By: Don Shaughnessy
Intuitively, price and cost are the same thing. Very wrong! Catastrophic mistake in the making! Truth is you get value by incurring cost and the money is just part of it.
Suppose you are flying over the prairies and the captain comes on the intercom and declares that the plane is going to crash. Fortunately, the airline has made provision for this and will rent parachutes to those who want them.
An attendant comes to you and says, “We have two kinds. One is $50, the other $100. Which do you want?”
You know that price is a poor way to judge value, so ask, “What’s the difference?”
“The $50 ones are factory seconds and work about half the time.”
The value, escape from a failed airplane, cannot be adequately achieved with the $50 parachute. Its cost to you is the money of $50 plus the acceptance of a 50% probability of death. The alternative of $100 and no concern for blood stains on the ground looks like a better deal.
Just like life insurance.
From the insurance company’s perspective, all life insurance “costs” the same. People die at the same rate regardless of who insures them or how, the cost to do business is about the same for all carriers and the investment returns they receive don’t vary much. If a carrier can offer a lower price, it is because they put something in that you don’t want, or took out something you do want.
An insurer could sell for half price if the contract included a clause that provided that in the event of a claim, the insurer will toss a coin. Heads they pay. Tails not. Some policies almost have this provision. It is the pre-existing condition clause. With it, you can’t be sure you have coverage.
An insurer would offer a very attractive price if you agree to take a medical every year and the policy ends if the company doesn’t like the result. How much is the access to coverage worth to you? You must pay more money to replace the cost of uncertainty.
Consider English philosopher, John Ruskin’s view.
“There is hardly anything that some man cannot make a little worse and sell a little cheaper, and people who consider price alone are this man’s lawful prey.”
If you don’t know how the price difference arises, you are blindly accepting a cost that is as real as money. Invisible is not the same as not there. I cannot afford anything that cheap is a thought to consider.
Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. firstname.lastname@example.org