Various types of insurance (health, car, life) protect you from relatively low probability but very expensive events in life (cancer, serious car accident, etc.) For the average person, it makes sense to have these kinds of insurance, because we could go bankrupt if one of these events happened.

On average, however, the insured lose money and the insurance companies make money. Not that it is a bad thing; insurance companies do provide a valuable service.

Very wealthy individuals can absorb the cost of expensive events. It seems that they would save money and aggravation by not having insurance at all (because some insurance companies are difficult to deal with).

For a very wealthy person, does it make sense to not have common types of insurance (where not required by law)? How would one determine whether they are better off without insurance?

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    This question I assume is asked for the USA. In my country (and probably many others) it is simply illegal to not have your car insured for example. – Fatalize Mar 20 '17 at 14:15
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    And in my country (and probably many others) health insurance is entirely unnecessary, unless you want to pay for private treatment. – alephzero Mar 20 '17 at 14:41
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    Note that very big companies also buy insurances. Insurers do too. – Relaxed Mar 20 '17 at 17:05
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    @Fatalize I dont know what country you come from so cannot easily speak, but most countries allow an option to self insure if you are sufficiently wealthy. for example in the UK I believe the road traffic act allows you to deposit 500,000GBP with a court in order to not have insurance legislation.gov.uk/ukpga/1988/52/section/144 However in most cases this is foolish as 500,000GBP well invested can generate more income than car insurance costs. – Vality Mar 20 '17 at 18:41
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    @Fatalize: There are two kinds of car insurance (in the US, anyway). Liability insurance covers the damage you might do to other cars/people/property, and is mandatory. Collision & comprehensive insurance covers damage done to your car, and is optional (unless you took out a loan to buy the car). So if you can easily afford to repair or replace your car, C&C insurance is a bad deal. – jamesqf Mar 20 '17 at 19:45

15 Answers 15

up vote 44 down vote accepted

Yes, and the math that tells you when is called the Kelly Criterion.

The Kelly Criterion is on its face about how much you should bet on a positive-sum game.

Imagine you have a game where you flip a coin, and if heads you are given 3 times your bet, and if tails you lose your bet. Naively you'd think "great, I should play, and bet every dollar I have!" -- after all, it has a 50% average return on investment. You get back on average 1.5$ for every dollar you bet, so every dollar you don't bet is a 0.5$ loss.

But if you do this and you play every day for 10 years, you'll almost always end up bankrupt. Funny that.

On the other hand, if you bet nothing, you are losing out on a great investment. So under certain assumptions, you neither want to bet everything, nor do you want to bet nothing (assuming you can repeat the bet almost indefinitely).

The question then becomes, what percentage of your bankroll should you bet?

Kelly Criterion answers this question. The typical Kelly Criterion case is where we are making a bet with positive returns, not an insurance against loss; but with a bit of mathematical trickery, we can use it to determine how much you should spend on insuring against loss.

An "easy" way to understand the Kelly Criterion is that you want to maximize the logarithm of your worth in a given period. Such a maximization results in the largest long-term value in some sense.

Let us give it a try in an insurance case.

Suppose you have a 1 million dollar asset. It has a 1% chance per year of being destroyed by some random event (flood, fire, taxes, pitchforks).

You can buy insurance against this for 2% of its value per year. It even covers pitchforks.

On its face this looks like a bad deal. Your expected loss is only 1%, but the cost to hide the loss is 2%?

If this is your only asset, then the loss makes your net worth 0. The log of zero is negative infinity. Under Kelly, any insurance (no matter how inefficient) is worth it. This is a bit of an extreme case, and we'll cover why it doesn't apply even when it seems like it does elsewhere.

Now suppose you have 1 million dollars in other assets. In the insured case, we always end the year with 1.98 million dollars, regardless of if the disaster happens. In the non-insured case, 99% of the time we have 2 million dollars, and 1% of the time we have 1 million dollars.

We want to maximize the expected log value of our worth. We have log(2 million - 20,000) (the insured case) vs 1% * log(1 million) + 99% * log(2 million).

Or 14.49 (insured) vs 13.7953 (uninsured). The Kelly Criterion says insurance is worth it; note that you could "afford" to replace your home, but because it makes up so much of your net worth, Kelly says the "hit it too painful" and you should just pay for insurance.

Now suppose you are worth 1 billion. We have log(1 billion - 20k) on the insured side, and 1%*log(999 million) + 99% * log(1 billion) on the uninsured side.

The logs of each side are 20.72 (insured) vs 21.42 (uninsured). (Note that the base of the logarithm doesn't matter; so long as you use the same base on each side).

According to Kelly, we have found a case where insurance isn't worth it.

The Kelly Criterion roughly tells you "if I took this bet every (period of time), would I be on average richer after (many repeats of this bet) than if I didn't take this bet?" When the answer is "no", it implies self-insurance is more efficient than using external insurance. The answer is going to be sensitive to the profit margin of the insurance product you are buying, and the size of the asset relative to your total wealth.

Now, the Kelly Criterion can easily be misapplied. Being worth financially zero in current assets can easily ignore non-financial assets (like your ability to work, or friends, or whatever). And it presumes repeat to infinity, and people tend not to live that long.

But it is a good starting spot.

Note that the option of bankruptcy can easily make insurance not "worth it" for people far poorer; this is one of the reasons why banks insist you have insurance on your property.

You can use Kelly to calculate how much insurance you should purchase at a given profit margin for the insurance company given your net worth and the risk involved. This can be used in Finance to work out how much you should hedge your bets in an investment as well; in effect, it quantifies how having money makes it easier to make money.

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    So many good answers and so hard to choose. I picked this one because I like theory and math and, in a way, it is the most direct answer although certainly challenging to apply practically. – Jeff O'Neill Apr 3 '17 at 13:15

I think the key to this question is your last sentence, because it's applicable to everyone, high net-worth or not:

How would one determine whether they are better off without insurance?

