Why Insurance is not Gambling?

There are individuals that do not think highly of insurance products.  Some of them believe the cost of certain insurance products such as life insurance and disability insurance are too expensive for their budgets.  Unfortunately, some of these individuals may also believe that buying insurance is the equivalent of gambling.  For those who own insurance products, are we really gambling when we purchase insurance?

I will explain why buying insurance is not gambling.  When you purchase a lottery ticket, you give the cashier $1, and the cashier hands you a lottery ticket.  If your lottery ticket’s numbers match a certain amount of the numbers drawn, then you will win a prize.  On the other hand, insurance does not operate in this manner.  When you purchase an insurance policy, your goal is not to become rich!  However, this might be your intentions when you purchase a lottery ticket.  Insurance allows you to transfer a stated amount of risk to an insurance company for a premium.  For example, if you purchase a $10,000 life insurance policy, then your premium amount will reflect the insurance company’s risk of insuring you based on your health and age.  No transfer of risk occurs when you purchase a lottery ticket.  Furthermore, insurance companies could not afford to exist if everyone could buy a $1,000,000 life insurance policy and pay a $1 premium per week.  The lottery can survive from everyone buying $1 tickets because the odds of you winning a $1,000,000 lottery drawing are astronomical.  But, you will die one day; therefore, insurance companies carefully screen for pre-existing conditions and dangerous activities such as skydiving.  Also, your insurance premiums help to offset other claims that your insurance company must pay to other policyholders.

Analysis

Buying insurance is definitely not gambling.  In fact, you might be gambling if you do not buy insurance, depending on your financial circumstance.  The goal of insurance is to transfer some predetermined amount of risk in exchange for a premium.  This is quite different than purchasing a lottery ticket.  When individuals buy lottery tickets, they are not being evaluated for risk and do not have to pay a higher price for a lottery ticket based on their age and weight.  As a result, buying a lottery ticket is gambling, but buying insurance is not gambling.