Why even billionaires like Elon Musk need insurance

Why even billionaires like Elon Musk need insurance

Elon Musk is one of the world's richest people. The 45-year old self-made billionaire is estimated to have a net worth of US$11.7 billion (S$15.76 billion). He is the person that actor Robert Downey Jr modelled after when he was playing the role of Tony Stark in the Iron Man film series.

For those who are not familiar with Elon Musk, you might recognise the companies that he owns, or used to own.

Paypal and Zip2

Elon Musk was the former CEO and co-founder of Paypal, a company that was sold in 2002 to eBay for US$1.5 billion. Elon received USD $180 million from the sale of eBay, giving him the financial muscle to pursue other passions in life. Prior to Paypal, Elon also sold his first company Zip2 for US$307 million, which netted him US$22 million.

SpaceX and Tesla Motors

After his PayPal days, Elon Musk went on to start and fund two high-risk, high-profile companies, SpaceX and Tesla Motors.

SpaceX builds rockets and space crafts and sends them to space. The mission of SpaceX is to create the necessary technology for space travel that would one day enable the colonisation of Mars.

His other company, Tesla Motors, would be more familiar to us. Tesla designs, manufactures, and sells electric cars. The company hopes to build affordable electric cars for people around the world to own and drive.

The bulk of Elon Musk's net worth today is derived from his ownership of both of these valuable companies. No matter how you look at it, Elon Musk is a very rich person.

Do rich people need insurance?

One common misconception that people sometimes have is that rich people like Elon Musk wouldn't need insurance. But that isn't true. They too need to be insured, just not by the same plans that average joes like us need.

The logic behind this (incorrect) thinking is that if you are rich enough with sufficient liquid assets, then insurance is unnecessary since you can "insure yourself" by ensuring that you have enough to cover the needs of yourself and your family if unforeseen circumstances strike.

For example, an accident occurring may prevent a person from working for a year as he or she recovers from it.

An income protection plan would help to cover that loss of income, this is especially important if you are a self-employed person such as an entrepreneur (similar to Elon Musk), and insurance agent (the irony) or even an Uber driver.

For a person like Elon Musk, the need for an income protection plan is not important. That is because we are pretty sure if Elon Musk decides to quit working for a year, he would have other sources of income that he can rely on. For your information, Elon Musk's basic salary is less than US$40,000 per annum. Likewise, a person who already has sufficient passive income (e.g. US$10,000 a month) may not need such an insurance policy.

The other common scenario would be life insurance. If you have enough income-generating assets, the need for life insurance reduces since your dependents can still be taken care off by the assets that you already have.

This gives rise to the thinking that rich people do not need insurance.

But if rich people really does not need insurance, then why are some of the richest and most famous personalities in the world also the same people that have gotten the most amount of personal insurance?

The truth is that rich people do need insurance, just not the ones that we commonly go for.

Why rich people also need insurance

David Beckham's legs were at one point insured for anything between US$70 million and US$100 million. The reason is simple. David Beckham earned most of his income from his football skills on the pitch and the subsequent endorsements that follow it.

A career-ending injury during his prime would have led to a huge loss of future income for David and his family. Thankfully, that did not happen and Beckham retired gracefully at the age of 38. He is still making millions each year from his endorsements.

Other personalities that have bought multi-million personal insurances on their body (or body parts) include Jennifer Lopez, Daniel Craig, and Cristiano Ronaldo.

The idea is that even rich people buy insurance to ensure coverage for their most prized assets that help them generate income.

Even SpaceX rockets need insurance

Not surprisingly, sending a rocket into space is really expensive. SpaceX charges between US$62 million and US$80 million to launch each rocket. This excludes any other equipment inclusive of any accompanying satellite.

What we may not realise is that even with technological advancement in recent years, launching a rocket into space is a risky proposition. A CNBC article reported that on average, 1 in 20 launches would fail.

The recent SpaceX Falcon explosion would have blown up, literally, a few hundred million dollars worth of investments. This would include the SpaceX Falcon rocket, as well as the satellite that was meant to be sent into space, which was to be used by Facebook.

Insurance would cover some or all of the cost of the investment lost. If we assume each launch is insured for about $200 million, and we have a 1 in 20 chance of failure, then the minimum premium to be charged by insurance companies for each launch would be US$10 million, probably more.

It's expensive, but hey, launching space crafts into space is a risky and expensive business, and paying US$10 million (or more) to insure your rockets and satellites would probably be better than being worried about them blowing up in front of you without any insurance coverage.

Insure the things that are important to you

For most us employed people, we buy insurance to insure our health and life. This is our greatest income generating asset because we need a healthy life to stay gainfully employed and to earn a living for our families and ourselves.

For people with investments, insurance might be obtained to protect our assets. For example, we would buy fire insurance to cover the properties that we own.

Business owners such as Elon Musk would buy insurances to protect their business assets. This could include protecting expensive machines and equipment against fire, damages or even theft.

For some companies, they may also insure themselves against the risk of losing a key personnel. A listed company may insure its Chief Executive Officer (CEO), ensuring a payout will be given to the company should anything happen to their CEO.

The idea is that different types of insurances are purchased to protect the assets that help us generate income. For some of us, this is most practical in the form of a health and life insurance. For others, it could be insurance on our properties or businesses.

And contrary to popular thinking, it is the rich people or the rich companies, that may actually need insurances most.


DollarsAndSense.sg is a website that provides bite-sized and relevant articles to help Singaporeans make better financial decisions.

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