Insurance can be helpful, but it can also be the worst. Best case scenario it helps you in a time of need, worst case they are casinos masquerading as helpful loving companies. Most financial advisers and insurance brokers have a more positive view of insurance, but I would say that is only because they have a vested interest in you or the public believing and purchasing insurance. There are often kickbacks or commissions when insurance is sold to a client making their opinion or advice not in your best interest. You really want a fiduciary advisor when working with a financial adviser, which is a fancy word for someone who doesn’t sway you to a product just to sell (make commission) you something that you may or may not need.
Fiduciary Advisor
“A fiduciary advisor is a financial professional who is legally and ethically bound to act in the interests of their clients. Fiduciary advisors must prioritize the needs of their clients above their own needs.” It is highly recommended that if you see anyone for advice or knowledge you think about their motivation. How are they getting paid? Do they have my best interest at heart? Sales for example is classic for just wanting to sell you their product or service by any means even if you don’t really want it or cannot afford it. Realtors want to sell your house or get you to buy a house. Travel agents want you to travel. Investment brokers want you to invest and insurance brokers want you to buy insurance. Think about who gets commission before you make any purchase so you can understand the motivations of those you are working with and even ask them straight up how much they will make off your sale.
Life Insurance
The fear of a loved one dying leaving a spouse to handle expenses and the mortgage is a huge fear insurance brokers love to emphasize. They can of course rid you of these fears for a monthly fee. So why am I against life insurance? Well, it starts with the fact that selling insurance like selling anything is a business. Business must be profitable to stay in business, therefore the monthly fee is much higher then what is necessary to cover the fee of paying out a claim if a loved one were to die. For example, the insurance company needs to pay the salesman, which is most often, half of the first year's premium and around 5% - 10% of your monthly premiums. They have operations staff to pay, building and maintenance costs and advertising. These are all extra costs on top of your claim if you were able to claim your policy less of an investment and more like gambling. Plus most like insurance policies expire right before most people die (designed this way) so you may be paying for a policy your entire life and not get a penny out of it. Well, you might say you received peace of mind. Well I would say you paid a lot for that peace of mind. Which you might say, when then buy Whole Life Insurance so that you are guaranteed to get your money out of the policy. Whole Life Insurance never expires so you will get paid out whenever you die. Aged 50 or aged 100.
Whole Life Insurance
I can understand the thought process of why this would be attractive. You get life insurance benefits with no chance of not getting your money out of it. Yes, but once again, it's a terrible idea. Like I said before, there are many people on the payroll at insurance companies and having them be a middleman to your money is like attaching leaches to your investment portfolio. You can avoid the sales commission by simply investing the same amount of money you would be spending on your life insurance but in an investment. Your money would grow over time and there is a zero percent chance of your investment expiring.
Insurance Incentives
Insurance companies don’t want to pay out. Whether it be car insurance for an accident, life insurance, pet insurance and house insurance. Every time they pay out, the company loses money which they are very much incentivized to prevent. Not that they would deny all their claims, clearly not as no one would sign up with them. But they would like to make it difficult and annoying to cash in wherever possible to even reduce claims by a percent or two. Just this fact alone makes me hate insurance.
The Argument Against Life Insurance
Money When You Don't Need It
Life insurance is needed the most when you're young just starting out in your career and starting a family, but that is the exact time when you're least likely to pass away. Most health complications happen after 50 which at that age, assuming you have been properly budgeting you should be more financially independent with a house paid off or almost paid off. By that time you are in less need of life insurance money. Losing an income will be difficult and may lead to some cut backs but it is survivable, especially with family support.
The Financial Trade Off
Imagine you are 30 years old and someone offered you a deal between $40,000 at age 50 or the possibility of $500,000 if you died before age 50. If you signed up for life insurance at age 30 for a 20 year plan at $35 a month (the average payment) it would cost you $8,400. Now if you took that money and instead invested in the S&P 500 with an average of 10% return it would grow to $40,000 at age 50. After the 20 years are up you could renew, but at a much higher monthly rate which of course would increase your return if instead it was taken and invested.
Now if you are in a single income household or you have a lot invested in the breadwinner with schooling and other debts, then life insurance makes sense especially between 30 and 50. After the age of 50 the cost of life insurance drastically increases making less about hedging your bets and more about betting on dying soon.
Casinos and Insurance Companies
Sure if you got hit by a bus tomorrow there wouldn't be much saved. But statistically that's not going to happen, hence why insurance companies are happy to sign up 20 year old for low monthly fees knowing the odds of death are extremely low. As you age your policies premiums go up since your odds of death also rise. The real kicker in all insurance policies is you need the bad thing to happen in order to “win”. Want that life insurance money? Well you or your loved one needs to die. Want car insurance money? You need to get into a wreck with your car. House insurance? You need your house to burn to the ground. It's morbid and awful and insurance companies have crunched the numbers to find out the likelihood of every bad thing happening, then set their policy prices accordingly so they come out on top . Casinos know the odds as well. Sure someone might enter and win big on black jack, but with a large enough sample size the numbers even out to around 40% chance of losing money, so the house always wins in the long run. You could sign up for house insurance and the next week have your house burn down, but it's unlikely, just like it's unlikely to beat the casino. Look at the odds, run the numbers and realize you are not likely to win. So just don’t play. Don’t go to a casino and don’t sign up for any more insurance than you have to.
Maybe you are an anxious person and it is worth every penny for the peace of mind, and fair enough. But at least realize the odds are against you, like people know the odds are against them at a casino.
If you found this helpful and would like help budgeting or investing please email me at TaylorMckeeCoaching@gmail.com
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