Problems and opportunities usually come in complicated wrappers. Sometimes you must deal with the whole problem and other times you can deal with the pieces inside the wrapper. One key to success is to know when to decompose a problem and deal with the parts.
There are ways to decompose large questions, but even formal analysis does not work perfectly all of the time.
It fails when people misunderstand the meaning of some of the pieces. For example, you cannot reduce your total cost of car ownership by eliminating insurance.
People sometimes look at that line item and try to go cheap. What they fail to realize is that the insurance is not a true cost. It is a representation of a cost, a proxy. It replaces a cost that is not certain to occur, but very large if it does. Liability for an accident, or loss to theft for example. That potential cost of catastrophe is part of the all-in cost of ownership. The insurance is merely how you deal with it.
Similarly the premium for disability income insurance or life insurance is merely a substitute for the real cost. In this case, the cost is the inability to take full advantage of your education, energy, skill and experience. If you don’t convert your personal skill assets to money, then what?
It is a serious mistake to examine premiums without the context of what potential cost you have shed to an insurance company. They can deal with it more easily because they think about a huge pool of risk. They know the tragedy will not happen to everyone. Make on the oranges, lose on the bananas and it works if you have enough oranges.
It’s different for an individual, you are either a victim or you are not. On or off. You would bear the full cost of a loss and you save the premiums. Or you could give up affordable premiums in exchange for the absence of that particular risk. With insurance you don’t need to care if you are an orange or a banana.
For young healthy people, the cost to prevent a huge, but improbable, loss is insignificant. We recently arranged life insurance coverage for a newly graduated physician. She is 28 and $2,000,000 of term coverage costs less than $65 per month. If she were 38, the premium would be just over $80.
For her the $65 amount is well less than parking.
By analyzing expenses one at a time, you cannot necessarily make your life both cheaper and better. Sometimes you need to look at the big picture. You especially must be careful with expenses that are a replacement for some other cost. Insurance or catastrophic loss. Gym fees or weaker health. Vacation or chronic stress. Course fees or falling behind.
It is organized common sense. Be cautious. Sometimes the price details hide the life meaning.
Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.