Is Insurance A Waste of Money?

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I couldn’t remember even if I tried how many times I have been asked by potential clients, “What happens to my collected premiums if I don’t die?”

A lot of these people belong to the school of thought that spending money on something that may or may not happen is a waste of time and money and that one is better off dedicating the same funds towards an investment which is palpable and somewhat predictable. Some want to get some of their premiums refunded to them if they reach a certain time milestone claim free, a gimmick popularized by many short-term insurance (insurance for inanimate objects) providers.

Now, before I get into my views around this issue, it would only be fair to make it clear in the case of Long Term Insurance (insurance on living beings) that death is the only certainty we all know will become our eventuality.

In all fairness, I want it to be clear that some of the people who ask me this question are in agreement on this point.

What Kind of Insurance Am I Talking About?

I am in full agreement that when it comes to disability/impairment insurance, dreaded disease cover and health-related income protection, venturing into whether or not this is a probability is speculative at best. Even so, the probability of this happening to a professional is statistically less likely in the case of disability in particular.

I have however come across many who had the hubris and temerity to declare that they would by no means get disabled or suffer a dreaded disease. One would have to forgive me for holding my reservations about whether or not the majority of the modern urban population is unlikely to suffer a dreaded disease, but I will not delve deeply into that matter in this post.

Every time I get asked this “witty” question (What happens to my premiums if I don’t die?) I in turn always check to find out whether or not their car is insured. Needless to say, it always is.

This, to me at least, is a great source of amusement, sadness, and befuddlement all at the same time, as these individuals can clearly imagine themselves being involved in a traffic collision and possibly having their vehicle written off but cannot imagine themselves becoming injured or disabled as a result.

I can never figure out if this invokes in me more amusement or sadness.

Focus on Your Financial Needs, Not Products

Now, let us get mildly technical. The first thing to remember is that insurance companies are similar in many ways to a casino, chief of which is the following: The House Always Wins!

Insurance companies have strong actuarial functions and always ere on the side of risk that is most favorable to them. More specifically, these companies are armed with statistics that they convert into usable data.

This being said, take into consideration the value proposition: “Should you go X amount of time without submitting a claim we will refund you Y percentage of your collected premiums over the same period.”

Sounds like a good deal, I will concede, but what if we were to imagine for example’s sake that your premium comprises two components: a risk and investment component respectively.

This is to say, the bulk of your premium is to cover your risk which the insurer is assuming on your behalf, and the  Y component of your premium is being invested to be given back to you should you meet the conditions of the contractual claim-free refund period.

Would this sound like a good deal to you?

If this were the scenario, what would you say then becomes of the Y component of your premium in the event of you submitting a claim within the period contracted against, and who would become the beneficiary of these proceeds?

Would it not be more prudential to rather invest your Y component into an investment over which you have more agency?

I always persuade my clients to not get lost in the product and forget about the financial need that they are trying to secure.

Once You Start, Never Stop

Secondly, I will use my own personal experience to illustrate a principle.

When I first got a car I was insured with Insurer A. I then moved to Insurer B, then C, D, E and eventually F over a period of approximately five years. I hadn’t even been with Insurer F for six months when I got involved in a collision and got my car written off.

Granted, Insurers A through E collected several premiums from me and owed me nothing in return for it. Insurer E got a really raw deal, but remember, “The House Always Wins” and like insurer A through F they had clients from whom they collected premiums whose risk they no longer had to carry.

Insurer E was a reputable company and I got paid out very quickly so everybody was happy.

Now suppose I had stopped paying my premiums three months, or three years prior. Who would be the loser? Only me.

All the insurers in question would owe me absolutely nothing and I would irrevocably have lost all the money I had contributed during the time when I was insured. When I claimed, I got all the money that I paid over the five year period and then some.

The lesson here: once you pay a single insurance premium, never stop.

Change insurers as often as you prefer but never stop being insured or else you lose your money.

Learn From the Best

Thirdly, almost all of us wake up and do what we do in pursuit of money. We would be remiss to forgo observing how the rich spend and preserve their wealth, while attempting to become what they have successfully attained.

We all know by now that the wealthiest either invest in or run hedge funds. It stands to reason from this that there is a relationship of sorts between hedging and wealth. What more is an insurance policy than a hedge? Taking out insurance is taking a smaller loss to guard against suffering a bigger financial loss in the event that things don’t pan out quite the way we would have hoped.

The ultra-rich do it, would it not make sense to apply the same principle to your own finances?

Crunching the Numbers

In conclusion, I will have you look at this example and crunch some numbers and see what happens to your insurance if you end up living longer.

A 26-year-old healthy male credit analyst will pay $13.12 per month for $68,824.89 worth of Life Insurance.

If he were to live to a life expectancy of 85, he would have contributed $9,355.75 in premiums. This is 14% of his insured amount even if he does not see a premature demise.

Sounds like a good deal to me

Sounds to me like he would literally be buying money.

Conclusion

Hedging is something we all do in various ways. It is a gloomy, grudge purchase, but insurance is deeply worth it.

We will all die, so Life Insurance is an obvious part of the financial portfolio of a financially astute individual.

Granted, Disability and Dreaded Disease may or may not happen to you, but getting a comprehensive package helps offset the small losses of events that you may never claim against, against the one that we will all without a doubt claim against.

Be sure to check out these posts about insurance:

Are Funeral & Burial Insurance Worth It?

Life Insurance – Is the Price of Your Premium All You Should Worry About?

Life Insurance – Three Sneaky Words to Be Careful Of