Insurance

 

It's a sensible idea, insurance is. When a group of people is faced with the small chance of a future loss that would be catastrophic, each one puts in a small amount, and the unlucky individual gets paid from that fund and their loss is largely compensated.

However, one constant in the situation is that someone is making money by selling insurance. On average, you will lose money, so there's good reason to avoid it if you can cover the loss yourself.

One supposed benefit to whole-life insurance is that it builds a cash value over time. Yet you can build cash over time without those by simply saving some of your money. Perhaps it helps build value by fighting against the natural human tendency to spend what you have, and not save unless you are forced to do so.

My father bought for me at age 13 a whole-life insurance policy. I believed he waited until I was 21 to tell me about it and hand it over to me. I debated what to do with it, looking at various upsides and downsides. There were a couple years when I could borrow its cash value at the guaranteed 5% rate and invest it in the money market to earn 14%, but those days didn't last long.

When I had children, I needed insurance with a much higher death benefit than that policy provided, ($15,000?) and got some term insurance (was it for $250,000? I don't remember). After debating another year or two, I just cashed out the old policy. The main benefit was that I would no longer wonder what to do with it. The decision was made. Life was a little bit simpler.

I held the term insurance until my daughters grew up, then canceled it. I got the term insurance through Amica, a company my family had used for auto insurance, based on a sense of good customer service and loyalty. I later was told that if I had known how to shop around, I could have gotten the term insurance for half the price. Well, I didn't know how to do that.

A few years ago all my peers were considering long-term care insurance, and a fair number bought it. My instinct said not to. I still don't know if it was the right thing to do, but news stories recently tell of troubles in the marketplace. There is always fine print... my memory now is that when I checked, I found it would not cover care provided outside of the US or care needed due to self-inflicted injury. I believe that without insurance, if a person of modest means needs expensive long-term care, they spend down their assets to $2,000 and then they are covered by Medicaid, as they are then poor enough to qualify. They are not put out on the street. That seemed like a reasonable fallback position.

I owned a house jointly with my then-wife for 9 years, and of course insurance is required, and I don't recall having much choice about it. It was the only time in my life that I have been in debt.

Car loans require insurance on the car, but I have been fortunate enough to always be able to buy my (simple, no frills) cars with cash. I kept collision and comprehensive for the first year or two the one time I bought a new car, but I've mostly done without. I'm a good driver. In general, good driver discounts are not as much as they should be in a hard-nosed rational system. Even with the discounts, good drivers subsidize the drivers who would otherwise rapidly price themselves out of the ability to get any insurance at all after a few accidents. Being a good driver who avoids extreme conditions and rarely parks in hazardous places, I'm less of a risk than the actuarial tables would suggest.

With Amica, my current annual auto premium is $409. That puts an upper limit on what I could save if I shopped around.

I recall hearing a few years back that air bags did not actually reduce fatalities from auto accidents. Knowing the air bag was there reduced the caution of some drivers. Less caution combined with air bags led to a constant death rate. I suspect that my knowledge that I don't have collision insurance makes me a little bit more cautious as I drive.

Insurance always comes with hitches, or so it seems. There's a deductible. For minor accidents, the advice is to pay to repair collision damage yourself, or else the increase in your premium will outweigh any benefit you received.

For a couple years towards the end of their lives, I was managing my parents' finances. They owned a house near the beach on Cape Cod, and insurance was considerable. The house was considered a "tear down" -- anyone who bought it would tear down the modest house and build a bigger one on the lot. Sentiment about keeping the house versus selling it was divided in the family, and any sort of major damage would push us over the line into selling. I had the brilliant idea of canceling the insurance. There would be no point in rebuilding a house if it was to be torn down. A smoldering cellar hole was no less valuable than a house that was to be torn down. The other purpose of the policy was liability. I inquired if we could get a cheaper policy that covered only liability, but was told that a custom policy would in fact be more expensive. Given the incredibly low chance of liability for a simple house that was vacant most of the time, I suspect we would have been better off without the policy. But as an agent for my parents, prudence dictated we keep it.

I mentioned that part of my judgment on not getting collision or comprehensive was comparing myself to the pool of people who would pay similar rates. You may have reason to think you are at a higher risk than the pool, in which case insurance becomes attractive. Apparently there was a period in the early days of the AIDS epidemic when people understood the symptoms that implied imminent death, but the insurance companies did not have the mechanism to take AIDS into account in setting policy premiums. Some of the AIDS victims bought very expensive life insurance policies, and surely their heirs benefited greatly.

When I bought my current car, a used Toyota Yaris, the seller looked at me like I was crazy when I said I would not be getting collision or comprehensive. Reaching the conclusions I have about insurance seems to be rare. I wonder if others have different perspectives.

As for health insurance (shudder)... That's a topic for another day.