In general, insurance is a net good when the coverage would prevent a 'catastrophic' event. If a catastrophic event doesn't happen, oh well, you wasted money on insurance. If it does happen, you just saved yourself from bankruptcy. These are two separate outcomes, so taking the 'average' cost of a catastrophic event (and weighing that against the more expensive insurance premiums) is not practical. This is a way of reducing risk, not of maximizing returns. Let the insurance company take the risk - they benefit from having a pool of people paying premiums, and you benefit because your own life has less financial risk.

Now for something like cheap home electronics, insurance is a bad idea. This is because you now have a 'pool' of potential risks, and your own life experience could be close to the 'average' expected result. Meaning you'll pay more for insurance than you would just replacing broken things. This answer is another good resource on the topic.

So to your question, at what point in terms of net-worth does someone's house become equivalent to you and your toaster?

Remember that if you have home fire insurance, you are protecting the value of your house, because that loss would be catastrophic to you. But a high net-worth individual would also likely find the loss of their house catastrophic. Unless they are billionaires with multiple 10M+ mansions, then it is quite likely that regardless of wealth, a significant portion of their worth is tied up in their home. Even 10% of your net worth would be a substantial amount.

As an example, would someone worth $1M have only a 100k home? Would someone worth $10M have only a $1M Home? Depends on where they live, and how extravagantly. Similarly, if you were worth $10M, you might not need extra insurance on your Toyota Camry, but you might want it if you drive a $1M Ferrari! Not to mention that things like auto insurance may cover you for liability, which could extend beyond the value of your car, into medical and disability costs for anyone in an accident. In fact, being high net-worth may make you more vulnerable to lawsuits, making this insurance even more important.

In addition, high net-worth individuals have insurance that you or I have no need of. Things like kidnapping insurance; business operation insurance, life insurance used to secure bank loans.

So yes, even high net-worth individuals may fear catastrophic events, and if they have so much money - why wouldn't they pay to reduce that risk? Insurance provides a service to them the same as to everyone else, it's just that the items they consider too 'cheap' too insure are more expensive than a toaster.

Edit to counter concerns in some other answers, which say that insurance is "always a bad idea":

Imagine you are in a kafka-esque episode of "Let's Make a Deal". Monty Hall shows you two parallel universes, each with 100 doors. You must choose your universe, then choose a door. The first universe is where you bought insurance, and behind every door is a penalty of $200. The second universe is where you didn't buy insurance, and behind 99 doors is nothing, with one random door containing a penalty of $10,000. On average, playing the game 99,999 times, you will come out ahead 2:1 by not buying insurance. But you play the game only maybe 3 times in your life. So which universe do you choose?

Now, you might say "pfft - I can cover the cost of a 10k penalty if it happens". But this is exactly the point - insurance (unless already required by law) is a net good when it covers catastrophic losses. If you are wealthy enough to cover a particular loss, you typically shouldn't buy that insurance. That's why no one should insure their toaster. This is not a question of "average returns", it is a question of "risk reduction".

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    I still find it totally plausible that someone worth $10M is driving a Toyota Camry and doesn't own a Ferrari. – Dmitry Grigoryev Mar 20 '17 at 13:22
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    @DmitryGrigoryev If The Millionaire Next Door is to be believed, you should expect someone with a net worth of $10M to be driving something closer to a Toyota Camry than a Ferrari. And really; why should you tie up 10% of your net worth in a car if you can make do with one costing a few percent of your net worth? If you were that much into expensive cars, I suspect that you wouldn't aquire and keep a $10M net worth for long... – Michael Kjörling Mar 20 '17 at 13:56
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    In the first decade of this century I once helped a former coworker push-start his 1980's-era Ford Escort hatchback when the battery died. The former coworker had a two-digit Microsoft employee number; I leave it to you to deduce his likely net worth at the time. – Eric Lippert Mar 20 '17 at 18:11
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    +1 for the counter to "insurance is always a bad idea." – stannius Mar 23 '17 at 18:58
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    I partly disagree with "This is not a question of 'average returns'". Insurance can be viewed as a question of average returns, only the return isn't the amount of money you have but rather a utility function that realizes the idea that e.g. the leap from having 50k to having 250k is a lot bigger than the leap from having 250k to having 450k. For example, Kelly Criterion in this answer the logarithm of your "bankroll" (which may include the value of your ability to work etc.) as utility function. – JiK Mar 24 '17 at 15:29

There are 2 maxims that help make sense of insurance:

  1. never insure anything you can afford to replace
  2. always insure anything you can't afford to lose

Following those 2 rules, "normal" insurance makes sense. Can't afford to replace your car? insure it. Can afford to lose your TV? Don't insure it.

People with a net worth in the low millions have very similar insurance needs to the middle class. For example, they might be able to afford a new car when they total it, but they probably can't afford to pay for the long term care of the person they accidentally ran over. Similarly, they probably need to insure their million dollar house, just like average people insure more affordable housing.

"Very wealthy" people still have the same basic choices, but for different assets. If you are a billionaire, then you might not bother to insure your $30k childhood home or your fleet vehicles, but you probably would insure your $250m mansion, your $100m yacht and your more pricey collectible cars.

It's also worth noting that "very wealthy" people are at much higher risk of being sued for negligence or personal injury. As such, they are more likely to purchase personal liability or umbrella insurance coverage to protect against such risks. Multi-million-dollar personal injury suits would never be filed against a poorer person simply because they couldn't afford to pay even the plaintiff's lawyer fees when they lost the court case.

Insurance also makes sense when the insurance company is likely to (grossly) underestimate the risk they are taking. For example, if I am a really bad driver, but i have a clean record thanks to my army of lawyers, then insurance might actually be a good deal for me even on average. To take the "very wealthy" stereotypes to the extreme, perhaps my eccentric billionaire neighbor and I are in an escalating feud which I think will result in my butler "accidentally" running his car into my neighbor's precious 1961 Ferrari.

