The purchase of insurance does not reduce the chance that you will incur a loss, but it does reduce the financial risk associated with the loss. You simply cannot go out and spend a budgeted amount for insurance in a very haphazard and nonchalant manner, and expect to be fully protected.
Rule # 2- Consider The Odds
Obviously, when thinking about what risk you want to guard against, you will consider how likely the loss is to occur. But, just because the odds are relatively small, don’t forget rule number one. Considering the odds doesn’t mean you automatically purchase the insurance. Take Long Term Care insurance for instance- even though the odds are greater than 50% that you will need nursing care, if your assets are below a certain level, it would not be a wise purchase. Flood insurance is one type of insurance that many people avoid, even though the potential for loss is huge. If you live on high ground, you may decide not to purchase flood insurance because the risk of a flash flood is so small. So in considering whether to transfer the risk to an insurance company or retain the risk personally, consider both the odds of a loss occurring, and the odds of how bad that potential loss will be.