Insurance, Leverage, and Peace of mind.

Read more? Past postings on Insurance


Insurance

Why are we paying premiums for insurance?

It is the fear that drives us to seek protection. It is paying money for protection.

We fear and seek protection against specific unexpected high financial losses coming from some unforeseen life events by paying premiums to insurance companies for them to take it away from us. So, in fact, we are just transferring this risk from ourselves to someone else so that we can have peace of mind and sleep well at nights with one thing less to worry.

Life with less things to worry will be easier to catch more moments of happiness.

Read? Four Pillars in our life to support our happiness index

Leverage

Read? Playing The Game of Leverage (11) - Win Big or Lose Big

I believe most people will sensibly leverage themselves within their financial strength and avoiding taking too much risks as they still want to sleep well at nights. Who will want more things to worry and keep awake at nights?

Then how did some people get themselves so highly leverages and go bankrupt after a series of bad investment failures?

The greed in these people may have slowly strengthen up to drive them to see more "opportunities" to make more money but overlooking their associated risks. More opportunities taken may actually translate to higher risks exposure. No meh?

BTW, who don't want more money?

Most of us like to believe that our mind is strong and sensible enough to control financial losses from escalation, able to cut losses fast, and prevent taking us towards the path of bankruptcy.  Unfortunately, in reality, many more can't.

Chinese has a saying "Lose until mad!" and it is true.

When someone loses so much money and once that level of sanity has breached; madness will take over one's mind and that will probably explain why some people can leverage so much and take so much risks far far beyond their means to do so.

Conclusion

The key here is unexpected high financial losses and protection against it.

In insurance, we pay for that peace of mind and we know it is worth paying for. Similarly, in investment we too can leverage for much larger financial gains; but at what price will we be paying for that same peace of mind that has been already paid for through our insurance premiums. Don't understand? or too cheem?