  • +1 this directly answers "How would one determine whether they are better off without insurance?". – Agent_L Mar 23 '17 at 17:02
  • While your response is generally true. There are also the cases where you know beforehand that you have a high likelihood of needing to have the item replaced and the cost of replacing it is substantially more than the insurance. Examples of these are writable optical drives and blue tooth earbuds. I have never had these last more than a year so I always take out purchase insurance on them. – JSWilson Mar 23 '17 at 18:40
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    @JSWilson i addressed that point specifically in my last paragraph. if you have some reason to believe you have a substantially higher likelihood of filing a claim, then insurance can be a good bet. but on average the insurance company will win. anytime you subject a consumer-grade product to a professional workload, it is worth considering. but keep in mind that consumer product insurance has very high margins you need to overcome – james turner Mar 24 '17 at 17:18
  • To "replace" you can also add "do without", for example when I upgraded my camera I kept the old model, which would have been adequate for my purposes had the new one got stolen -- and in the position I was in at the time, insuring the new one would have been expensive. Of course the middle ground is replacing an expensive car with a cheap one in the event of an uninsured loss. – Chris H Mar 27 '17 at 11:15
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    @ChrisH i wrestled with that word choice myself. my compromise was to phrase the first axiom presuming replacement and the second axiom presuming you make due without. i think it gives the pair both breadth and interest while remaining succinct. – james turner Mar 28 '17 at 16:35

The point of insurance is to trade high variable costs for much lower fixed costs. The question isn't whether you can afford what would be a catastrophic event for anyone else, but whether it would be better to pay a small amount regularly vs. a possibly larger amount occasionally.

One of the reasons to buy insurance is to avoid costly litigation (rich people are more frequently targeted for litigation). By purchasing liability insurance, the insurance company pays for the litigation and/or settlement. If you are wealthy enough to keep an experienced litigation firm on retainer, you may not need that benefit, but it might be worth giving that stress to a third party.

Life insurance is also an important part of estate planning because of the tax treatment of insurance payouts compared to the tax treatment of a large estate.

There are certainly classes of insurance that make less sense for those with great cash flow, but money doesn't obviate all the benefits of insurance.

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    Exactly. Does self insuring a car make sense? Maybe - for Coa Cola Delivery Trucks where the company MAY operate enough that it can run maths and come out ahead. But for an individual - never. – TomTom Mar 22 '17 at 15:45
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    @TomTom: Certainly it makes sense, though of course we ordinary moderately high net worth folks can realistically only do it for C&C, not liability. For instance, over the years I've maybe spent an average of $3K per car. (The most expensive was the $8.5K hybrid, but most of that should go under "tech toy", not transportation.) So what would be the point of paying for C&C insurance? If it costs more than a few bucks to fix, I'd just buy another one. – jamesqf Mar 22 '17 at 18:14
  • @jamesqf: Can you share what C&C means? The acronym I'm familiar with has no relevance in this context, and searching for "C&C insurance" did not render any useful results. – Michael Mar 24 '17 at 15:09
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    @Michael collision and comprehensive – Nathan L Mar 24 '17 at 15:36
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    @Michael: Yes, collision & comprehensive. Maybe it's a US-centric term (though Google gives me 550K hits on "C&C insurance".) It's insurance that pays for damage to your vehicle when there's no other party involved, as when you have a single-vehicle accident, or it's damaged by a hailstorm. – jamesqf Mar 24 '17 at 17:44

It depends. "High net worth individuals" is very subjective.

Lets say a person is worth 1.5 million. High, but not super high. For one, they should have an umbrella policy. Until your net worth is above 300K, you really don't need an umbrella policy. They should insure their home and cars, but should probably have high deductibles. Health insurance is a must as a bad illness can wipe them out. They should have long term care insurance when they reach age 60.

Now lets say a person is worth about 10 million. They might be able to self insure basic transportation and probably don't need long term care insurance. However, they may choose to carry the full coverage car insurance, or other lines, because it is a value.

In conclusion insurance needs change based on a person's net worth and income. It is very hard to make a blanket statement without details of the makeup of one's net worth and how they earn their income.

Having said all of that, a high net worth (HNW) individual may never be able to drop certain coverage. Lets say that a HNW owns a 50K condo, 1K square foot condo. Given that the outside structure is covered by the HOA the insurance on such a unit only covers the contents and liability. The contents could easily be floated by the HNW individual, but not the liability. It is probably a requirement, on their umbrella policy, that they carry the maximum liability protection on their vehicles and properties. In the case above they would carry a policy for the purposes of liability protection.

This could also be true of their dependents. Say for example, their adult child receives some financial assistance from their parents (like college being paid for). The HNW individuals should have their child cover the maximum liability on the auto policy.

According to this site: A person with a net worth of 1.5 million would be in the 90-95 percentile, a person with 10 million in the 99th.

This article does a decent job of describing what constitutes a HNW person or household. Namely 1 million in investable assets, which is of course a bit different then net worth.

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    Interesting link, Pete! So, top 10% is just under $1M, top 5% just under $2M, but it's a huge jump to get to top 1%. I forgot what MND called HNW, $5M? – JoeTaxpayer Mar 20 '17 at 22:01
  • +1 for the point on higher deductibles. If you're a big earner it probably doesn't make sense to bother with $100 deductibles. – quid Mar 21 '17 at 21:15
  • The rule of thumb to have insurance equal to your net worth is just that, a rule of thumb. It's very rough. There's nothing stopping someone from suing you for a million bucks just because you only have $300k, and there's nothing requiring someone to sue you for a million bucks just because you have it. – stannius Mar 22 '17 at 16:37

The general answer to this is "yes". When you're dealing with single-digit millionaires, the answer is that their insurance habits and needs are basically the same as everyone else. When you get into the double digit and triple digit millionaires, or people worth billions, they have additional options, but those basically boil down to using "self-insurance" rather than paying a company for an insurance policy. The following is based on both what I've read and a fair deal of personal experience working for or with various stripes of millionaire, and even one billionaire.

Addressing the types of insurance you mention:

Life insurance

This is generally used to provide survivors with a replacement for income you can no longer provide when dead, in addition to paying for costs associated with dying (funeral, hospital/hospice bills, etc). Even millionaires and billionaires have this, yes, but the higher your net worth, the less value it has. If you're worth 9 or 10 figures, you probably already have trust funds set up for your family members, so an extra payout from an insurance policy is probably going to represent a small fraction of the wealth you're leaving your survivors, and as has been noted, insurance makes a profit, so the expectation by the insurance company is that they'll make more money on the policy than they'll have to pay out on death. That being said, the members of the 9+ figure club I've worked for all had multi-million dollar life insurance policies on them, which were paid for or heavily subsidized by the companies they owned or worked for. I doubt they would have held those policies if they had to pay the full cost, but when it's free or cheap, why not?

