When It Comes to Insurance, How Much Risk Can You Take?

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Insurance companies are in the risk-taking business. They collect premiums and pay claims when they occur. But they are not the only ones that play in that sandbox. Every consumer decides what risks to take and how to hedge against loss. We have different risk tolerances, and that determines a great deal of our daily experience. Let’s see how you and your insurance company are more alike than different.

Almost all insurance policies have deductibles — the amount of money you’re responsible for paying before the insurance kicks in. What deductibles do you have? If you have a large deductible — and when I say large, I’m talking multiple thousands of dollars or more — then your risk tolerance is higher. Perhaps you have enough cashola in the bank that you can afford to pay a few grand or more without blinking an eye. If you have a lower deductible, it may mean you have less capital on hand and need the insurance company to step in with its checkbook sooner rather than later.

Remember, the lower your deductible, the higher your premium — and the higher your deductible, the lower your premium. Makes sense, right? The more exposure the insurer has, the higher your premium is.

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Remember that expensive diamond ring your mother never wore, gave to you and that you now never wear? You estimate it is worth about $20,000, but have you insured it? Maybe it never occurred to you, or maybe you figure it didn’t cost you anything and you’re not about to start paying to protect it. That’s a decision you make based on your own risk tolerance. You can’t insure sentimentality, as far as I know.

Rising insurance costs

These days, the cost to insure your home or your car is increasing. This is not welcome news to anyone, and you may be having discussions about whether it makes financial sense to maintain your car insurance. Your car may be older, and if you do a little quick and dirty math, you realize that in a few years, you will have paid in premiums about what the value of the car is. We’re not talking about liability or uninsured-motorist coverage, mind you. We’re just discussing the coverage for any physical damage to your owned vehicle. That’s risk tolerance. How comfortable are you with the idea of knowing if your car is damaged or stolen, it’s all on you? Depending on the you that you are, the decision will ultimately be made.

If you’re one of the lucky ones who own a home, risk tolerance is tested every minute of every day. While you have a loan on the house, your friendly bank will mandate that you protect their collateral — your home — with an insurance policy. You don’t have to make any decisions about should you do it or not — they make that decision for you.

But what happens once you pay off that 30-year mortgage and the house is all yours? Do you continue to insure it? Again, we’re talking about the physical house and perhaps the stuff inside, not liability insurance. Once again, some will simply say they don’t want to pay for anything that isn’t mandated. They will take the risk on themselves. Some will say, “No way, dude (or dudette). Now that the house has gone from a liability to an asset, the last thing I would do is not protect it.” Again, different strokes for different folks.

The choice: Is the risk yours or an insurance company’s?

What this all distills down to is you making an informed and educated decision about how much you are willing to self-insure. Everything is insured — the only choices are do you transfer the risk from yourself to another person or insurance company. If the house burns down in a fire, it is either insured by your bank account or an insurance company, but someone is responsible.

What you should take away from this is that the ultimate decision on how much risk you take on should be made as a well-informed consumer. Make decisions based on your own financial stability, your own educated, well-thought-out attributes. Don’t make significant decisions lightly about protecting things you own. It may seem like a simple decision — pay for an insurance policy or not — but when the time comes, and the reality is losses do happen, you’ll want to be sure that you can live with the choices you made.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Karl Susman is a veteran insurance agency principal, nationally engaged insurance expert witness and broadcast host who translates insurance from jargon to judgment. For more than three decades, he's helped consumers, courts and policymakers navigate coverage, claims and compliance. As Principal of Susman Insurance Agency, Karl works directly with households and businesses to compare options and make clear, defensible coverage decisions.