Risky Business: How Insurance is like Investing

Aren’t they the opposite?

We typically think of investing and insurance as two completely different things.  With investing, you put your money somewhere with the hope that it grows, giving you a return on what you put down.  With insurance, you put your money somewhere to avoid paying more later if something bad happens.  But they share one really important thing in common: risk.

Hey y’all, watch this.

Look at your portfolio: you’ve got all your bases covered, your investments are careful and diversified, protecting you from risk.  You know how to protect yourself in the market and you watch your balance grow every year with satisfaction.  Putting your eggs all in one basket means the possibility of losing everything, so intelligent investors will avoid this in order to minimize any potential fallout.  Diversification is just many ways of avoiding risk.  But minimizing risk – while maximizing return – is the name of the game.

So what about insurance?  Do we look at our own lives the same way we look at our investments?  Most of us do not, thinking that if we have our automobiles insured and our house covered then we are probably fine.  But if we thought about insurance the same way we thought about investing, we would look at it quite differently.  To start, let’s look at how exposed to risk we actually are.

How Exposed Are You?

You probably have your cars, trucks, and home covered from risk in the form of auto and homeowners insurance.  But what about your boat?  Your motorcycle?  Do you have an umbrella policy to protect against liability risks like lawsuits and other unknown circumstances?  If you’re a business owner, is your business insured?  Do you have a Life insurance policy to protect your family from the worst possible scenario?

Each of these represent a risk that insurance has been created to cover.  But most of us don’t have all of the policies to cover the entire “portfolio” of insurance risk.  Not only that, but some of the policies we do have don’t cover everything we think they do.

My work-from-home business is covered by my house.  Right?

So, if we looked at insurance the same way we look at investing, what would that look like?

Minimizing Insurance Risk.

Insurance works by transferring risk from the consumer to the insurance company.  And to make sure we minimize as much risk as possible, we should have a policy that covers all of our exposures.  Auto, Home, Boat, Motorcycle, Personal Umbrella, Life and Health are all pieces of a larger portfolio of insurance, policies that help you manage risk in your personal or business life.  Another way of looking at it is to imagine that each policy is a piece of armor.

The complete Package Policy.

Your auto and homeowners insurance may cover your head and your heart, but what about the rest of the body?  Each additional policy helps cover another part of you that is exposed to risk, resulting in complete protection that can help keep your family safe no matter what takes a swing at you.

Making sure that you’re completely covered is the main reason to insure all of your risks.  But there’s another reason to have all of these policies, especially if they are with the same company.

Maximizing Return.

With investing, maximizing return is all about making the most money for the least amount invested.  With insurance, it is about spending the least amount for the maximum coverage.  Just paying as little as possible on your auto insurance isn’t always the best strategy – you never hear someone bragging about only paying the minimum into their 401k, do you? – having a small premium but only having minimum limits of coverage is often a terrible idea.  Even a small accident can leave you owing money out of your own pocket.

What do you mean my $30 a month policy doesn’t cover this?

Instead, savvy consumers find value in a variety of discounts, none better than the multi-policy discount.  Not only is this a big discount (usually around 10%) but it affects every policy you have with the same company, adding wave after wave of value.  Making sure that you have your policies with the same carrier can help to give you a big boost when it comes to maximizing the most coverage for the least amount of premium.

Know Risk, Know Reward.

It turns out insurance is kind of like investing:  risk plays a big part in both, and you want to make sure you maximize the value you get from what you pay into it.  But in investing we try to minimize risk, while in insurance we try to transfer it to our insurance company.

If we ignore risk and leave a boat without a boat policy, jewelry that isn’t added to your homeowners policy, or a family that doesn’t have life insurance, we are simply rolling the dice in the game of life.  Investors rarely take such reckless, cavalier attitudes with their money, so it is surprising that so many of us have this attitude with the things that matter the most in our lives.

How bad could it be?

Don’t gamble with your life.  Call us, email us, or fill out the form below for an annual insurance review to find the missing gaps in your risk portfolio.  Being proactive can save you from some massive unseen headaches in the future – and can probably save you some money to boot.