Health insurance

Absolutely. As health insurance in America is an untaxed employment benefit, owing to regulations from World War II, all the wealthy folks I've had contact with got outrageously good plans as part of the companies they work for or owned. Having said that, even their trust fund beneficiaries held health insurance, because this type of insurance (in America, at least) is actually not really insurance, it's more of a pre-payment plan for medical expenses, and as such, it provides broader access to health care than you'd get from simply having enough money to pay for whatever treatments you need. If you walk into a hospital as a millionaire and state that you'll definitely be able to pay for your open-heart surgery with cash, you'll get a very different response than if you walk in with your insurance card and your "diamond-level" coverage. So, in this case, it's not as much as about the monetary benefits (although this is a type of "insurance" that's generally free or heavily discounted to the individual, so that's a factor) as it is about easier access to health care.

Car insurance

Although this is required by law, it's one of the common forms of insurance that the very wealthy can, and often do handle differently than the rest of us. Most (if not all) US states have a provision to allow motorists to self-insure themselves, which amount to putting up a bond to cover claims against them. Basically, you deposit the minimum amount the state determines is required for auto insurance with the responsible state organization, get a certificate of self-insurance and you're good to go. All the high wealth individuals I know when this route, for two reasons - first of all, they didn't have to deal with insurance companies (or pay sky-high rates on account of all the speeding tickets they picked up) and secondly, they made their deposit with government bonds they had in their portfolios anyway, and they could still collect the interest on their self-insurance deposits. Of course, this meant that if they wrecked or dinged up their Maserati or Bentley or whatever, they'd be out of pocket to repair or replace it... but I guess if you can afford one $200,000 car, you can afford to buy a second one if you wreck it, or get by riding one of your other luxury automobiles instead.

Since someone else mentioned kidnapping insurance, I'll point out here that what Robert DeNiro did in Casino when he put a couple million dollars into a safety deposit box for his wife to use if he was kidnapped or needed to pay off a government official is essentially the same thing as "self-insurance". Putting money away somewhere for unexpected events in lieu of buying an insurance policy against them. In real life, the very wealthy will often do this with US treasuries, government bonds and other interest-bearing, safe investments. They make a little money, diversify their portfolios and at the same time, self-insure against a potential big loss.

Home-owner's insurance

This is another insurance area where even the very wealthy are remarkably similar to the rest of us, in that they all generally have it, yes, although the reason is a little different. For normal folks, the home they own is generally the largest part of their net worth, or at least a very substantial fraction, for those older folks with retirement savings that exceed the value of their homes. So for us, we have home owners insurance to prevent a catastrophic event from wiping out the lion's share of our net worth. If you're an ultra-wealthy individual who can afford an 8 figure home, that's not really the case (at least with the ones I've dealt with, who made their fortunes in business and are good managing their wealth and diversifying their assets - could be different for sports stars or the entertainment industry), and these people generally own multiple homes anyway, so it's not as big a deal if they lose one. However, no one actually buys a multi-million dollar home by writing a multi-million dollar check. They get a mortgage, just like the rest of us. And to get a mortgage, insurance on the property is a requirement. So yes, even the ultra wealthy generally have insurance on their home(s). There is an element of not wanting to shell out another 20 million if the place burns down, or someone breaks in and steals your valuables, but the bigger part of the reason is that it's required to get a mortgage in the first place, which is generally done for financial reasons - interest on your mortgage is a tax deduction, and you don't want to sink millions of dollars all at once into buying a property that's not going to appreciate in value, when you can get a mortgage and invest those millions of dollars to make more money instead.

  • While I agree with your opinion on "term life insurance" for the wealthy I'd counter your your overall conclusion by noting "Whole life insurance", the generally poor return, high fee product salespeople make huge commissions on only makes sense for high net worth individuals because it moves assets to beneficiaries without being counted in the final estate, or taxable to the beneficiary. – user662852 Mar 22 '17 at 11:54
  • I know about the bond-in-lieu-of-auto-insurance. However when I did the math, the bond itself is a total loser of an investment compared to a prudent University endowment style investment at 4-7% rate. Those proceeds would pay for auto insurance and then some. NevermInd the higher coverage limits. Nevermind the insurance company main-tanking a legal fight, which takes it out of your focus so you can focus on making money. – Harper Mar 25 '17 at 20:47

Simply put, it makes sense from the moment you can afford the loss without negative consequences. For example, if your car costs $20000 and you happen to have another $20000 laying around, you can choose not to insure your car against damage. In the worst case, you can simply buy a new one.

However, not insuring your car has a hidden cost: you can't long-term invest that money anymore. If your insurance costs $500 a year, and you can invest those $20000 with a return on investment of more than 2.5%, it still makes sense to invest that money while having your car insured.

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    You assume that $20k would be your max out-of-pocket expense but that is not often the case. Lets say while totaling your car, you hit a minivan with a family of 6 causing severe injuries. If you had insurance they would pay the medical expenses and inevitable payouts. If you did not have insurance then the family sues you and your estate. So the "worst case" is much more than the $20k car you totaled. – Ron Beyer Mar 20 '17 at 13:32
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    @RonBeyer You're confusing car damage insurance and compulsory third-party damage insurance. If you don't have the latter, you simply won't be allowed to drive, no matter how much money you have. – Dmitry Grigoryev Mar 20 '17 at 13:36
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    @RonBeyer Thanks, I didn't know there were places where you could drive without any insurance at all (BTW, what happens if I get hit by a car there and the driver doesn't have the money?). In my example I assume that the difference between comprehensive and liability only policy is $500 a year for a $20k car. – Dmitry Grigoryev Mar 20 '17 at 13:45
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    @DmitryGrigoryev, Unless you carried uninsured motorist coverage you would eat the loss. Same as being hit by uninsured without money anywhere else. Just because insurance is required does not mean everyone has it. Laws are not magic. – Shannon Severance Mar 20 '17 at 14:55
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    @ShannonSeverance Actually in some countries laws pretty much are magic. At least as far as insurance of motor vehicles goes. In the Czech republic for example if you are hit by an uninsured vehicle the loss is covered by a specially set up insurers branch which then deals with trying to get the money from the perpetrator. – DRF Mar 20 '17 at 20:08

There is an economic, a social and a psychological side to the decision whether to buy insurance or not, and if yes, which one.

