I’ve heard so many times that its stupid to go to Vegas and gamble. The house almost always wins and for every winner there are a multitude of losers. So unless you are just doing it for the entertainment value and can afford to lose the money, economically it’s a dumb play. Now if you think of the insurance company as the “house”, the house will always win in the long run. If it turns out you need the insurance due to some disaster, then you’re the winner, so to speak. But the vast majority of people who buy insurance will end up as loser in the long run. And when it comes to medical insurance, even if you don’t have any, the ER will still take you. And if you can’t pay they can’t put you in jail or even take your house (at least in Florida). So if I’m stupid, economically speaking. for gambling, why am I not stupid for buying insurance? The majority of people would have more money if they invested their premiums instead of giving it to insurance companies.
It is wrong to think of insurance as an investment. You should think of it as a cost where you’re purchasing some protection against a catastrophe that you don’t have the resources to work through on your own.
So yes, you should expect that your expected claims return will be less than your “investment”. But that isn’t the point. The point is that if your house burns down or you need two million dollars worth of cancer treatment you don’t lose all your assets and end up destitute. There is an upper bound to your financial obligations: the cost of your premiums and any deductible.
That is why if you can afford to deal with the catastrophe you may be better off “self insuring”. I suspect most extended warranties on household goods fall into this category, where you’re better off in the long run without and taking the occasional hit where you have to replace the faulty dishwasher yourself.
Think about the nature of risk. Risk can be inherent to a situation - owning a car, house, or living life in general. The risk exists whether you want it or not. Everyone that buys insurance is paying someone for providing the service of assuming their risk. When you gamble, you create risk out of thin air. Taking negative expectancy bets for the fun of it is different than paying an insurance company to assume risk you don’t want.
My ex-father-in-law was in the rental car business. He self insured his entire fleet, which he said was thousands of dollars cheaper than insurance, even though every once in a while he’d have to write off a car. He also owned a dealership, so he could have all repairs done at cost.
If you CAN self-insure, it’s the way to go.
Florida does exempt your personal residence in bankruptcy, but many other states don’t. But many people have assets other than their personal home. And even if they sink all their assets into a multi-million dollar home, they may not be left with enough money to pay real estate taxes, replace a hurricane-damaged roof, or pay the gardener.
And, I believe that all the emergency room is required to do for an indigent patient is stabilize them and treat the immediate emergency.
Yes … we can frame buying insurance as gambling … most of us will never have our house burn down or have it wash away in a flood … one could say buying homeowner’s insurance is a waste of money if we look at it this way …
However … houses do burn down … and in the rare case it’s yours … the losses are catastrophic … without insurance you’ll be facing not only rent payments but you still have to pay off the mortgage on the no-longer-existing home … you’ll be looking at a bankruptcy and ruination of your credit … if you do have insurance, then (hopefully) you’ll get a check to pay off that mortgage and some extra to cover new clothes, furniture, pots and pans, etc etc etc … it will still be a heavy loss, but the insurance will keep you out of bankruptcy court …
Best to think of insurance as a shared risk venture … everybody pays in a couple hundred dollars per year and when someone’s house burns down it get rebuilts … that way for a little bit of money no one gets thrown into debtor’s prison … less a small percentage for overhead; payroll for the clerks and accountants, the electric bill and so on …
Comparisons to casino gambling are hard to find unless we make something up … say at the dicing table the rules are that IF the shooter rolls 1,1, THEN you have to pay $40, UNLESS you put $1 down … Any other roll you lose the $1, but you are saved from having to pay the $40 when 1,1 does come up … In the long run you’ll still lose money, but if the unfortunate event happens that 1,1 comes up four times in a row and you can’t pay the $160 … the thugs take you at back and beat the living crap out of you … you can see where the small losses are worth it to your health …
Casino gambling is strictly for entertainment … in the long run you will always lose money … however in Las Vegas the booze is free as long as you’re gambling … if you’re smart about how you bet I think you can stumble away with a major drunk on the cheap …
The difference seems pretty obvious.
