Insurance: A Tax on People who are Bad at Math? (Article)

Insurance: A Tax on People who are Bad at Math? Insurance of all types – car, house, jewelry, health, life – is a crazy field swayed by lots of marketing, fear, and doubt. In fact, I'd bet most insurance is bought partly on fear and without doing any actual math on whether it's a good deal. If you're an average consumer, you spend several thousand pesos per year on insurance. Maybe there's a way we can cut that down and let you keep some money for yourself! The first thing to understand about insurance companies is that they are making money off of you – lots of it. They do this by employing a team of brilliant mathematicians called Actuaries who analyze detailed mountains of statistics about the average behavior of people like you, and thus how much money they expect to pay out to you in claims. They then strategically set your premiums to a level where on average, they can pay your claims, pay their employees, and still make a large profit for their shareholders. So they have, of course, rigged the odds against you. So when buying insurance, you will most likely pay in more than you get out of it. This seems obvious, but some people still need a little reminder, because I keep hearing things like, "I need insurance, so I don't have to pay for my funeral!". That's a mindset that is imagining that insurance actually SAVES you money on average, which it does not – otherwise the insurance companies would all lose money – which they do not! Once you understand this, you realize there are only three possible reasons to get insurance in any particular area. - You're forced to do it (car insurance laws, house insurance required by your mortgage bank) - You can't afford the consequences (A burned-down house or a year in the intensive care unit. - You are riskier than the insurance company thinks you are (you engage in drunken car racing or competitive eating events on the weekends). Or on a more serious note – if you are planning or expecting a baby, or have any known upcoming or chronic health conditions.. these are good times to plan in advance and set yourself up with a much lower-deductible plan. That covers the main categories of insurance. But what about things that you can't afford but are really unlikely? Do you get kidnapping insurance on yourself to cover up to a P3 million ransom? Identity theft insurance? Insurance on your kids? Extended warranties from Apple on your new laptop? Stop! It's all a trick. Luckily there is a solution: Get almost none of it. Especially if you already have a healthy 'Stash of savings built up and could thus afford any unexpected expenses. Since you'll be driving only affordable used cars with no bank loans, get only liability insurance. Since you will be keeping yourself healthy for life, get only a "catastrophic" type of health plan where you pay ALL your own bills. Since you will be building up savings and cutting your living expenses, and you are very unlikely to die in the next few years, you may not need any form of life insurance. My wife and I have never carried life insurance on ourselves, and we consider it a compliment to each other: "I believe you would do Just Fine if I wasn't around, because you're a capable and independent person". Get the highest deductible on your house insurance that the mortgage company will allow. Or if you have no mortgage, the highest you are comfortable forking over after an incredibly unlikely event. Then put all the savings from these premiums into growing your nest egg, realizing that you are now getting paid to be your own insurance company. It sounds risky if you let the fear creep in. But it should actually feel deeply satisfying and safe. By not buying into a product where the odds are stacked against you, you are STATISTICALLY likely to win. We can't predict the future, but we do have one tool that lets us turn the unknown to our advantage, and that is statistics. They are my best friend when it comes to becoming wealthy, and they should be yours too. The savings of thousands per year will add up alongside all your other newfound riches from frugality, and you'll soon find that none of these potential expenses will scare you. Over the past 10 years, I've saved about P600,000 in insurance premiums compared to the average level of spending, and now that P600,000 is sitting alongside my other employees, producing P42,000 of passive income each year, and already more than big enough to cover replacing a crashed car or paying any possible deductibles on medical bills. And after 10 years of relatively exciting living, I haven't even had to dip into it once. Now I see why insurance companies make so much money!