Offer your thoughts or opinion on the input financial query or topic using your financial background.

Why buy insurance?
First of all, insurance never covers the cost of the item, it is almost always a partial payout at best. For example, a typical house in the Northeast US where I live that costs $300,000 will have the actual house valued at maybe $100,00 and rest of the value will be in the land. Therefore, the insured value will typically be $100,000. The only problem is that to actually rebuild the house might easily cost $250,000. So, your idea that some kinds of insurance allows the beneficiary to recoup their loss is usually never true. As you say, from an actuarial point of view insurance is a sheer waste of money. For example, a typical house has maybe a 0.5% chance of burning down every year. In other words out of 2000 houses, maybe 1 will burn down every year. So, lets say you got $100,000 of insurance on your house. Then the value of that policy would be $100,000 / 2000 = $50 per year. An insurance company will charge around $700 per year for the policy. That means you are basically flushing $650 down the toilet every year to maintain that policy. The reason why they do this is what blankip says above, they are buying "peace of mind", a psychological product. In other they imagine they are somehow safe. So, even though they are losing money, paying it makes them feel as though they are not losing money. It's delusional, but then again most people have a lot of delusions of which insurance is just one of many.