Insurance – an ingenious modern game of chance in which the player is permitted to enjoy the comfortable conviction that he is beating the man who keeps the table.”

Ambrose Bierce, Journalist

Pros and Cons of Insurance

advantages and disadvantages of insurance

Insurance is quite important in order to be covered in case of emergency. There are numerous different insurances out there that can save you from significant potential financial problems.

However, apart from the many advantages of having insurance, there are also some issues related to it. In this article, the types, pros and cons of insurance are examined.

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Types of Insurance

  1. Car insurance
  2. Life insurance
  3. Health insurance
  4. Travel insurance
  5. Pet insurance
  6. Homeowners insurance
  7. Renters insurance
  8. Liability insurance
  9. Mobile insurance
  10. Cycle insurance
  11. Bite-size insurance
  12. Income protection insurance
  13. Financial markets hedging
  14. Social security and welfare

Car insurance

Car insurance can cover you in case of traffic accidents. It may also protect you in case your car gets stolen.

Life insurance

Life insurance can be quite important since it can cover your family in case you die for several possible reasons. In case you don’t die within the contract period, you will often even get back part of the money you paid as a premium.

Health insurance

Health insurance can cover you against all risks related to your health. This includes basic medical treatment, but also more complex surgeries and other treatment that may be quite costly.

Travel insurance

Many people also get sick during their travels. In this case, travel insurance can cover you and allow you to get medical treatment in foreign countries of our planet.

Pet insurance

Not only medical treatment for humans can be expensive, also our pets can cost us a lot of money in the long run. Pet insurance can cover you in case your favorite needs medical support.

Homeowners insurance

In case you own a house or a flat, you might also consider getting homeowners insurance since it can cover you against certain risks related to your homeownership. It may also protect you against fires and other adverse events around your property.

Renters insurance

If you want to rent a property, you often have to show the landlord that you got renters insurance. This type of insurance covers you in case you damage or destroy something within the property you rent.

Liability insurance

Liability insurance can cover you against big unforeseen events that are not covered by the other insurance types.

Mobile insurance

Our smartphones become increasingly important to us and also always get more expensive. If you have a quite expensive one, you may want to insure it against damage or theft.

Cycle insurance

Bicycling also becomes increasingly popular. Good bikes can cost quite a lot of money and you may also want to consider getting cycle insurance to be covered in case of theft or damage.

Bite-size insurance

Bite-size insurance usually covers people against minor risks of several sorts. Although this kind of insurance can make sense for a limited period of time, it will not too much sense in the long run for most people.

Income protection insurance

In case you get unemployed or cannot work anymore due to several other reasons, you will often be in serious financial trouble since you may no longer be able to pay your rent, your car or other things you need for your daily life. Income protection insurance can help you in this regard since it covers you in case you are no longer able to work in your job.

Financial markets hedging

In case you invest in stocks, you can also hedge yourself against financial losses through different financial instruments. However, this requires plenty of knowledge and should only be done if you really know what you are doing.

Social security and welfare

Social security and welfare are concepts that aim to financially support all people who are not able to provide for themselves due to various different reasons.

Advantages of Insurance

  1. Insurance can cover you in case of serious health issues
  2. Can protect your family
  3. You will be better able to plan for the future
  4. Getting insured can secure your living standard
  5. Most people are risk-averse
  6. Makes sense to hedge against big negative events
  7. Can cover you in case of problems on your travels
  8. People often underestimate risks
  9. Insurance and investment at the same time
  10. Can help people in case of unemployment
  11. Plenty of different insurance companies and plans
  12. Can prevent you from becoming bankrupt
  13. Insurance sector provides jobs for many people

Insurance can cover you in case of serious health issues

One important advantage of insurance is that you can be covered in case of serious health problems. Even though you might not get sick too often when you are young, your chances for serious health issues will increase significantly over time. Medical treatment can be quite expensive and in case you get sick or even need surgeries, it can become quite costly.

In case you don’t have proper health insurance, you will have to pay all the costs related to your treatment by yourself, which can easily add up to over 100,000 USD in case you need extensive medical treatment. Hence, in order to cover yourself against this huge financial burden, make sure to get proper health insurance.

Can protect your family

Insurances of several sorts can also help to protect your family from unexpected financial strains. For instance, in case you or your family suffer from serious diseases, you will have to spend large amounts of money for treatment.

Moreover, in case you die due to several unexpected reasons, your family may lose all its income if you don’t have proper life insurance, which may lead to a state where your family may no longer be able to pay the rent and may end up homeless due to that.

Thus, make sure to also insure yourself and your family in order to also protect your loved ones.

You will be better able to plan for the future

Being properly insured can also help you to be better able to plan your future. For instance, if you don’t have proper insurance, you may always be worried regarding what might happen in case of accidents or other unexpected adverse events.