Economically, as you say already in your question, an insurance is on average a net loss for the insured.

The key word here is "average". If you know that there are many cancer cases in your family buy health insurance by all means; it's a sound investment. If you are a reckless driver make sure you have extensive coverage on your liability insurance.

But absent such extra risks:

  • Independently of somebody's wealth insurance should be limited to covering catastrophic events.

  • What is often overlooked is that the insurance by all means should really cover those catastrophic events. For example the car liability minimums in many states are not sufficient. The typical upper middle class person could probably pay the 15k/30k/10k required in Arizona with a loan on their house; but a really catastrophic accident is simply not covered and would totally ruin that person and their family.

  • Insuring petty damage is a common mistake: economically speaking, all insurances should have deductibles which are as high as one could afford to pay without feeling too much pain.

That "pain" qualification has an economical and a social aspect. Of course any risk which materialized is an economical damage of some kind; perhaps now I can't buy the PS4, or the diamond ring, or the car, or the house, or the island which had caught my eye. I could probably do all these things, just perhaps without some extras, even if I had paid for insurance; so if I don't want to live with the risk to lose that possibility I better buy insurance.

Another economical aspect is that the money may not be available without selling assets, possibly on short notice and hence not for the best price. Then an insurance fee takes the role of paying for a permanent backup credit line (and should not be more expensive than that).

The social aspect is that even events which wouldn't strictly ruin a person might still force them to, say, sell their Manhattan penthouse (no more parties!) or cancel their country club membership. That is a social pain which is probably to be avoided.

Another socioeconomic aspect is that you may have a relationship to the person selling you the insurance. Perhaps he buys his car at your dealership? Perhaps he is your golf buddy? Then the insurance may be a good investment. It is only borderline bad to begin with; any benefits move the line into the profit zone.

The psychological aspect is that an insurance buys peace of mind, and that often seems to be the most important benefit. A dart hits the flat screen? Hey, it was insured. Junior totals the Ferrari? Hey, it was insured. Even if the house burns down having fire insurance will be a consolation.

I'm going to take a very crude view of this: Suppose that you have an event that would cost $100,000 if it occurred. If there's a 10% chance that it'll happen to you and the insurance costs less than $10,000, you'll make a profit "on average."

This is, of course, assuming that you could afford a $100,000 loss. If you can't, the actual loss could be much higher (or different). For example, if you couldn't afford surgery because you didn't have health insurance, it could be a lot more "costly" in a way that could be difficult to compare to the $100,000.

Obviously, this is a very simplistic view of things. For example, making more than you paid on the premium typically isn't the only reason you'd buy insurance (even if you're high net worth). Just wanted to throw this out there for what it's worth though.

While a lot of the answers focus on cost to replace and how much money you should have for tangible goods. There are a few more issues to consider.

However before we get started, these issues are not related to ones net worth. They are related to other factors. Having money certainly helps, but someone worth only $10 may not need to insure their stuff under some circumstances.

Insurance is a risk avoidance strategy. As such, it should be used to avoid risks that would otherwise cause issues for you. The normal example is a house. If you lost your house due to fire, would you be able to "make it" while you paid the mortgage off, and got a new mortgage to pay for a new house? This is a relatively simple view, but a good one.

These days people tend to look at insurance as a savings account. I payed in X so I am entitled to Y. Heath insurance (a bit more on this later) is exacerbating the issue by selling it's self that way, but it simply isn't true. What your paying the premium for to avoid the risk of loss. Not so you can have a pool of money to draw from in time of need, but so that a time of need should never arise.

Which brings us back to, should you get insurance?

Tangible Assets

Let's assume you have no legal or contractual obligation to have insurance. If you put the money you were spending aside would you have enough money to secure a new asset should your current one just vanish? This is the normal argument. But it has a second side. Do you need the asset at all, or can you just accept the loss. Lets pick on a red neck for a second. While certainly not millionaires, or "well off" by conventional means, the guy with 6 cars on bricks in his lawn does not need to insure 6 cars. If one were to vanish, it may make a hardship but hey, he's got 5 more.

So with tangible goods it's more of a question of can you afford to replace the item, do you need to replace the item, and how big a risk is it to you to loose the item? What would you rather loose, the item, or the cost of the insurance?

Non-tangible Assets

I am going to try to keep this as un-rant like as I can manage, but be aware that I am biased.

There are two big examples of non-tangible assets that are commonly insured. Life Insurance, and Health insurance. There are others, but it's very hard to get people to pay money to insure something that they don't actually have. Ideas can be insured, for example, but in order to insure an idea you have to spell it out, at that point why not just file for the patent etc. etc.

Keep in mind that a lot of people and companies will insure against losses due to IP theft or other such intangible things. Largely these follow the same rules as tangible assets. This section is meant to focus on those insurances that do not.

Life Insurance

Life insurance is a bit odd. Were all going to die, so it seems like a "good bet" but what your insuring against with life insurance is an early death. For term life insurance it's a gamble. Will you die before your term runs out. For full life insurance (with no term) it's a different gamble. Will you die before you have paid in what they agreed to pay out. In many cases it's also a gamble that you will miss a payment or two and cancel the policy before you die. If the risk of your death worth the insurance. Usually while young the answer is yes. Do you leave your Family short one earner? Will they make it without the insurance? But as you get older, as life insurance becomes more of a sure thing it also becomes less needed. Your kids move out, there not dependent on you any more. You have retirement accounts setup so your partner need not worry should something happen. What risk exactly are your trying to avoid at this point. You will die. You have planned for that eventuality, it's not a risk anymore, it's a fact.

