

Insurance: A term that can make eyes glaze over or hearts race, depending on one's familiarity and experiences with it. It's a staple in our personal finance toolkit, but often, it's misunderstood, underappreciated, or worse, misused. As a financial planner, I'm often asked about various insurance products, such as permanent life insurance and annuity, which can increase in value over time. Yet, I don't own any permanent life insurance policy, and I don't plan on getting one any time soon. Why? Because I use insurance as a safety net, not a wealth generator, guided by core principles I'll share today. These principles frame insurance as a tool to shield your financial health, rather than profit from it. 🛡️💡

💎 Principle 1: Don't Try to Profit, Insurance Isn't Your Best Investment Vehicle

Insurance is for protection, not profit-making. Its core purpose is to protect us from significant financial loss due to unexpected events. The aim should be to compensate for loss, not to gain profit. If you're considering insurance as an investment, I would recommend viewing my video The Truth About Life Insurance: Is It a Good Investment? Remember, other investment vehicles usually offer better long-term returns and significantly lower cost. 📈💼

💎 Principle 2: Insure for Low-Probability, High-Impact Risks, Not High-Probability, Low-Impact Ones

Insurance is best used to protect against risks that are infrequent, yet carry severe financial consequences if they occur. Think of it like a safety net for events such as a house fire, which are rare but financially devastating. 🔥🏠Conversely, it isn't cost-effective to insure frequent, low-cost incidents that can be readily managed out-of-pocket, thus saving you on insurance premiums. When it comes to certain and costly life events, like death, the case for insurance becomes more complex. If you're considering annuities, make sure to watch my video Should You Buy Annuities? Get Annuities Right!!!

💎 Principle 3: Where Possible, Self-Insure by Increasing Deductibles and Maintaining an Emergency Fund 🐖💰

Increasing your insurance deductibles can help lower your premiums. This strategy, also known as self-insuring, assumes you're willing and able to cover small losses yourself. To ensure you can manage these costs, establish an emergency fund.

Take my own situation, for instance. In all of my insurance policies, I opt for higher deductibles of $2,000 or $3,000. The premium savings are significant over time. To mitigate the risk of a larger out-of-pocket expense in the case of a claim, I keep an emergency fund designated specifically for insurance deductibles. This strategy balances the risk and rewards of insurance, aligning with the principles of self-insurance and risk management. 💰🔧

🎯 Final Thoughts

Remember, insurance is a defensive player in your financial game, designed to shield you from devastating financial hits. It's not the star striker scoring your financial goals. These principles will guide you to make smarter decisions about insurance, helping to keep you and your loved ones financially secure in a world of uncertainty. Remember, the goal is not to build wealth through insurance, but to protect the wealth you're diligently building.

It's also a good idea to consult with an experienced and unaffiliated financial planner or insurance broker before making any decisions. They can provide you with personalized advice based on your unique situation and goals. Stay insured, and invest smart! 🎯🚀