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Financial Freedom Is Merely Organized Common Sense
What If Stupid Hurt?
Why do people put off the decision to own life insurance? Pretty simple really. There is a cost but no benefit to the present self and a benefit for the future self that cannot be enjoyed by the present self. In these situations the present self often makes decisions that the future self would find unacceptable.
I spent a good part of the past weekend tidying up my home office. Sad to say the man from Mars might not notice the difference but I do. In the process, I tossed about 30 pounds of articles, papers, and magazines that had been cluttering up the space. Obsolete – gone. Not interested any more – gone. Duplicated – gone. It felt good. One of the interesting things I noticed was in a Tim Cestnik article. It dealt with procrastinating on the insurance decision.
Over lunch, his adviser suggested, “Why don’t you sleep on it and if you wake up in the morning, call me.”
“If you wake up” is the key. It is very easy for the present self to put off the insurance decision. “I woke up this morning, it’s a good thing I didn’t buy life insurance yesterday.”
Sadly for advisers, in these circumstances the present self is right far more often than it is wrong. For someone who has been making this decision for 10 years, they have been right more than 3,600 times and not wrong even once. When events turn out in your favor 3,600 times and against you none, you get a bit confident. Pity! Because frequency of outcome is an incomplete guide.
Analysis of decisions of this type involve two parts:
- frequency of being right and the saving that results, and
- Frequency of being wrong and the cost that results
For a 30-year-old male non smoker, $1,000,000 of coverage will run $50 or so per month. Say $1.65 per day. Not a significant difference in lifestyle either way. About the price of a medium coffee at Tim Hortons.
There is a high probability of a small win.
When wrong though, the future self is out $1,000,000. That is likely significant for the surviving family.
The same thing happens later in life. For 65 year-old male non-smoker, with a $1 million tax liability, $30,000 per year of Term to 100 will buy the million. $82 per day. If you think your $82 can, with certainty, earn 5% after taxes and if, again with certainty, you will live 20 more years, then it is a neutral decision. The trick is the “with certainty” part. How much would you estate care if you passed away in 5 years? Not at all if you have invested at 83% after taxes.
You are truly insurance poor only when your estate needs the death benefit and doesn’t have it.
The present self needs to learn this..
It is dumb to play games where the strategy is to win small with high probability and lose big when you are wrong, albeit with low probability.
If stupid hurt instantly, there would be a lot less of it.
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@moneyfyi.com | Twitter @DonShaughnessy | Follow by email at moneyFYI
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Fantastic Article Don and a great way to look at this critical component of a persons Risk Portfolio .