Heath Insurance

Is another beast all together. Historically you insured against some catastrophic event, that you couldn't really plan for. Say a heart attack. Surgery and treatment would run in the tens of thousands, so it would ruin you if you didn't have insurance to cover that. That was the risk that you were avoiding. A big, expensive event, causing financial ruin. However, over time it has shifted into something else. The general concept is still there, insure to avoid a risk. But the "risk" has been widened to include all manor of things that are not actually risks.

For example a flu. You would go to your doctor, pay your co-pay, and your insurance would pay the rest of the visit. Then you would go to the drug store and get the drugs, pay your co-pay and the insurance pays the rest. But what risk, in this instance are you insuring against? That you can't cover the cost of a doctors visit? That you can't cover the cost of the medication?

In this example, a common one, historically the "mother of the house" would go you have a flu, have some chicken noodle soup and go to bed. That would be the end of it. Cost of care is a day's lost wages (or maybe a weeks) and a few cans of soup. However today, because we choose to, the cost of care is much higher. We go to the doctor, pay our co-pays, the insurance has to pay it's part. The doctors office has to carry the cost of the staff it takes to see you, and the staff it takes to handle the claims with the insurance company. And now your flu, cost $1,500. But again that's not exactly true either.

With heath insurance and "normal" medical care (like sprained ankles, and colds, etc.) the insurance only really covers the cost of having insurance. In that same flu example, if you went to the doctor as a "self pay" (no insurance) you would often time get a much lower, and reasonable rate. Frequently, under the cost of your standard co-pay. This seems like the doctors being "bad" but it's not. They don't have to file a claim, they don't have to keep track of it. They get immediate payment, not payment 6 months down the line that they need to share with other businesses.

With "critical" or "catastrophic" care, heath insurance is still a good thing. If you have a big, unforeseen event, then heath insurance is great at helping you avoid that risk.

With chronic (long term) care, your back in the same boat as the flu. Often times you can get better, and cheaper, care as a self pay patent, then as a insured patent. That is not always the case however. So you have to measure your own circumstance, and decide if insurance is right for you. But remember insurance is about risk avoidance, and not about paying less. You will ALWAYS pay more for insurance. It's designed that way. Even if the cost is hidden in many ways. (Taxes, spread out over visits, or prescriptions, etc.)

The point about insurance is solidarity. Think about this:

In London a few hundred years ago people first started insuring their houses against fire. There were several insurance companies, and if you used one you got a marker on your house. So if your house caught fire they would come and check, and they would put the fire out only if it had their marker on it.

Now, in most places these days the fire brigade will always come and always put your fire out. We expect this, and we are happy to pay for this service by taxation, and we do not fret about wasted money if we pay it for decades without ever having a fire. We also do not complain if the neighbour's house burns, and they get the full fire service which we have been paying for.

Now all the fire brigade do is rescue you and put your fire out. Here in Germany every house owner is also obliged to have fire insurance, so if your house burns it can be repaired or rebuilt. Everyone pays insurance premiums, and I never heard anyone complain if they paid for 50 years and never claimed anything.

If you need a new house the payout is huge. But the premiums are low. This only works if everyone is insured. This can only work if we all accept the concept of solidarity.

It is easy to say, I don't smoke so I don't need to insure against fire, or, I live a healthy life so I don't need to insure against cancer. But lightning does not check your CV before it strikes. It hits you or your fellow man, and how can you justify not helping your neighbour? Insurance can only work if we all take part.

I think that insurance is one of the best things ever created for this reasons:

  1. Because "insurance" brings security and peace. For example what would happened when someone damage another persons car. With all his rights the person whose car has been damaged would ask compensation. But what if the person who caused the accident doesn't have enough money to compensate it, this for sure that would cause chaos, so here is the time when insurance companies get involved, because they compensate the cost of the damaged car. In this way everyone gets home happy.
  2. Help people in need. Most of the people who gets a life insurance are healthy entire all their life, so they would say that they are spending money for nothing. I can't join them. Because first of all their money will be distributed all the people in needs. They will be distributed to the persons, who will be suffering from different diseases, you would say that the insurance company will get a good part of it. Yes they will, of course they will, because they are working for it, they are employing much persons and they will get their profit too. Is there anyone that will make it for free?
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    This doesn't seem to answer the question, which is about how high net worth interacts with insurance and whether or not it is personally efficient – Kevin Wells Mar 21 '17 at 22:42

Let's face it: most people pay more in insurance premiums than they "get back" in claims. I put "get back" in quotes because, with very few exceptions, the money paid out in claims does not go to the insured, but to others, such as doctors and hospitals. But even if you ignore the question who does the money actually go to, it's a losing proposition for most people.

The exceptions are those who have a major loss, greater than what they put in over the years. But never forget: these are exceptions. The return on your money, on the average, is only a little better than playing the lottery.

The usual counter-argument to the above is, but what if you are one of the exceptions? I for one refuse to let my life be dictated by worries of unlikely events that might happen. If you're the sort who obsesses on what could (but probably won't) happen, then maybe you should have insurance. Just don't tell me I need to do the same.

When I lived in California, they had a program where you could deposit $25,000 with the State, and then you could drive, legally, without insurance. I did this for a while, didn't have any accidents, and exited the system (when I moved out of state) a few years later with more money (interest) than I put in. You don't accomplish that with insurance.

But let's get back to rich people. Unless you get into an accident with you at fault and the other guy needing a head transplant as a result (joke), you could probably absorb the cost of an accident without blinking an eye. Those in the upper-middle-class might do well with high-deductible insurance that only pays out if there's an extreme accident.

Then again if you have to borrow to buy something expensive (making monthly payments), they will usually demand you buy insurance with it. This is a way for the lender to protect himself at your expense, and if you refuse, good luck getting a loan somewhere else.

I hate the idea of insurance so much I would make an act of insurance punishable by law.

