That is the tricky part. You see, insurance has come a long way and no one can deny it is one of the CORE financial tools. Some may even think that IT is the Mother of all finance. That is because you can literary start with Nothing and gain Everything by setting up an insurance business.
However, the original intention of insurance is protection ( from the buyers point of view ). And it is a game of statistic. You contribute a small amount of money to a pool, if something unpredictable happened to you, you got compensated with a large sum of money from the pool. Statistically less people will face unpredictable incidents than the total money contributed to the pool. The remaining money left in the pool is what the insurance business earns. ( but don't kid yourself, its damn complicated in real life )
So from Personal Finance point of view, insurance is like a lottery. You buy with a small amount of money, if you win, you got a lot of money back. If you don't hit the jackpot, you lose the money you paid. Then next month, you buy again if you want to continue playing. ( today its called Term Insurance )
Ofcourse the differences are :
1. Insurance is a proper contract, govern and regulated to protect your rights
2. Sometimes Insurance 'can be' a sure win lottery if you go with the contract that says 'Whole Life'
3. In normal circumstances, you Do Not Want To 'Win'
... and a few more technical stuff.
So its all about the 'jackpot'. Or its all about the large sum of money you were hoping to win. Why ? Why do you need that sum of money ? And why do you want to buy a lottery, take a chance to get that sum of money ?
Because you have a dream, a target, a goal. Because you want to get that sum of money 'just in case'.
So in Good Finance Planning, you buy insurance when you have a Goal. When you know exactly how much you need just in case you are not able to earn it if some unexpected happen to you.
That is why it does NOT fit into a Basic of Standard Finance Planning Pyramid. You Don't Have to have an insurance in your finance planning. But it will be a big plus if you do ... who wouldn't want to guarantee win a lottery eventually ? :)
So if you have goals in your life, you may need insurance. For example :
You want to earn $100,000 to buy your dream car in 5 years time. You may consider buying an insurance worth $100,000 just in case your plan is interrupted by some unexpected events (sickness, accident etc.) so you know no matter what, you are going to have your dream car ! And the best thing is, you don't have to lock down with your car, you can use that sum of money to buy other things you really want by that time.
Another common scenarios are dependant. If someone depend on you for a living and you care about them, most probably you want to make sure their lives are substainable just in case.
So if you care about yourself or someone else, you may need insurance.
But if you don't give a damn about everything, then insurance may not be the right finance tool for you.
Even if you don't care, you HAVE TO SAVE ! You may NOT regret NOT buying a lottery, but you WILL regret losing TIME - the only Golden Opportunity to Compound.
