Some people think that buying insurance is like gambling. They say that if we end up using it, we win and the insurance company loses. If we never end up using it, we lose and the insurance company wins.

Some people think that buying insurance is like gambling. They say that if we end up using it, we win and the insurance company loses. If we never end up using it, we lose and the insurance company wins. However, buying insurance is actually very different from gambling. The fundamental difference is that gambling is an added risk (generally, and the exceptions are often illegal even where gambling is legal otherwise 0), where insurance is a hedge against an existing risk; both decrease your expected financial return, but gambling also increases risk while insurance decreases it.

Why Insurance is Not Gambling

However, buying insurance is actually very different from gambling. When we enter into a gambling engagement, such as buying a lottery ticket or putting money in a slot machine, we create risk of loss that did not previously exist. In other words, there was no risk of losing money to gambling until we bought the lottery ticket or put the money in the slot machine.

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Conversely, the risk of financial loss from other causes already exists whether we purchase insurance or not. For example, my home faces the same risk of being burned down by a fire whether I buy homeowners insurance or not. If I do not have homeowners insurance, I am faced with the possibility of having to pay completely out of my pocket to rebuild my home in the event of a fire.

How Insurance is Better than Gambling

Even if we never end up using our insurance, we still benefit from it because it enables us to live a full, fun, free life that is unencumbered by constant fear of loss. If insurance did not exist, we may not feel comfortable buying or doing many of the things we now consider to be no big deal. When we are properly insured, we feel free to buy expensive homes, drive our own cars down the freeway, fly to Hawaii, cruise through the mountains on ATVs, ski down black diamond runs, and maybe even hike through the rainforests of South America.

How the San Francisco-Oakland Bay Bridge Illustrates the Benefit of Insurance

Have you ever driven across the majestic San Francisco-Oakland Bay Bridge that spans the San Francisco Bay in California? It is very impressive. According to the California Department of Transportation, it is 4.5 miles long (one of the longest spans in the world), 5 lanes wide, and stands about 200 feet above the water level of the bay. On average, 280,000 vehicles use the Bay Bridge per day. The speed limit for most of the bridge is 50 MPH, so thankfully it is equipped with hefty guardrails on each side.

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For those of you who have driven across the Bay Bridge, have you ever hit one of the guardrails? I am sure that a very small percentage of the 280,000 vehicles that cross the bridge every day have ever hit the guardrails. However, if the guardrails were removed, how fast do you think people would drive across the bridge, even though they have never needed to use the guardrails in the past? 20 MPH? 10 MPH? Some of you may quip that you have never been able to drive more than 10 MPH over the bridge anyway because you are always crossing at rush hour, but you get my point.

Even if no one ever hits them, the presence of the guardrails still improves the lives of everyone who crosses the bridge because they can enjoy the drive without having to worry about falling into the water, and they can drive much faster than they would dare to drive otherwise. Would any of these passengers argue that building the guardrails was a waste of money?

Much like guardrails, insurance benefits our lives by increasing our efficiency and reducing our fear, even if we never end up using it. We must carry adequate insurance coverage in all of the essential areas if we are serious about maintaining financial security throughout our entire lives.

Are You Properly Insured?

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At Capstone Capital, we help simplify your life by managing your financial assets so you can have peace of mind and focus on the most important things in life. If you have questions about your own insurance coverage, please contact us to schedule a free consultation.

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Adam Dawson, CFP® is a Principal at Capstone Capital and the author of Timeless Principles of Financial Security.