Insurance. What’s It For?

Insurance Poor is everywhere.  Insurance poor can mean one of two things.  A) I am paying too much premium for the benefits I receive and I am therefore insurance poor.  Or B)  I have too little insurance and my family will be poor if something happens to me.

I have no statistics but I would be willing to bet that situation B) is more common than A).

The “What’s it for?” for insurance relates to the asset and to the risk of loss.  The idea is that if the potential loss is big and unaffordable, then someone else should take the risk because I cannot afford to keep it.  Insurance is a form of guarantee that you get money for what you could have earned.

The value of my career is a big number when I am young.  What is my P/E ratio?  Probably 15 to 1 or more depending on growth factors.  If I die, the E becomes zero and my family may care about that.  If I insure my value, then I am out the minute premium and they have a chance.

Same thing, but more complicated with disability insurance.  If I cannot work, there will need to be capital working in my place.  It is surprising how many people look at it and say I could do something else or I would be back soon.  Not so true.  A majority of people who are disabled and off work for more than 4 months, never go back.

Proper insurance uses money to replace a destroyed asset, your ability to earn.

Other forms of insurance, like fire, replace the asset in exactly the same way.  No asset, here’s money.  It is strange how people insure assets they can touch, like their home, to the full extent possible, while they fail to insure their largest asset, their ability to earn money, at all.  For most 35-year-olds, their career is worth 4 0r 5 times the value of their house.

Other forms of insurance provide money to offset new costs or temporary losses.  Critical illness insurance falls into this category.  If I develop cancer I will get a check.  I can buy otherwise unaffordable things like better care.  Or I can focus on recovery with no thoughts of the money problems that result from a little time away from the office.

Even smallish amounts will matter.  $25,000 would go a long way towards paying for transportation, parking, medicine and home care.  If I want to consider going to Sloan-Kettering I might need more.

An often overlooked situation is Critical Illness coverage on children.  Aside from the cost, the stress and the worry may keep Mom or Dad from working.  A 5-year old can be insured for $100,000 for less than $25 per month.  We all hope nothing happens to a child, but sometimes it does.  Would the claim amount, albeit unlikely, be more useful than the $25 a month?  For me, yes.

If I never have  a claim, so much the better.  Same as your house.  No fire is good.

Insurance replaces lost assets with money or provides money to pay certain costs.  If I or my family cannot afford the loss, then the insurance has value.

The choice is a big unaffordable loss in the future, maybe, or a tiny affordable loss in the present.  The maybe is what keeps the premium small.

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Contact:  |  Follow Twitter   @DonShaughnessy

Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large person

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