People believe that cost and price mean the same thing. Very wrong. An error that can easily lead to catastrophic mistakes.
When you acquire a product or service, you are trying to get value equal to or more than what you must give up to get it. The give up is cost. Money is one part of cost, but often not the most important.
You need to know all the parts you are trading for the hoped for value.
For example. Suppose you are flying across the prairies and the captain comes on the intercom and declares that the plane is going to crash. However, the airline has made provision for this. (You might wonder why you chose this airline.) The flight attendants are in the aisles renting parachutes.
The attendant comes to you and says, “We have two kinds of parachutes. One is $50, the other $100. Which do you want?”
If you know that price is not a good way to judge value, you will ask, “What’s the difference?”
“The $50 ones are factory seconds and about half of them work. The $100 ones work all the time.”
Clearly, you cannot adequately achieve the value required, (certain continued life) with the $50 parachute. The total cost to you is $50 plus a 50% probability of death versus $100 and no uncertainty.
Many financial products are like that too. Like life insurance.
From the insurer’s perspective, all life insurance “costs” the same. People die at the same rate regardless of who insures them, the costs to do business are about the same for all carriers and the investment returns they receive are much the same too. If someone is offering a lower price, it is because they took something out that you might want, or put something in that you do not want.
For example. An insurer can offer you a very attractive price if you agree to take a medical every year and if your health has declined, the insurer cancels the policy. How much is the access to future coverage worth to you? The higher premium that guarantees availability might be better.
Similarly, an insurer could sell for about half price if the contract included a clause that says, “If there is a claim, the insurer will toss a coin and if it comes up heads they will pay the claim; otherwise not.” Some policies almost have this clause. It is the preexisting condition clause. You cannot be certain you have coverage or that you have answered all the questions properly.
If there is a question that looks like, “In the past 10 years have you had any medical tests performed?” Many healthy people answer no, but that is almost always wrong. Blood tests or blood pressure taken that were normal are easy to forget about if you are healthy. normal. If you had a normal blood pressure test 10 years ago, failed to disclose it and died from a heart attack, you might not get paid. Better to deal with an insurer that does their underwriting before they issue than one that does their underwriting when faced with a claim.
If you do not know how the price difference arises, you can be in trouble. Bear in mind that the insurer knows more about insurance and probabilities than you do. Probably vastly more.
You cannot afford cheap. Would you buy cancer drugs from a person in an alley? How about cheap brakes or low-priced laser eye surgery? No?
Bargains are okay but only if you know why they are bargains.
Consider this idea attributed to the English philosopher, John Ruskin.
“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.”
Or this one from Seymour Jaron,
“The bitterness of poor quality remains long after the sweetness of a low price is forgotten.”
Easier to remember – CHEAP IS TOO EXPENSIVE!
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. email@example.com
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