Betting that you are going to die…or not

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The old joke about life insurance is that the policyholders are betting that they are going to die, while the insurers are betting that they won’t, at least until the premiums and investment income pass break-even. One significant new social change emerging from this coronavirus pandemic is that the most conservative segment of the insurance industry’s base is refusing a free insurance policy against the biggest life or disability risk that working-age adults have faced in decades.

Meanwhile, America’s average life expectancy has actually decreased for the first time in many decades, down nearly two years for children born in 2020 compared with their siblings born a year earlier. It is too often death by innumeracy.

Americans are not particularly good at assessing risk and evaluating insurance alternatives. And unfortunately, much of the insurance industry is based on profiting off that ignorance. The best risk protection alternatives are often among the cheapest, especially in the long run. And yet they are often the least visible, because profit margins for insurers are often low on the pure “risk game” products.

I have detailed this gap in the Medicare market annually for the last few years. When you treat all of the Medicare supplement alternatives as bets, and then shoot for insuring against your own costliest risks at the lowest outlay, you will more likely make selections that differ from the ones most heavily advertised on television, where the profit margins for the insurers are the highest.

The classic “good advice” remains true

The long-time “informed consumer” advice on life insurance is still mathematically sound. “Term life,” especially when taken out only for the period for which your family is most at financial risk if you were to die, remains near the optimum for covering the most risk at the lowest cost. And it is often competitively priced. Using insurance to “make your heirs rich” or to insure your life well into your senior years gets very expensive, and the net benefit falls quickly.

Most families now have better low-entry-cost investment opportunities available than in the past, especially in employer-subsidized 401(k) plans. “Whole life,” which adds an investment component to a term life policy, is usually much more expensive for less coverage than is a term life policy accompanied by a disciplined family investment commitment.

The best “cost versus coverage” ratios ironically still come with insurance that does not typically pay off. You don’t really want to win the life insurance bet, which is why term life, for which most people never collect, is so much cheaper.

Basic disability insurance coverage is often in this camp. In reasonable amounts it protects against a family’s financial ruin if the main income provider can no longer bring in a paycheck. It especially makes sense for young families where the premiums are low, or when your employer subsidizes the cost. Again, the insurer is betting that you will not collect, and in the end that outcome likely makes you happiest as well.

I remember years ago receiving mail offerings with the silly disability pitches that usually signaled sketchy plans, such as “We pay $5,000 for the loss of one eye.” Perhaps these plans are still offered, but they have not popped up in my mailbox for some time. The good bet is much simpler: How much income protection do I need if I can’t work, and for how long?

Am I buying insurance or a cartel pricing scheme?

When you are offered insurance against something that you will likely need eventually anyway, then it is more like a pre-payment plan than insurance, often with coming restrictions on how you can collect. And it will be priced accordingly. The insurer needs to get more money back, and much sooner.

A big chunk of your “medical insurance” premium is more along this line. You will need to see a doctor at some point and so you are often buying into what is basically a price-fixing cartel of healthcare providers, which can prove to be a good, or a bad, thing, depending on the quality of the “cartel.” Being uninsured can present a huge financial risk in the event of major medical emergencies, but it most often costs significant dollars just because the uninsured must pay the very expensive “rack rate” for everything from Urgent Care visits to more common surgeries. The well-insured “me” gets that appendectomy nearly for free, while the uninsured “you”, who can ill afford even a day off work, will pay many thousands of dollars more for that same procedure. That’s American healthcare.

Dental offices have increasingly become part of big national and private equity-financed price-fixing cartels that will keep repairing stuff in your mouth until you cry “uncle.” Unless you are in pain right now, you have little expertise in interpreting their advice. There are lots of dental “insurance” offerings that provide discounts for major dental procedures, but since most users “collect” on this “insurance” at some point, the value for price ratio is pretty weak.

There are alternatives, however. My own dentist is in an independent family-owned practice. He offers similar “insurance” for discounts off major procedures for little more than the price of pre-paying for two annual cleanings, which we need anyway, and he refuses to push unnecessary procedures.

That Covid vaccination is free insurance

The seven-day average of daily Covid deaths in the U.S. remains well above the 2000-mark, and recent CDC estimates place the risk of an unvaccinated person dying at 68 times that of a fully vaccinated person. This is an extreme example of “Get yourself insured against a big risk [i.e., death or long-Covid disability] for a low cost [free]”. Refusing to take the jabs is a very dumb decision based on family financial security criteria alone.

Several other vaccines also lie along that “low cost to avoid pain later” line. If you know someone who has had shingles, you don’t need a television commercial to tell you that the vaccine is a wise investment if you are in a high-risk demographic. When the annual flu spike virtually disappeared in winter 2020-2021 because of our increased masking, it should be now clear that the annual flu vaccine is another form of “insurance” well worth the cost (and again the cost is often zero).

The investment wizard Harry Markowitz long had as his own personal investment strategy, “Minimize regret,” often opting for safety over potentially more lucrative, but much riskier, options. This is a wise plan these days when your unmasked, unvaccinated nephew can kill you at your birthday party.

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