Of course there are times when insurance is necessary like it you have a car, but other times it’s a lot more ambiguous and really depends on individual circumstances. I’ll talk about 2 kinds of insurance (supplementary health insurance and life insurance) where it really depends on your individual circumstances whether you’d need them or not.
Supplementary Health Insurance
For the sake of simplicity, I’m going to assume that we’re not talking about the USA, but about every single other developed country in the entire world that has some form of national healthy care. Of course these plans differ, but many of them don’t cover things like prescription drugs, ambulance rides, or dental care. Here in Korea, it’s partly user pay and partly government funded so that for something like cancer, you can actually end up paying a significant portion out of pocket, especially if you want to get treated at the top hospitals in the country. Something like going to the doctor for a cold or the dentist for a check-up is basically free, including medication.
So is supplementary health insurance necessary? For me, the answer is no because I’m young and very healthy. Also, the insurance I get through the Korean government covers a lot and if I were to get sick, my emergency fund of about $10 000 US would hopefully cover the rest. If not, I would be able to get a lot more money through selling some of my investments, although it would take a bit of time. Basically, I’m self-insured. For anything serious, I get a significant discount at the hospital run by the university I work at, so I would have to pay less than other people would. And finally, even though there is a three month waiting period, I could return to Canada and receive free health care for something that is serious, but not urgent.
But for other people? The answer is probably yes if you don’t have a fully-funded emergency fund and/or significant investments. The answer is also probably yes if you are unhealthy and/or older (50+). And, finally, it’s also probably a yes if you have kids. If it’s you, your spouse and 2 kids, the chance that someone will get sick or seriously injured is much greater than for just a single person.
Paying off Debts?
Dave Ramsey offers some sane advice in a world of personal finance crazy: The The Total Money Makeover
Life insurance is something that a lot of people ignore, to their own peril. That said, I’ve met many people over the years who have life insurance and I really have no idea why. The purpose of life insurance is to provide for dependents in case of death. Dependents is the key word here. If you don’t have children or a spouse that requires your salary in order to live, then you really don’t need life insurance.
However, if you have children or a spouse that depend on your salary, you need life insurance. Even a stay at home spouse with young kids should have life insurance because if they were to die, childcare costs would be significant.
Of course, similar to supplementary health insurance if you have a significant emergency fund (1 year or more), significant investments and no debt, you probably don’t need life insurance even if you have kids because you are basically self-insured.
Of the 2 kinds, whole-life and term insurance, term insurance is BY FAR the better choice. See: Whole Life vs. Term Insurance