In this case, you may not be able to make big financial commitments like buying a home since you will not know what the future will bring for you and whether you have to pay large sums of money for medical treatment or other things or not.

However, in case you have proper insurance, you can be sure to be covered in case of emergency and therefore, planning for the future becomes much easier.

Getting insured can secure your living standard

Unexpected financial burdens related to a lack of insurance can also lead to a state where you have to significantly lower your living standard. For instance, you might work in a job that pays good money and live in a nice home with a few different cars. However, one day, you get diagnosed with cancer and the treatment will be quite costly.

In order to afford the necessary treatment, you may have to sell your cars or even your home. In order to avoid this, you should make sure to be insured properly so that you are covered in case of emergency.

Most people are risk-averse

Many people in our society also don’t like risks at all. Hence, if you are one of those people, getting proper insurance can make great sense since you can insure yourself against all kinds of negative events that might happen to you and your overall quality of life might increase due to that since you will no longer have to worry since you know you are financially covered.

Makes sense to hedge against big negative events

Especially insurances that are related to significant negative events in your life usually make great sense. For instance, you always want to make sure that you have proper health insurance so that you are covered in case you need expensive medical treatment. Moreover, you also want to make sure to have proper life insurance so that your loved ones are covered as well.

You might consider getting even more additional insurances, depending on your individual risk profile. Always make sure that you are covered against the biggest risks in your life in order to avoid quite unpleasant surprises once fate hits you.

Can cover you in case of problems on your travels

Insurance can also help you during your travels. For instance, travel insurance is a great way to get covered in case you need medical treatment while you are traveling. In some countries of our planet, medical treatment can be quite expensive.

Therefore, in order to be covered against potential huge medical treatment costs in foreign countries, it can make quite a lot of sense to get travel insurance.

People often underestimate risks

People often also underestimate the risks that are apparent in our lives. Even small probabilities add up over time and at some point in your life, you may get hit by several adverse events.

In such a case, you will be quite thankful that you covered yourself with proper insurance since you would otherwise be in serious financial trouble.

Insurance and investment at the same time

Some insurances are also a hybrid between actual insurance and investment. For instance, this is often true for life insurance since it covers your family in case you die but it will also pay you some money back at the end of the contract term. Hence, such kinds of insurances can also be regarded as a type of investment from which you can benefit later on in your life.

Can help people in case of unemployment

Once you become unemployed, chances are that you will be in serious financial trouble since you will often on longer be able to pay your rent and may also have problems paying for various other things of your daily life.

In such a case, you might be quite grateful for your unemployment or income protection insurance since you will get a certain amount of money from your insurance each month so that you are able to continue to pay your rent and do not end up homeless in the streets.

Plenty of different insurance companies and plans

Another benefit of insurance is that you can choose from a big variety of different plans and companies. Depending on your individual circumstances and your risk profile, you can choose for yourself how much insurance you actually want to get and which options you might want to exclude.

Can prevent you from becoming bankrupt

In case you are not insured against the biggest risk factors in your life, chances are that you will become bankrupt sooner or later. For instance, imagine you need complex surgery that costs over 100,000 USD. Chances are that you will have to get a loan for it and this loan has to be repaid at one point in time.

Yet, many people will never be able to repay those huge amounts of money and therefore often even have to declare bankruptcy. Hence, in order to protect yourself against bankruptcy, make sure to get proper insurance, at least for the biggest risks that may hit you in life at one point in time.

Insurance sector provides jobs for many people

Apart from the many individual benefits of insurance, the insurance sector is huge and provides job opportunities for millions of people all over the world. Thus, the concept of insurance also gives many people the ability to earn an income for their families.

Disadvantages of Insurance

  1. Insurances require you to pay premiums
  2. May not worth it for minor things
  3. People may no longer actively prevent damage
  4. People may overestimate their coverage
  5. Insurance companies often exclude certain services
  6. You may have to sue your insurance company to get your money
  7. It may take long until insurance companies pay you
  8. Implies some level of bureaucracy
  9. You have to quit way in advance if you don’t need it anymore
  10. Adverse selection may lead to problems
  11. Some insurance companies may not accept you

Insurances require you to pay premiums

Apart from the many advantages of insurance, there are also some issues related to this concept. One disadvantage of insurance is that you have to pay insurance premiums for it. Depending on your individual risk, insurance companies will demand you to pay a certain amount of money so that you are covered in case of emergency.

On top of your individual risk, your insurance company will often also demand additional money in order to make profits. Hence, even though insurances make sense for bigger risks, they usually make not too much sense for small risks since those small risks are often not important enough to justify paying significant insurance premiums.

May not worth it for minor things

In most cases, it is not advisable to insure yourself against minor risks. For instance, you can buy baggage insurance so that you are covered in case your luggage gets stolen or is lost. However, your baggage will often only be worth a few hundred bucks and for such minor amounts of money, you may not want to get insurance at all since you will also be able to cover those costs without insurance most of the time.