Gamble: large chance of losing a small chosen amount, small chance of gaining a large amount.
Don’t insure: large chance of losing nothing, small chance of losing a large undetermined amount.
Insure: 100% chance of losing a small chosen amount, zero chance of losing a large amount.
Failing to insure is the only case where you have a chance (even if small) of losing more than you deliberately choose to lose. I suppose if you have very few assets and thus nothing significant to lose, it might make economic sense.
–Mark
Yeah, they’re related, but gambling is essentially paying to take on risk. Insurance is paying to minimize risk. I can tell you which one I’d rather do.
Edited to add: This comparison suggests that smart gambling addicts should open self-funded insurance businesses. 
Right. Self-insurance will always be cheaper in the long run than buying insurance. But, the vast majority of enterprises (and people) can not absorb the cost of a catastrophe, which means they can not self-insure. They can either gamble that a catastrophe will not occur, or buy insurance to mitigate financial risk. Nobody should rationally expect to come out “ahead” when buying insurance; as mentioned upthread, it is a product you buy, not an investment vehicle.
I have been comparing insurance to gambling for years, often getting derisive comments. "gambling is essentially paying to take on risk. Insurance is paying to minimize risk", pretty much sums it up, but of course there are many points in between those extremes.
I insure my house and my car; if I was in the USA I would insure health costs, but it is an individual decision, based partly on attitude to risk, as to how much insurance to carry. Health insurance, as I understand it can cover any and all health related expense, or it can only kick in at some predetermined figure (copay) in the same way as I can choose to put my bet on a horse with high odd or a single number at roulette, where the return and the risk (of losing) is great.
Every year I place a bet with an insurance company that I won’t damage my car. If I do, they will cover most of the costs (copay again), which, in the case of a serious injury, could be astronomical, If the year passes with no damage, they win but I still consider it a worthwhile ‘investment’. I could pay less and get a lower level of cover, or more for more - that is a decision I make, just as I could bet on an odds-on favourite or a rank outsider. The only real difference is that if I choose not to bet on any horse, I will suffer no adverse consequences, whereas not insuring my car, could be catastrophic.
This answers OP eloquently.
Another who wrote on the difference is G.B. Shaw, the famous playwright, in his The Vice of Gambling and the Virtue of Insurance (pdf)
Exactly. Insurance should be though of as the equivalent of buying a fire extinguisher or a parachute. It’s a safety measure for use in case of a disaster.
No matter how many ways I hear it explained, I still can’t help but think of life insurance as a Ponzy scheme. 100% chance you will die, no loopholes. As long as the premiums keep rolling in and everybody doesn’t die at once, we’re good.
They’ll patch up your acute problems, but if you don’t have insurance, and you don’t have a lot of assets, you won’t be getting a heart-lung transplant. Or cancer treatment. Or any of a whole list of Very Expensive medical treatments that you might need at some point later in life.
Instead of thinking of the insurance company as the house/casino, think of yourself as being the house/casino. If you live without insurance, then every day you will probably come out ahead (just like the Vegas casino), and over the long run you are very likely to come out ahead - but once in a while The Bad Thing will happen - car crash, house fire, cancer - and you’ll be set back severely. Can you cope with that Bad Thing? The Vegas casino can; they’ve got vaults full of money so they can afford to pay out when someone wins that $100M slot machine prize. If you’ve got a vault full of money, then you’ll probably survive just fine without insurance, too. If you don’t, then insurance is probably the smart thing to do. Seen in this way, buying insurance is the equivalent of choosing NOT to gamble.
My parents used to buy well-used cars (purchase price in the 80s was typically $5000). They carried the legally required liability insurance, but declined to carry collision insurance because they could comfortably afford to buy another well-used car if they happened to total the ones they currently owned.
