What Is “Insurance Poor”?

Anyone can be insurance poor. Maybe everyone is.

You could be insurance poor by paying too much premium each month. Or, it could be your future self or estate who is insurance poor because the claim received because of your death or disability is too small.
This present-future conflict is fundamental within each of us. When your present self makes decisions that your future self would find unacceptable it is because of the way future and present values compare.

The present self uses hyperbolic discounting to estimate the value of the future benefit. Thus the benefit turns up small. The current premium seems to be worth more, so the present self feels hard done by if they pay.

You would not believe the excuses you hear to justify the avoid insurance 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” Inevitably this tactic fails. The mortality rate in Canada is the same as it is everywhere else. One death per lifetime. The future self stands 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 financial 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 decision the future self would make. 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 unaffordable 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 small deductible results in a premium reduction that is greater than the amount self insured.

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. don.s@protectorsgroup.com

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