Hence, for all minor things, you should carefully evaluate whether you really want to get insurance or not. Yet, if you don’t get insured for those minor issues, make sure to save some money in case you need it for those minor damages.

People may no longer actively prevent damage

Another downside of insurance is that people may lose their motivation to actively prevent damage. For example, in case you are covered against the theft of your bike, you might be more willing to leave it outside your house since you know that you are covered anyway and therefore, you may not take the same precautionary measures like in a state where you don’t have proper insurance. Therefore, insurance can also lead to flawed incentives for people.

People may overestimate their coverage

Some people may also simply overestimate their coverage. In many cases, there is a certain amount of deductible related to insurances you have to pay by yourself. Moreover, some insurance companies also only offer limited coverage.

Hence, while many people think they are actually covered against all sorts of risks, this might not be true. Thus, make sure to check the insurance terms in order not to suffer from unpleasant surprises in case of emergency.

Insurance companies often exclude certain services

Insurance companies are usually quite smart and often exclude certain services in their insurance policies. For instance, many insurances exclude services related to the dentist since dentist treatments can be quite expensive and are also often used by people. Hence, make sure to inform yourself regarding potential exclusions in your insurance policy.

You may have to sue your insurance company to get your money

Another downside of insurance is that insurance companies often refuse from paying out money to their customers due to various reasons. Quite often, you even have to sue those companies in order to get your money even if you are covered properly. Consequently, having insurance can also imply serious efforts to get back your money.

It may take long until insurance companies pay you

It can also take a quite long time until you finally get paid by your insurance company. Many insurances often want to examine accidents and other events quite carefully in order to determine whether they actually have to pay for them or not.

Therefore, this can take a quite long time and you may have to wait for several months or even years until you get your money from your insurance company.

Implies some level of bureaucracy

Having proper insurance also implies some level of bureaucracy. You will have to communicate with your insurance company from time to time. This can be quite exhausting, especially if you have several different kinds of insurances at different companies.

You have to quit way in advance if you don’t need it anymore

Many insurance companies also require you to quit your insurance contract way in advance in case you no longer need your insurance or in case you want to switch to another insurance company.

However, many people fail to quit in time and therefore, they often have to stay with their insurance company for an additional term, even if they don’t want to do so.

Thus, make sure to quit your insurance in time in order to avoid paying unnecessary premiums.

Adverse selection may lead to problems

There is also the problem of adverse selection in the insurance sector. Imagine you consider to get insurance. Quite often, you will consider your individual risk profile when it comes to deciding for or against insuring yourself. If you have a quite high risk, you will be much more inclined to get insurance than if you only have a quite low risk.

Hence, this may lead to a state where all high-risk people get insurance while many low-risk individuals may not want to get insurance. In turn, insurance companies may make significant losses due to that. In order to avoid those losses, insurance companies often demand higher average premiums in order to be able to deal with the adverse selection problem.

Some insurance companies may not accept you

If you have serious pre-existing medical conditions, many insurance companies may also not be willing to insure you at all. Hence, for people with those pre-existing conditions, it may be quite hard to get proper insurance.

Top 10 Insurance Pros & Cons – Summary List

Insurance ProsInsurance Cons
Insurance can help you protect your wealthHigh insurance premiums
Can help you in case of serious health problemsMay not be necessary for smaller risks
May give you a better feelingCan give people flawed incentives
Insurance is also important for your familyPeople often overestimate their coverage
Especially helpful for risk-averse peopleExclusion of services are rather common
Can help you against major adverse eventsSome insurance companies may not pay you
People often underestimate risksCommunication can be difficult
Can help you in case of unemploymentBureaucracy can be a problem
Plenty of different insurance plansAdverse selection of high-risk people
Many jobs depend on the insurance industrySome insurance companies will not take you on

Do You Need Insurance?

As we can see from the previous argumentation, there are many advantages and disadvantages of insurance. While it makes sense to insure yourself against all major risks in life, it may not make sense to insure yourself against rather minor issues.

In the end, you have to decide for yourself how much insurance you want to get. Yet, make sure that you set aside money in case you don’t want to get certain insurances so that you can cover yourself in case of emergency.

Sources

https://en.wikipedia.org/wiki/Insurance

https://www.investopedia.com/terms/i/insurance.asp

https://www.healthcare.gov/

About the author

My name is Andreas and my mission is to educate people of all ages about our environmental problems and how everyone can make a contribution to mitigate these issues.

As I went to university and got my Master’s degree in Economics, I did plenty of research in the field of Development Economics.

After finishing university, I traveled around the world. From this time on, I wanted to make a contribution to ensure a livable future for the next generations in every part of our beautiful planet.

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