Stop Wasting Money on Unnecessary Insurance – Here’s How to Decide What You Actually Need….

Dear Mr. Miller:

The insurance agent says I need life insurance.  It is expensive.  How do I know if I should buy any particular insurance?

Prospective Insured

Avoid it, Self-Insure It, or Transfer It — here’s how smart people decide when insurance is worth buying and when it’s smarter to skip

Insurance is for What Will Ruin Your Life, Not for What Will Ruin Your Day–here’s why you’ll almost always come out ahead by self-insuring the small stuff

Uninsured Motorist Property Damage

Life Insurance

Probability vs Possibility–Why ‘I’m young and healthy’ is the wrong reason to skip insurance

What to Do with the Money You Save–Redirect it to the insurance that actually protects your future — medical, disability, long-term care, or higher liability limits

How to Audit Your Policies Like a Pro–Drop what you don’t need and strengthen what actually matters

Call Us

Dear Prospective:

Your question caused me to start thinking–thinking  back, way back, to an article in a San Diego County Lawyer magazine (you know, an actual hard copy, paper magazine)  I read decades ago.  There was an ad in there for the equivalent of a modern day crowd fund request.  A lawyer was in serious financial circumstances.  He had become ill and could no longer work.  How was he going to  pay his medical bills?  He had no medical insurance or disability insurance.  This ad was requesting other lawyers to chip in.

I remember the ad actually made me angry.  At the time I was paying a lot for medical insurance for myself, wife, and two children.  I was paying for long term disability insurance, too.  But this guy, apparently, decided not to pay for either and now was begging me and everyone else for money.  I think I broke down and sent $100 to someone I had never met and who had decided to spend his money on whatever he spent it on rather than the insurance that he obviously needed.

That caused me to think even further back.  When my wife and I had rented our first apartment we knew we needed to have insurance.  At the time I knew nothing about insurance.  This was before I had even started law school.  My father-in-law, who also knew nothing about insurance but, whom I figured knew more than me, recommended that I ask the insurance agent what the extra premium would be if we wanted the zero deductible option for fire and theft of our personal property.  He said they won’t tell you about it, they hide it from you, but it isn’t that much more and we should get it.  So I dutifully asked the agent about that.  He looked at me incredulous.  The deductible was $50 and the cost was probably half that.   My father-in-law told me, “See, you got $50 for $25, what a good deal.”  Of course, now I realize that I would have maybe one claim in 10 years so I would get an extra $50 from the insurance company for a cost over 10 years of $250.  Not really a very good trade for me!

Avoid It, Self-Insure It, or Transfer It — here’s how smart people decide when insurance is worth buying and when it’s smarter to skip:  This is what is called “risk management.”

Risk management theory tells us that for any risk, you have three options:  #1  Avoid the risk. #2  Self insure.  #3  Transfer the risk to an insurance company (i.e. buy insurance)

As to avoiding the risk, sky diving and scuba diving are good examples.  If you are paralyzed for any reason, you probably don’t have the resources to pay for your living expenses for the rest of your life.  So you wish to transfer the financial risk to the insurance company through the purchase of long term disability insurance.  That insurance can be expensive and often excludes sky diving and scuba diving from coverage unless you purchase a rider that makes the policy even more expensive.  If you can’t afford the rider (and presumably you can’t self insure–option #2) in order to afford to purchase the policy you avoid the risk by not participating in these activities at all (option #1)

But option #1, avoiding the risk is not always feasible.  If you own your house you can’t avoid the risk of fire destroying the house.  And you typically can’t self insure as the cost to rebuild after a complete destruction, is simply too much for the vast majority of people.  So you have to transfer the risk (option #3).

Obviously then, there are times that you have to purchase insurance.  But when do you do that and when don’t you?  The zero deductible example I gave earlier is a great example of when you don’t.  But what of the extended warranty of your electronics or the uninsured motorist property damage (note that this is different than the uninsured motorist bodily injury coverage) on your auto policy?

Insurance is for What Will Ruin Your Life, Not for What Will Ruin Your Day–here’s why you’ll almost always come out ahead by self-insuring the small stuff:  This maxim is how you decide.  If you have the financial resources to cover your lost phone, buy a new electronics gadget that fails earlier than expected, pay for the damage to your car that an uninsured motorist causes (more on this later), then don’t buy the insurance.  You don’t need it and, unless you are one of the unluckiest people on the planet, you will come out ahead if you’d don’t buy it.  And if you are the unluckiest, you have the money to cover the loss without having to permanently change your life style.  You may cry for the day over the loss, but it won’t cause you to have to change your lifestyle.

Why will you come out ahead? The insurance company premium is made up of several different factors or charges.  First the pure cost of the insurance which is basically the cost per year to the company to pay for the losses in that year averaged over all of the insureds (essentially what it would cost you to self insure).  But the company also adds into the premium the cost to pay for the person to answer the phone, the phone line, the manager for that person, the rent for the building, the cost of the commission to pay the agent (he/she is not working for free), and profit for the company.  The bottom line, you always lose if you trade money with the insurance company because they have all of these additional costs which you don’t if you self insure (when you can).

Uninsured Motorist Property Damage: The charge is usually minimal per year.  Nevertheless, it is generally a bad deal.  Why?  It does not cover the total cost to repair your car. What it covers is your deductible on your collision coverage, usually $500 or so for most people.  The collision coverage typically takes care of the rest–assuming you have this coverage as it is not usually required and not recommended for older cars with minimal value.  If you can handle the $500 deductible and if you have collision coverage, then you should probably self insure.

Life Insurance:   I have seen a lot of clients with life insurance that they are paying for every year even though they have no dependents or more than enough financial resources to support the surviving spouse.  That insurance often has a cash value, maybe as much as the death benefit.  And even if it does not, it can often be sold to an investor to remove the premium burden from your shoulders and get you cash that you can spend or invest.

Probability vs Possibility–Why ‘I’m young and healthy’ is the wrong reason to skip insurance:  The long ago attorney probably was in this boat.  The thinking goes, “I’m young so I don’t need medical insurance because the probability of my having a serious problem is low.”  What he didn’t consider was that the probability simply determines whether the premium will be higher or lower, not whether you need it.  Whether you need it is determined by the possibility and whether you can afford to self insure or not.

What to Do with the Money You Save–Redirect it to the insurance that actually protects your future — medical, disability, long-term care, or higher liability limits:  That savings goes into the medical insurance that the long ago attorney didn’t purchase, it goes into long term disability insurance that most people don’t have.  (The state’s disability insurance is short term and worker’s compensation generally only covers injuries suffered at work.)  For older persons, it goes into long term care nursing insurance.  Or higher liability limits on your auto or homeowners insurance.

How to Audit Your Ppolicies Like a Pro–Drop what you don’t need and strengthen what actually matters:  Either do this on your own or with your insurance agent or financial planner.  Where are your gaps and what can you cut?  Now, do remember that the agent is paid by how much he/she sells so he/she has a natural inclination to not want you to cut anything–but I have found that most will have an honest discussion with you on this topic if you bring up risk management theory.

Call Us:  So stop purchasing insurance just because and think about why you are buying it, what it really covers, and whether you really need it.  Call us at 760-436-8832 about estate planning, estate administration (death cases), long term nursing home/assisted living/in home care so we can help guide you on this and other topics.