89 comments

Insurance: A Tax on People who are Bad at Math?

I recently read a Facebook conversation about health insurance where one person said, “I’m better off saving the $1000/month premiums and paying for my own medical bills if they ever come up”. And the other person said, “Bah! Recipe for bankruptcy! You need full insurance!”. Which person was right?

Years earlier, I was talking to a friend who had just bought her husband a Rolex watch as an anniversary present. As part of buying the watch, she also bought an insurance policy which would buy them a new Rolex if it was stolen. Was this policy a good idea too?

What about collision insurance on your car? And life insurance?

Insurance of all types – car, house, jewelry, health, life – is a crazy field swayed by lots of marketing, fear, and doubt. In fact, I’d bet most insurance is bought partly on fear and without doing any actual math on whether it’s a good deal. If you’re an average consumer, you spend several thousand dollars per year on insurance. Maybe there’s a way we can cut that down and let you keep some money for yourself!

The first thing to understand about insurance companies is that they are making money off of you – lots of it. They do this by employing a team of brilliant mathematicians called Actuaries who analyze detailed mountains of statistics about the average behavior of people like you, and thus how much money they expect to pay out to you in claims. They then strategically set your premiums to a level where on average, they can pay your claims, pay their employees, and still make a large profit for their shareholders. So they have, of course, rigged the odds against you. So when buying insurance, you will most likely pay in more than you get out of it.

This seems obvious, but some people still need a little reminder, because I keep hearing things like, “I need dental insurance, so I don’t have to pay the $300 every time I take my kid to the dentist!”. That’s a mindset that is imagining that insurance actually SAVES you money on average, which it does not – otherwise the insurance companies would all lose money – which they do not!

Once you understand this, you realize there are only three possible reasons to get insurance in any particular area.

– You’re forced to do it (car insurance laws, house insurance required by your mortgage bank)
– You can’t afford the consequences (A burned-down house or a year in the intensive care unit at $10,000/day)
– You are riskier than the insurance company thinks you are (you engage in drunken car racing or competitive eating events on the weekends). Or on a more serious note – if you are planning or expecting a baby, or have any known upcoming or chronic health conditions.. these are good times to plan in advance and set yourself up with a much lower-deductible plan. The US is an unusually expensive place to have a baby in a hospital, and even I wouldn’t advise risking paying for this out of your own pocket. The cost will range from $3,000 to $1 million+, depending on complications you cannot predict in advance.

That covers the main categories of insurance. But what about things that you can’t afford but are really unlikely? Do you get kidnapping insurance on yourself to cover up to a $3 million ransom? Identity theft insurance? Insurance on your kids? Extended warranties from Best Buy on your new laptop?

Stop! It’s all a trick.

Luckily there is a solution: Get almost none of it. Especially if you already have a healthy ‘Stash of savings built up and could thus afford any unexpected expenses.

Since you’ll be driving only affordable used cars with no bank loans, get only liability insurance.  Since you will be keeping yourself healthy for life, get only a “catastrophic” type of health plan where you pay ALL your own bills unless the cost exceeds $5-10k in a given year. Since you will be building up savings and cutting your living expenses, and you are very unlikely to die in the next few years, you may not need any form of life insurance.

My wife and I have never carried life insurance on ourselves, and we consider it a compliment to each other: “I believe you would do Just Fine if I wasn’t around, because you’re a capable and independent person”. Get the highest deductible on your house insurance that the mortgage company will allow. Or if you have no mortgage, the highest you are comfortable forking over after an incredibly unlikely event (I usually set mine at about $10k).

Then for the insurance lines that you are keeping, do a nice afternoon of shopping around – I did this last January and sliced about $300 per year off of my remaining home and car insurance. The winners for me ended up being subsidiaries of Geico, although different people will find their results vary with different insurance companies, strangely enough.

Then put all the savings from these premiums into growing your nest egg, realizing that you are now getting paid to be your own insurance company.

It sounds risky if you let the fear creep in. But it should actually feel deeply satisfying and safe. By not buying into a product where the odds are stacked against you, you are STATISTICALLY likely to win. We can’t predict the future, but we do have one tool that lets us turn the unknown to our advantage, and that is statistics. They are my best friend when it comes to becoming wealthy, and they should be yours too.

