Right before my wife and I met, she was in the crosshairs of someone who called himself a "financial advisor." He worked for one of the big insurance companies. He was actually an insurance salesman and almost sold her on a way to "invest" her money. This fellow was trying to confuse insurance with investments.
My wife and I are going to the north shore of Lake Superior soon to go on some cool hikes. Here are some things that might go very, very wrong:
I could break my leg falling on a steep part of a trail. The medical bills associated with this would be huge.
My wife could fall and become paralyzed. It would be hard to be a physical education teacher if she was paralyzed. We would have to change our lifestyle if we lost her income.
On the way home, I could get distracted in our vehicle and swerve and hit someone on their bicycle. I would be sued, for sure. That settlement could wipe us out.
If I crashed our vehicle in the process, we would have to buy a new one. That is another expense we don't need right now.
We could get home from the trip and find an electrical problem caused our house to burn down. I don't need to tell you how much it would cost to build or buy a new house.
I could die. It would be difficult for my wife to keep up our current lifestyle without my income.
We could become so healthy from our activities that we end up living until 115 years old. We would run out of our savings if we lived that long.
What Is Insurance
At its core, insurance is risk management. Every one of those examples represents a large financial risk to my wife and me. The risks are very unlikely to happen, but if they do there are huge costs associated with them. That's where insurance comes in. There are risks that, even though they are unlikely to happen, would wipe us out if they did.
This is what insurance companies do. We can pay them a little bit of money and they bear those financial risks for us.
Medical insurance covers my hospital bills if I break my leg
Disability insurance pays us part of my wife's salary if she becomes disabled
Liability coverage with my auto insurance covers the costs associated with me being liable for injuring someone with my car.
Auto insurance covers the costs associated with fixing or replacing my car.
Homeowners insurance pays to rebuild or repair our house.
Life insurance pays the salary that I can't make anymore if I die
An annuity offers protection against living too long