Insurance – It’s Real Purpose

Some people own insurance for what it purports to do – replace things lost or at least replace their value.

Some people own insurance for what it is. A document that shows they have done something responsible.

Both are right in their way, but neither gets the complete idea.

Insurance is about providing choices 

“Insure for what can go wrong, so you can invest for what can go right.”   Jason Butler

People with no insurance, must always pay some attention to having liquidity. to cover disasters. If the house is damaged or the car is wiped out, if they get sick, or if someone dies. there are costs that must be covered. Those potential needs cannot be invested in a business, or speculative land development, or in many stocks you might like.

You will recall that liquidity is the defense for volatility in the market. Just as you can spend a dollar only once, you cannot use liquidity more than once either. If it is protecting your you against fluctuations instock portfolio it cannot simultaneously protect your catastrophe need.

Insurance is an option on money

Holding money for the need is costly in terms of opportunity cost. You cannot do anything else with it. Think of insurance as a way to free up money for better investments than T-bills and the like.

Years ago I met a person who would owe $6 million in taxes on his death. He had the money invested in a money market fund. The yield after taxes would not have covered more than  a few weeks of his cost of living. He could have bought a $6 million life insurance policy by setting aside less than half of his money to fund the premiums. That would have freed nearly $3.5 million.

Unfortunately for everyone, he had been told by his father 50 years ago that life insurance was a bad deal. Did he objectively assess the facts? With the insurance.

  1. The estate money was guaranteed.
  2. The premium was guaranteed.
  3. There was more than $3 million free dollars left over
  4. His accountant wanted him to do it.
  5. His family was never told of the choice, even though they would have been the beneficiaries of the extra money.
  6. Showing him how a policy from 1940 made his father right, and how modern policies were much different carried no weight.

He never did it. I have often wondered what the real reason was.

One of the things I have learned over the years is logic doesn’t change anyone’s world view. You can take that to the bank.


I help people have more retirement income and larger, more liquid estates.

Call in Canada 705-927-4770, or email don@moneyfyi.com 

 

 

 

 

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