03 August, 2021

Quora Answer: Why Do the Wealthy Buy so Much Insurance instead of Self-Insuring through Savings?

The following is my answer to a Quora question: “Why do the wealthy buy so much insurance instead of self-insuring through savings? 

A wealthy person would never think to ask such a question, because it demonstrates a fundamental misunderstanding of wealth and leverage.  The purpose of insurance is to manage risk, and mitigate exposure to risk.  If you are using your own funds, you are not managing that risk at all. 

For example, insurance is a means to mitigate the risk of loss of income.  That loss could be due to critical illness, disability, death of an income generator, or loss of ability to generate income through changes in the economy, or loss in business.  You cannot self-insure for that by simply saving, since you have not addressed the loss of the source of income, which generates those savings. 

For example, insurance is a means to generate and protect wealth in the event of loss of investments through various business, personal, legal or other factors.  If you have your savings garnished by creditors due to an adverse court judgement, that savings is not going to “insure” you.  If you have a divorce, and half your assets is taken away as part of the settlement, that means you have half those savings. 

These are just two examples.  Wealthy people, and people who aspire to wealth, buy a lot of insurance.  The more you have, the more you have to lose.  People also buy insurance with a death benefit, not because they are going to die, but because their family is going to live on after them, and they need to be protected from loss of income, and inherited debt.  There is no such thing as self-insuring through savings.



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