The savings of thousands per year will add up alongside all your other newfound riches from frugality, and you’ll soon find that none of these potential expenses will scare you. Over the past 10 years, I’ve saved about $40,000 in insurance premiums compared to the average level of spending, and now that $40k is sitting alongside my other employees, producing $2800 of passive income each year, and already more than big enough to cover replacing a crashed car or paying any possible deductibles on medical bills.

And after 10 years of relatively exciting living, I haven’t even had to dip into it once. Now I see why insurance companies make so much money!

 

  • Jenny June 2, 2011, 10:07 am

    Ok – so maybe you answered this – but if you or a family member is chronically ill, what kind of health insurance should you get? We’re talking hundreds of thousands of dollars in medical bills without insurance. But there are options – high deductible plans, and also the traditional kind. And a secondary insurance that requires primary insurance if offered at employer. I’ve never looked into the high deductible one, but perhaps that is a good option? And life insurance (term only) because you a primary caregiver for someone who is disabled for life? What about beyond the term? Perhaps I need a shift of thinking and don’t even know it.

    Reply
    • Jenny June 2, 2011, 10:07 am

      That’s per year. Continually. Forever.

      Reply
    • MMM June 2, 2011, 10:39 am

      Very good point, Jenny! I was incorrectly assuming everyone in the world is already in perfect health with no need for medical care.

      In the situation where you have a known stream of medical bills, you fall squarely into my category of “you are riskier than the insurance company thinks you are”. For you, insurance is actually profitable to buy. So in that case, you work out the best ratio of annual deductible (which you will always be paying in full) to annual premium cost. For example, if you can lower your deductible by $5000 for less than a $5000 increase in premium costs, you should do it. Your ideal health insurance plan might therefore end up being a very high-end one.

      In the very recent past, a person like this could only get coverage if they could get a job with an employer that offered a strong healthcare plan allowing pre-existing conditions. Otherwise they would be denied any health insurance, since it would be a guaranteed loss for the health insurer. So the only solution would be to go straight to poverty and bankruptcy, then get occasional assistance from Medicaid. With changes from the new Obama health plan that passed this year, even people with less fancy jobs will still be able to get health insurance. I think he had to bribe the insurance companies for this concession by adding a pool of healthy young people all getting insurance as well – hence the eventual requirement that everyone get insurance. But an added benefit is that universal insurance also cuts down drastically on unpaid use of the emergency room.. which provides some of the savings to pay for the care of the chronically ill.

      Reply
  • Laura June 2, 2011, 11:35 am

    Love reading your blog :)

    You don’t even think you should carry term life insurance if you have children? I would worry about not leaving them enough money to live until adult age.

    Reply
    • MMM June 2, 2011, 12:06 pm

      Thanks Laura!

      The term life insurance for the kids really depends: For a family with two parents around, the chance of both parents dying simultaneously is even lower than the chance of one dying. It is getting down into the “kidnapping” probability of things I wouldn’t even worry about myself.

      But since we all love our kids and don’t like the idea of taking any gambles with their future, how about this idea: make an agreement with one of your own grown siblings, your parents if they are young enough, or even a close friend, that they will adopt your kids in this highly unlikely situation. Then in your will, leave all your assets to your kids. It costs very little to add a kid to an existing household, so even a tiny inheritance will pay for their trip to adulthood.

      Reply
      • Heidi June 2, 2011, 1:14 pm

        We pay for term life insurance on my husband each year. We look at it year by year and our kids are under 5 so we figure its worth losing $100 so I could take care of the kids if he died and provide them with the stability of lots of time with me. We are also paying for the preference of my sister getting the kids if we both die. She couldn’t afford this change in her life without the insurance. Right now, our assets wouldn’t change this significantly.

        Reply
      • Laura June 3, 2011, 11:00 am

        I suppose it would make the most sense to get term for a working spouse if you had one stay-at-home parent. Currently we both work, no kids yet but in the near future :) so thinking ahead. Thanks for the reply!

        Reply
        • Marcia @Frugal Healthy Simple June 8, 2011, 8:36 pm

          We have term for both of us, simply because paying the mortgage on one salary would be tight. We could do it, but it would be tight. So trying to do it with the stress of being a single parent (were one of us to die…) too much.

