People sometimes complain about how high their insurance premiums are. Life insurance, homeowner's insurance, various liability insurances, car insurance -- I've encountered many instances where these insurance coverages were higher than they really needed to be. Why? A lack of understanding about what insurance is and what it ought to be.
What Is Insurance?
Insurance is a leveraged form of savings. You are leveraging the insurance company's existing cash reserves. The fact that the insurer places restrictions on what you may use the money for is a consequence of the leverage.
Insurers bind you with insurance coverage stipulating the rules under which you may use their cash reserves and how much money you'll ultimately receive from them. I find that people are often confused by the nature of insurance, even very intelligent people, so I rarely take for granted that this is an easy concept to understand. It really isn't.
Insurance is, more or less, emergency savings for a very specific purpose. Life insurance provides a lump sum of savings given to your beneficiaries prior to you actually accumulating that savings. Health insurance provides savings specifically for medical bills and related costs. Automobile insurance provides savings for property damages related to an automobile accident.
The effect of having the insurance is that you transfer the financial risk associated with having to come up with this savings on short notice from you to the insurer. Sometimes, insurance salespeople and the home office staff like to say that you're transferring a financial risk of loss from you to an insurance company.
What should insurance do for you?
Insurance, as an emergency savings, is unique in its ability to provide you with money you otherwise wouldn't have. However, it's not what I would consider "general savings". In other words, it's not designed to provide you with money to pay for incidental goods or services.
Health insurance, for example, does not function well when every health cost "under the sun" is covered. It's possible to insure a box of tissues for you when you get a runny nose, but that cost would become inflated over time if people starting seeing tissues as being "free" under the insurance policy.
This is a big reason why I favor high deductible health plans. These plans make you responsible for incidental costs up to a maximum dollar amount before the insurance company pays for any medical costs.
It also lowers your premium dramatically. An easy way to make your premiums more affordable is to assume more personal responsibility over your life. Raise your auto insurance premiums to their maximum dollar amount and learn to drive more safely. Increase your health insurance deductibles and adopt a healthier lifestyle. Raise your homeowner's or renter's insurance premiums and fix that old wiring, install new deadbolts, use your window locks and buy a home security system.
In short, use insurance for the purpose it fulfills best: covering catastrophic loss. If you've done a good job making a budget and saving money, then those increased deductibles on your insurance policy will never be an issue.