Insurance - The lottery you don't want to win

This is a simple phrase that explains the role of insurance in modern life.  Whether it is insurance that is mandatory, like auto insurance, or elective like dental it is important to understand why insurance is worthwhile, and how it works.

Let’s take auto insurance as an example of how insurance works.  Drivers have the same general risk, getting into a car accident.  The risks vary from a few hundred dollars for a “fender-bender” to millions due to injury.  While only a few of us will encounter the worst, we all want to be protected from that risk.

The insurance company determines that for every X number of people who pays insurance, one person will need to have coverage for the worst.  The money needed to pay for that person’s catastrophic accident, and smaller claims, is the largest part of your insurance premiums.  The rest of your premium goes to overhead costs, and keeps the insurance pool large enough to pay any claims.  For insurance to exist, more people must pay more than they will ever get back from a claim.  Considering what would need to happen for us to get our money back, most of us would consider that a lousy lottery to win.

Thankfully when it comes to dental insurance the same concepts apply, but the risks are considerably smaller.  Dental insurance plans also pay out less than what most people put in.  Only if you have serious dental work to be done can you expect to “get your money’s worth,” or get ahead at the end of the year.  But dental insurance does help spread the cost out over a year, and many plans save you money if you go to a network dentist (see also: PPO, HMO, DHMO).  With dental insurance most of us hope we never need to file that big claim, but it is important to know that if we need to it is there.