          Reply
      • Dan March 1, 2012, 12:44 pm

        Its also possible to buy a form of term life insurance that pays only in the event of both parents dying and leaving behind dependant children. Talk to your insurance broker, but a policy like this is a necessity in my opinion and (as the chances are so unlikely) it normally works out very cheap.

        Reply
  • Lucky June 2, 2011, 11:46 am

    I used to work for an insurance company. I ate some very good meals during those days. Stayed in the best hotels. It was great. So just get a job at a big insurer, which will insure a very pleasant lifestyle.

    Reply
  • Geek June 2, 2011, 12:24 pm

    Great post.

    I have comp/collision on my new car for now – I could afford to buy a new one but it would but a big dent in the ‘stash (I bought new but for cash. I *had* to do it once! :) ).

    I definitely don’t have pet insurance – there’s almost nothing that it would cover that costs more than I can pay, and by the time my dogs are old enough for really expensive care, I should have a much bigger stash (and hopefully be retired).

    Life insurance is cheap but I’ll probably drop it when I’m 30 (I’m 29 in a couple of weeks) as there’s nothing I’d burden relatives with that I don’t have assets to pay for, and my self-employed (not yet earning) DH could easily find a new job.

    Health insurance is hard but fully provided by my company for now. I have asthma and some allergies, so I’m a pre-existing-condition problem waiting to happen if I dump it. I’d need a bigger stash first.

    Reply
  • Kevin M June 2, 2011, 1:38 pm

    I totally agree, self-insure if at all possible. True story – last year my (small) employer discussed dropping their health plan, which really only covered 3 of us. I set out looking for a replacement plan for our family of 3, soon to be 4.

    We ended up getting a high-deductible plan that is HSA compatible for HALF the price of the employer plan – $400 vs. over $800/month. We started banking the difference and just about have our $5k deductible saved up. I truly enjoy paying myself $400/month rather than send it to the big bad insurance company. Not to mention the out-of-pocket max per year is actually LOWER by $1,000/year. The only caveat is we have a 12 month waiting period for maternity coverage, but since my wife just had the baby a month before we started the new plan, it was good timing for us.

    Double bonus – in January the insurance company screwed up their billing (due to the health legislation) and instead of fixing it for the next few months, just told us to keep paying the new premium amount of $340.

    Reply
  • fubek June 2, 2011, 3:45 pm

    +1.

    I’ve saved so much money on insurances compared to my peer age group in the first 7 years since I left uni. I am now independently self-insured except for catastrophic incidents (which would be life-threatening cancer, third party liability and the like, which does NOT include unemployment, car damage, a rotten tooth or a two year old laptop malfunctioning). All savings from then on went into my own pocket and not into the insurance company’s executives’ compensation and share holder dividents. Makes me smile!

    Insurance companies are advertising and marketing geniuses, so beware and keep real.

    Fubek

    Reply
  • Rainbow Rivers June 2, 2011, 4:04 pm

    Insurance is a hard one for me, I know typically people get way too much coverage and throw money down the drain with every coverage they can get. I yet have found a plan we can afford for health issurance. We are not on ANY government assistance ( a pride thing, I have always made it without so I leave it for those who may really need it)

    However about 2 years ago now I had to face the fact I may lose everyone I love within a 3 month span. It was brutal and to be honest I shut down and came real close to a nervous breakdown as it was too much in too short of time. The losses would of included my mom, my dad, my husband and BOTH my children then ages 10 and 8.

    So yeah health insurance is important to me I just don’t quite know what to do or where to look about it at the moment. AFLAC was a joke when I had it before and did not seem to cover anything that we came up with health wise!

    Medical bills have also deveasted our credit and YES medical bills DO matter on your credit score when they are aggressive hospitals and place your ungodly high bills into judgements.

    Reply
    • Rainbow Rivers June 2, 2011, 4:06 pm

      Oh but I do have a GREAT affordable plan if I die, I got two burning barrels out back!

      Reply
  • Alicia June 2, 2011, 4:16 pm

    Another great post, MMM.

    I’m curious what folks think about long-term-care insurance. My parents are 53 with no retirement savings or pensions, and I’m already envisioning the drama that lies ahead. (I live 1,200 miles away–on purpose–but I’ve got way more resources than my sisters.) I’ve thought about getting LTC coverage on them, but it would cost $300-400 a month.