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    Two problems with this answer: First and most glaringly, answers on this site are not about your personal opinion or experiences. That means that about half of your answer is irrelevant. I may suggest an edit removing all of those bits Second is that you do not understand insurance or the economics surrounding it. As mentioned in another comment, insurance isn't a gamble, it is a trade off between a definite loss of some money to protect against a possible loss of a lot of money. You are basically buying economic security – Kevin Wells Mar 21 '17 at 22:47
  • First of all, my apologies for the delayed reaction to this comment. – Jennifer Oct 11 '17 at 18:38
  • Yes, I did include a lot of personal opinion in there, but why not? Just skip over the parts you're not interested in. Secondly, I do understand the economics of insurance -- I just don't like them. When I worked for a dental insurance company, 24% of all receipts went to overhead expenses (including my salary) -- that eats into your expected rate of return big time. – Jennifer Oct 11 '17 at 18:50
  • Thirdly, I agree that the more risk you can comfortably absorb, the less you need insurance -- I thought I made that clear in my post. Finally, I don't like the idea that insurance is for "peace of mind" -- anyone who comes to me offering "peace of mind" is going to get "a piece of my mind" instead! – Jennifer Oct 11 '17 at 18:51
  • The reason not include your personal opinion is that it is against the guidelines for this site, and as you may have noticed answers that include opinion tend to get down-voted. Also, if your issue with insurance companies is the overhead cost, then you should make that clear in your answer. Finally, I said nothing in my comment about being able to absorb more losses or not, so I don't know what you're responding to there – Kevin Wells Oct 16 '17 at 18:03

Indeed, there is conservation of money. If the insurance companies have those big buildings and television commercials and CEOs, then that money comes from only one place: the insurance premiums of customers. To say insurance is a good deal is either

  1. naively biased/misinformed
  2. downright dishonest
  3. A very rare situation where it does actually benefit in expected value... but in those cases, it just indicates that others are losing even more than the insurance company takes in... nothing in life is entirely free; someone else pays for your gains, and it's almost certainly not the insurance company overall. Those people are making money off their brethren (and are therefore no different than the insurance companies)

The benefit and cost of insurance for most: Indeed, of all the answers here, James Turner's is best. If you can't afford to lose something, it is vital to insure it. Ideally insurance would be a non-profit operation to best cover this. Such that people would as a whole lose nothing. Theoretically it could even be slightly for profit by making wise investment decisions, and benefiting from the future value of money by beating inflation. But they don't (see this writeup for slightly dated information on health, and this Wikipedia article for more direction).

But even if you are taking an average loss (by using a profit-making insurance company), by taking insurance you avoid the situation where you're crippled by a catastrophe. You are paying a fee to hedge your losses. Like James said, insure what you cannot afford to lose. But realize you're going into a situation where the overall net is an average loss of between 10-50% of your money, on average. Basically you're playing the lottery, except your net losses mostly go to fund the company and the CEOs rather than nominally support education.

But you sounded like you understood those ideas well, so...

Can you self insure? As others noted, yes, there is the option of self insurance in most places. Even even often when insurance is considered as required. For example, in the US, basically car insurance coverage is required. But generally you are legally able to self insure to cover this requirement:

  • In some places (often more fiscally conservative states like Florida) all that is required is evidence of satisfactory (unencumbered) net worth. Basically, you have to have the money/assets to cover the big losses that others may suffer.
  • In others place (often more fiscally progressive states), a liability bond may be required (for example, in Washington and Vermont). You must actually put the money aside to cover the costs.

The cost of self insuring: There is one cost to self-insure: time. It takes time to research the laws, time to to satisfy those requirements, and then time to find/setup all the care providers (doctors, mechanics, lawyers, etc).


When is it worth it?

First, again, you must satisfy the prerequisite: you are able to financially handle the loss of the topic under consideration.

At a commenter's request, here is an attempt to better spell out this requirement (though it doesn't appear pertinent to the question asked, it is indeed very important not to mistakenly assume you satisfy this requirement). Can you comfortably cover the level of insurance you would otherwise be taking out. $50,000/$100,000/$50,000 is a common reasonable insurance level, so that would be $200,000. Basically, have enough money to cover the loss of your car, your possible injury expenses, and most importantly the damage and medical of anyone else you hit. You would need to have that value available, optimally in your accounts. Alternatively, you could weigh it against your assets, such that if you had low accounts but a paid off $200,000 house, you could conceivably sell your property and still be able to survive financially afterwards. However, it is indeed dangerous to make this assumption, as there may be additional costs and troubles in selling assets, and you may fail to recognize how precious the property is to you. Having at least double or triple in property you'd be willing to part with might be a more comfortable number. Again, the main idea is: can you afford to lose the insured value tomorrow? Though you hope it wouldn't happen, if someone came and took $200,000+ of yours tomorrow, would you be able to adjust to it relatively easily? If the answer is yes, you've satisfied this requirement. In many states it's easier to understand whether you can meet this requirement: it instead becomes can you take out the liability bond required.

If you've met that requirement, then it comes down to the time you'd lose versus the savings you'd gain. To get a fair idea, you'll need:

  1. The premium you would pay to purchase the insurance: Since you are likely losing 10-50% of your premiums, it should be fair to make a rough estimate of value lost by using 25% for most purposes (especially given that this still ignores the future value/opportunity cost of your money, which could often be 5-10% if invested well)

  2. The value of your time: You must properly identify either:

    • What you are willing to pay someone to save you time and effort (hints might be seen in what you pay lawn care providers, delivery drivers, etc... or by asking yourself what bonus cost/losses you'd be willing to take per day to go on a standard vacation, in addition to the actual costs)
    • Or what extra income you could make per hour of work if you likely would use time up that you would instead use to generate additional income.
  3. A rough estimate of how much time it will take you to research the legal requirements and meet them, and then to research/handle the subsequent needs that come up which the insurance would take care of in an average year. So try to balance those typical years where you wouldn't have a lot of work to do with a year where you'd need to call repair mechanics or find health practitioners. Perhaps aim high, research/calling usually takes more time than we think.

