Insurance is a Racket!
By Gil Baumgarten, Segment Wealth Management, LLC
I know that’s a bit harsh, but the odds of most claims are low, and costs are generally high relative to that risk. I’m also a former life-licensed agent from decades ago, so I’m pretty familiar with the math.
Being in the investment business, most people think I’m pro-insurance. If you’ve ever tasted Paregoric, you know it’s only better than the alternative. Shifting risk is very expensive. I have also found self-insurance (or taking the risk myself) to be the more profitable choice. Now, I’ve never faced a major calamity, but even so, high deductibles allow for the covering of catastrophic losses and leave the minor claims to be absorbed. Reduced premiums for this risk-taking are the “compensation.”
I have several points of reference arguing for larger deductibles. Many years ago, I spun out my new Chevy Blazer on an icy road in Boerne, Texas. The relatively minor $1700 repair bill was not too bad considering my $250 deductible. Then my agent broke the news that my premiums were now going up with the claim since I was obviously no longer “low risk.” My premiums would rise by $500 per year for three years, assuming I had no more claims in that period. That means it was going to cost me $1750 to make a $1700 claim (3 x $500 +$250). I withdrew my claim and paid out of pocket. I asked my agent why I did not have a $1000 deductible. He said it was probably a good idea; He should have mentioned that sooner. I fired him on the spot.
My new agent put me in the same $1000 deductible policy, which lowered my annual premiums by almost $800. That was 35 years ago, with nary a claim. That means the willingness to accept a $750 additional loss at any moment in time has paid me $28,000 plus interest ($800 x 35 years). And that’s tax-free.
Once, I took my son, Brian, to lunch at one of our favorite Cajun restaurants before he returned to TCU. His car was broken into while we dined, and several items were stolen, including two laptops and some of his girlfriend’s jewelry. My $7800 homeowner’s claim was whittled down to a check for $1018, after deductibles and depreciation. So, I increased my deductible from 2% of home value to $15,000 flat, and my premium dropped by 41%.
The difference between my old deductible and my new deductible means that I carry additional risk. But in just a few years, that financial risk paid for itself with the lowered premiums, and any savings beyond that will be tax-free profits. Furthermore, I made my last homeowner’s claim decades ago. This cycle would have already repeated itself twice by now if I had been thinking. Even if I do have a big claim and have to eat that big deductible, I’m still way ahead of the game. Overall, I’m home-free no matter what because I have already saved and invested tens of thousands of dollars of saved premium. I use the term “tax-free” because savings are dollars on which you have already paid tax.
After Brian graduated from college and became a workin’ man, he became a newfound target for insurance agents. At the time, he was single, with no mortgage or other responsibilities. Whole Life? For what?
Now that he is married and has two little girls, life insurance does make some sense, but Term Insurance for sure. As Brian asked me about life insurance, I stopped him and asked if the agent had told him about Whole Life and maybe Universal Life with a loan instead of doing a Roth IRA. He asked, “How’d you know?” I have already heard the pitch. It’s pretty predictable when you understand that Term Insurance has no commission, and Whole Life Policy and Universal Life Policy commissions can exceed 80% of your first year’s premium. I’m no rocket scientist, but I do know how agents get paid, and accordingly, how they think. I went on to ask Brian if he had ever heard the saying, “When all you sell is hammers, every problem looks like a nail.” He said no, but he totally understood what I meant with the question.
For more information, please contact Haley Parmer at (713) 800-7158 or Haley.Parmer@segmentwm.com.
Read more of Gil Baumgarten’s articles at Segmentwm.com/blog.