I have heard people refer to buying insurance as gambling. The thought is, if we end up using it, we win, and the insurance company loses. If we never end up using it, we lose, and the insurance company wins.
However, here is another way of looking at insurance . . . . .
You pay me two cents for every dollar you earn. If you ever get sick or injured and can’t work, I’ll replace majority of your salary until you either go back to work or until you are age 65.
. . . . Would you take this bet?
I took this bet, it’s called my disability insurance policy, or as I like to call it, my income replacement plan.
Is life insurance like gambling?
Think about it, casino’s make their money because the odds are slightly in their favour. They know they may pay out large lump sums. However, that is offset by those who lose.
That’s just like life/disability insurance. The carriers know that some will need to claim and get paid out, they also know, with reasonable accuracy, how many won’t need to claim. They do this by underwriting a client to determine their life expectancy and use the odds.
How is life insurance not like gambling?
Gambling involves risking your money for potential gain. You are creating a risk of loss, that did not previously exist, by putting your money towards a bet.
Insurance utilizes your money to mitigate risk. The risk of financial loss from other causes already exists whether you purchase insurance or not.
The Insurance Odds
Insurance companies get scared when there is uncertainty. If they can’t use actuarial science to determine what your life expectancy is, they may decide to decline your coverage. They refuse your bet – it’s like a card counter sitting down at the blackjack table, the house doesn’t want you to play.
If your life expectancy is lower than the average person for age and gender, the carrier may rate you. They will charge you more premium given the increase in risk.
And if you are in great shape, you may qualify for a discount via preferred underwriting. You are the type of client the carrier really wants, healthy with no lifestyle risks or family medical history. They reward you, give you the best rates since you are less likely to pass away.
You can think about insurance as a reverse lottery. It’s like gambling, however you are hoping that you lose. If you lose, it means you didn’t pass away too soon.
Unfortunately, life is too uncertain for any one person. Just like gambling, no one can go into a casino and guarantee themselves that they will win without cheating. For me, I’m not willing to put my family’s financial future at risk by believing that I will never be one of those unfortunate people who pass away far too young, or have my income reduced due to a disability.
Life happens!! Are you willing to bet that it will never happen to you? What are the financial consequences to your family if you bet wrong?
Here’s a bet I would make . . .
I bet your family would have wished you took the insurance in a situation of disability or death.
. . . those odds are most definitely in my favour.