If you own your home outright, you aren’t required to insure it (except for flood insurance in flood zones). My dad always went with a $1000 deductible, which significantly reduced his premiums. But of course, knowing he could not easily afford to buy another house if this one burned/blew down, he did not eschew homeowner’s insurance entirely. AFAIK he never made a claim on his HO insurance. Was it a waste, then? No; he was protected from the very large financial risk of owning an uninsured home.
Term life insurance is pretty straightforward. The premiums are based on the probability of your dying within the specified term (and on the benefit they’ll have to pay out if you do). The older you are at the outset (or the crappier your health), the higher your premiums will be. I have term-life; when I signed up, the asked me (among other things) if I did SCUBA diving or motorcycle racing, and then sent a nurse to my house to assess my general health.
Whole life insurance? The insurance company is betting that they can take a lifetime of premiums from you, invest them, and end up with more money than they are required to pay out at your death. I don’t have whole-life, but I suspect the setup is the same, i.e. if you are older and more decrepit (and just generally live dangerously) when you first sign up, your premiums are going to be higher. If you die approximately when/after the insurance company expects you to, then they make a profit. If you die unexpectedly young (before you’ve paid all the premiums they were hoping to get from you), then they take a loss.
A standard product warranty (the one included with purchase) is an insurance policy of sorts; rest assured that the purchase price you paid for your car or coffee maker or TV was inflated somewhat in order to cover part of the cost of replacing/repairing someone else’s defective unit. If you were willing to bear the potential cost of fixing/replacing your defective product, you could, in theory, pay less to purchase these items. In the long run, over the purchase of many sundry goods, you’d come out ahead, but once in a while you’d get burned by having to repair/replace a defective product. The warranty/insurance premium is the price you pay to the manufacturer for allowing you to turn the tables on them: now they come out ahead on most transactions (because of the extra money they’re collecting), but once in a while they get burned by having to repair/replace a customer’s defective product.
Deciding which situation is preferable is an individual thing. If you can cope with the bad outcome (paying out of pocket to replace your crashed car or burned house), then you can probably save money by not carrying insurance. If you can’t cope with the bad outcome, then you should probably pay someone else to handle it (i.e. you should get insurance). Some people make bad choices on this matter, downplaying the likelihood of a disaster (instead of asking “can I handle it if a disaster happens?”), and then they are devastated when calamity strikes. Watch the news next time there’s a natural disaster - flood, tornado, wildfire - and you’ll inevitably see someone holding their head and lamenting their failure to carry insurance.
Health insurance is somewhat more complicated in that insurers negotiate better prices with service providers. If you get treated with no insurance, not only will you pay out of pocket, you’ll pay more for your treatment/medicine than your insured doppelganger would.
Many good answers above, but I’ll add my one-line take-away to the mix: Monetary value is not the same as value (sometimes called “utility” in economics and game theory). Buying insurance can have a positive expectation value even if it does not have a positive monetary expectation value.
Most life insurance profits come from term policies that expire before you die. If you paid 20 years of premiums and didn’t manage to die during that period, the insurance company made a lot of money on you.
Whole life policies are designed such that they will be profitable if you live for a reasonable amount of time. For example, if you take out a whole life policy when you’re 40 and your life expectancy is 79, the insurance company will calculate your premiums such that you will have paid more than the accrued value of your policy by the time you reach age 75 or so. (Numbers made up.)
Buying insurance isn’t gambling; not buying insurance is the gamble.
Jeff Foxworthy talks about his life insurance agent calling him at the beginning of the month to gloat: “Still alive, huh? Loser!”
One thing you can do is partly self-insure: get the largest co-pay you can stand. My car insurance has $1000 deductible and the premium is a lot cheaper. I guess that now that the car is over nine years old it might pay to drop it entirely. The collision, that is, the personal liability is insured by the province, the cost built in to licence fees.
My complementary health insurance (to cover things the province doesn’t such as chiropractic and private lab expenses) is entirely self-ensured by my former employer, but they still find it worth their while to pay a regular insurance company to administer it.