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    December 2012
    M T W T F S S
    « Nov   Jan »


    Insurance Poor??

    Don Shaughnessy

    Somebody is always insurance poor.

    It could be your future self or estate who is insurance poor because the claim received for your death or disability is too small.   Alternatively, it could be your present self who has to come up with the premium each month.

    People tend to get his wrong because they don’t analyze the problem very well.  The present self uses hyperbolic discounting to estimate the value of the future benefit.  The current premium seems to be worth more, so the present self feels hard done by if they pay.

    There are many excuses that help justify the behaviour.

    My favourite, “Every morning I get up and say, ‘Good thing I didn’t buy insurance yesterday, because I didn’t need it,’  I have been right way more often than I have been wrong”  The future self is going to lose big while the present self wins small.

    I would be willing to wager that the Harvard Business School does not teach their MBA students that win small / lose big is a good strategy.

    Some people don’t like life insurance because, “It is like betting against the home team.”

    True in a way, but again the present self is putting their feelings in opposition to the needs of the future self.  The reality is that the present self could afford the loss of the premiums and the future self cannot afford the absence of the claim.  Clearly one or the other is going to lose.  Support the one with the bigger loss.

    You can be insurance poor but only if you have covered risks that don’t exist, have failed to cover risks that do exist, have mismatched the product and the problem, or if you have covered things that are certain to happen.

    In the last case, you are paying the claim plus the insurer’s overhead.  Think $0 deductible dental plans.  The claim is certain, the premium will be more than the claim because the insurer has overhead to recover and a profit to make.  For a single person, a deductible results in a premium reduction that is greater than the amount of a small deductible.

    Talk to a professional, they can help you sort out the real issues.

    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.

    The MONEY® Network