Financial security means different things to different people. In his book "Richistan," Robert Frank interviewed people from all socioeconomic levels and found that everybody, regardless of what they made, said they would feel financially secure if they made twice as much as their current income. At a more practical level, most working families have two choices for financial security in emergencies: a savings plan or insurance.
Before you consider going without any kind of insurance, remember that some kinds of coverage are mandatory. If you drive, you must have auto insurance in most states. If you buy a home with a mortgage, the lending bank will require you to carry homeowners insurance to protect its collateral. The Affordable Care Act will require all people to carry health insurance -- or have health insurance provided by an employer -- by 2014. Do not go without any of these forms of insurance, as the risks of being unprotected far outweigh the benefits of saving money in the short term.
Benefits of Savings
When you pay premiums on an insurance policy, that money belongs to the insurance company. If you never suffer a loss, you get nothing for that investment. By contrast, money you put into a savings plan doesn't just remain your money. It earns interest while it sits unused in the account.
Benefits of Insurance
The advantage of insurance is instant access to the large amounts of money a disaster sometimes requires. If you put $150 a month into savings instead of buying a disability insurance policy and you are hurt next month, you only have $150 to see you through your recovery. The disability insurance policy would give you income immediately.
Many financial experts recommend a combined approach to the insurance vs. savings question. This plan means buying the insurance you need and depositing money regularly into an emergency fund. If the emergency fund grows to a point that you have enough money to do without a policy, cancel the policy. In time, you'll have a savings account big enough for most disasters and more cash flow because you've eliminated most of your premium payments.
Whole Life Insurance
Whole life insurance is a special case in this context because it represents both insurance and a savings plan. A portion of each premium payment you make goes into an account with a cash value you can access. Once that cash value equals the death benefit on the policy, you no longer need to make premium payments and the policy remains in force for the rest of your life. However, whole life insurance is more expensive than other savings or insurance options. If you're considering this kind of policy, compare the specific costs against how a term life policy and a savings account would perform.
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