Is this calculation positive?
Your estimated net annual benefit (or cost) from self insuring is:
0.25 * (Insurance Premium Per Year) - (Estimated Value of Your Time)*(Estimated Hours Of Work\Research to Self-Insure Per Year)

This is a rough estimate. But if the result is quite positive (and you can afford to cover the hit the insurance would otherwise cover), you're likely better off self-insuring.
If the result is quite negative (or you can't cover the possible costs insurance would cover), you're probably better off buying insurance.

Finally, indeed there are still a few other factors on each side to consider...

  • You are actively passionate in finding the best services to benefit to you. Insurance companies often aren't. You're less likely to put off a life saving health screening in order to save a few dollars than an insurance company is. A benefit of self insuring.
  • There's also the luxury of not dealing with the stress or people. Some people are willing to pay a lot of money to escape a lot of social interaction. Then, will you have more frustration dealing with insurance companies regularly/in claims or in working through extra details with the service providers in such circumstances. You'll have to weigh this to decide which option it benefits and how important it is to you.
  • Sometimes there are additional costs that some industries may add for being an independent customer (it's easier to negotiate with/handle many people when they are setup as one large group rather than individuals). A benefit of purchasing insurance.
  • The freedom of choice. You can use any health care provider/mechanic whenever you wish, or do whatever you want with your home (such as have a trampoline/pool/etc) without stipulation, and you're the only one who can decide if it's a good or bad idea. Generally favors self insuring (if you're smart)
  • The value of experience. An insurance agent may recognize pitfalls you might miss. Benefit: purchasing insurance.
  • The peace of mind of being able to trust the one making choices in your life. There's often (or there often should be) suspicion on those making the choices for your insurance company. You know what you're doing. Benefit: self insuring.

Most often those additional pluses and minuses probably are smaller than the primary cost/benefits spelt out earlier. But if you're rich enough to have the money, you're in a situation where you can likely sacrifice a little income to have your peace of mind. So there's certainly a lot to consider in it. But if you're a self starter, I believe you're right that you'll find it's more worthwhile to self-insure if you indeed have the resources.

  • Note, I don't speak from specialized expertise in the field, but from a math background. I have taught a high school financial management class in the past, and have generally moderate political beliefs, so hopefully that offers some foundation to speak from. But most importantly of all, I have no skin in the insurance topic, which so many who will give advice on the topic cannot say. – JeopardyTempest Mar 21 '17 at 9:47
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    So insurance is always bad (based on your three points) but you should definitely insure things you cannot afford to lose preferably from a nonprofit insurance company. You do understand that nonprofits still have CEOs and buildings and employees, right? Your calculation completely misses the fact that you have no reserve funds from which to pay a claim. It would be one thing to gear this toward self-insuring via higher deductibles, but this idea that 25% of the premium you would have paid can be sufficient isn't sound, until you're MANY years out. – quid Mar 21 '17 at 21:14
  • @quid I repeatedly noted that you must be able to afford the loss/damages that you may incur. To self insure you MUST have the worth to do it (whereby you prove that you could sustain the loss... you may not want to, but would be able to... whether it's reserve funds or by selling something.) If "having the worth" means you'd have to sell something that you really won't feel comfortable selling, well then indeed you really DON'T feel you can afford to lose it. But in the financial circumstances Jeff proposed, he's suggesting someone who has comfortable resources to cover the possible costs. – JeopardyTempest Mar 21 '17 at 22:06
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    You use the word afford twice, both times referring to a different answer, then your bold "final answer" includes nothing related to total assets, net worth, or expected/potential claim/loss size, only a proportion of the premium, and the value of your time. The only difference between non-profit and for-profit is what the company is allowed to do with its surplus money. It's a fantasy that non-profits are necessarily less costly or more efficient compared to for for-profit alternatives. – quid Mar 21 '17 at 22:25
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    You could take the same profit stance with any industry, if profit was not built in to prices things would presumably cost less; this paradigm isn't unique to insurance. And your calculation still doesn't address assets, net worth, or expected claim size. You took the time to come up with a formula to determine whether or not you should self insure and completely ignore the value of the risk being insured relative to your financial situation or the likelihood of loss. – quid Mar 21 '17 at 23:25

Everyone is usually better off without insurance. A very few people are much better off with insurance. Insurance is a gamble and when you lose, you win. Very few people lose badly enough to win. Most people just pay money into insurance and never get as much back as they pay in. For most people, in most lives, insurance is a bad deal. The reason people crave insurance is because they cannot calculate the probability of something bad happening as well as an actuary can do so. The gap in knowledge between you and and actuary is what make insurance providers rich and you poor. They are smart, you are not. You think some terrible thing is going to happen to you, they know it probably won't. So they sell you a product you probably will never need.

Anyhow, most people can't understand probability, and how to analyze risk, so they won't get what I'm saying here. Understanding the real cost of risk is the first lesson in understanding money and wealth. Rich people usually understand the value and cost of risk. Hence, they only buy insurance when they expect to lose, that is, to win. We rich people do everything only when we know already we are going to win. We don't gamble, unless we are the house. When a self-made rich man buys something, its because he knows already he is going to come out ahead on it, most probably.

  • 3
    How do YOU rich people figure life insurance into your estate plan? Maybe you're not rich enough to have an estate plan or you have a terrible estate planner. – Nathan L Mar 20 '17 at 23:44
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    Even self-made billionaires make mistakes and gambles that don't pay off and act irrationally, economically speaking. Also, most high+ net value individuals didn't make their furtunes in finance or related industries - being able to throw a sports ball really well, or getting millions of people to buy an album, or happening to create a social network at just the right place and time does not automatically translate into a better understanding of money than anyone else. The truth is that making a huge fortune is about luck as much as it is about hard work and being exceptional at what you do. – HopelessN00b Mar 21 '17 at 2:30
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    Just to note, you never "win" with insurance, in the colloquial sense. Insurance isn't there to give you more money. Its there to bring you back to where you started at the time of loss. – BruceWayne Mar 21 '17 at 4:39
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    As noted elsewhere on this page, insurance isn't a gamble, it is essentially buying economic security and predictability in inherently unpredictable and volatile situations (like health, auto accidents, etc.) – Kevin Wells Mar 21 '17 at 22:53

protected by Ganesh Sittampalam Mar 21 '17 at 9:54

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