    Anybody have LTC wisdom to share?

    Reply
    • Kel January 29, 2014, 5:47 pm

      I’m not an expert on LTC, but here is my recent experience. My mother bought it 15 years ago when it was first becoming a product. Since then, she has developed dementia and the insurance is actually paying out. While she has enough resources to be okay without it, it is a blessing.

      However, since then insurance companies found that they were losing money on these policies, due primarily to the rise in dementia care, so the price shot up a year or two ago across all of the insurance companies. My wife and I purchased it because we knew the rates were about to shoot up, however I am considering cancelling it. And here’s why: most of the policies only cover you if you need a whole lot of care, usually not being able to do 2 of the 6 “activities of daily life”–i.e. you need to be in a nursing home or need pretty much 24-hour assistance.

      Since both your parents are fairly young, if one needs assistance, the other will probably be able to provide it to a great extent. If one or both start to show signs of dementia (or other health problems), one option get them into a continuing care facility before they get formally diagnosed (they won’t take someone who has a diagnosis of dementia). Shop hard and do it ahead of time–continuing care facilities can be quite nice. Price is high, but it stays fairly constant even as the level of care need increases. If your parents have a spacious house, another option will be to hire live-in care which includes housing for the caregivers. Here’s what I would do: try to convince your parents to put something aside and help them figure out how to do that in a secure location (like Vanguard), help them figure out how to maximize their social security payments and stay out of debt (executive skills tend to decrease with age), try to find a way to get them to let you in as a financial adviser so you will know if they start to get scammed or get into trouble. My mother was paying late fees on bills and making other financial mistakes she had never made before for quite some time before I became aware of it. Also get them to consult with an attorney and choose someone to give power of attorney for financial (and health care) now–if you wait till you need it, its too late. This goes for everyone, young and old–do it now! You can broach the subject by telling them that you are doing it too.

      Reply
  • Tammy June 2, 2011, 9:00 pm

    While I agree with the basics of this idea – not throwing money away on insurance for contingencies that we can cover ourselves – I do think we need to think carefully about just what we can cover ourselves. For me and my husband, we would both be devastated if the other died, having been together longer than we were single. Even though we could survive, it would be so much easier if we each had the option to not have to work in order to survive, for several months after being widowed. We carry a small amount of life insurance on each other, so we can have time to grieve without worries of paying the bills, and time to make some decisions about what may need to change in our life. It’s enough to live on, carefully, for a year or two, at our current lifestyle. My thoughts on this are probably influenced by my career in mental healthcare, as I care for people everyday whose lives are devastated by something, often outside of their control, and the last thing they need is the additional worry of having to return to work within a few weeks in order to pay the bills.

    Reply
  • Tammy June 2, 2011, 9:06 pm

    oh – and I meant to add that I’m really impressed with the HRA that my company offers. I went with it on its first year available last summer, and I’m staying with it again this fiscal year. It’s half the cost of the regular plan, and simpler to use. It is built on the premise that the more people are in control of, and responsible for, their healthcare spending, the more they will make good decisions. All prevention services are fully covered. For every other per person cost (meds, labs, doc visits, hospital, tests, etc) the first $750 is covered by the employer, the next $1250 is covered by the employee, and anything else for the rest of the year is covered by the insurance company.

    The other plan I’ve had that I liked was a cost sharing system that wasn’t really insurance. Families paid a premium of about $250 a month, and the plan paid nothing unless the cost exceeded a thousand or so per event. It’s another system where individual responsibility is a big part, as we were expected to absorb the regular stuff, and use it as true insurance — for the big stuff only.

    Reply
  • kunal June 2, 2011, 10:07 pm

    I do not agree to your view. First of all, I am not an advocate or affiliate of any insurance business, and do not have any biases. Having said that, my view is Insurance is a Risk policy , rather than anything else. What is covered under the risk is completely up to a person and what he values most in his life. I do believe that a person should not buy anything which will cause him to loose sleep over it, and if the “thing ” is lost, the consequence will be unrecoverable. So if a person wants to buy a Rolex, and can afford to loose the Rolex without much discomfort,he does not need the insurance. However, a young family should have adequate insurance in case the wage earner(s) gets disabled or is unable to work. This becomes a question of risk mitigation, rather than payment. IF you have built enough wealth that you can forgo the rest of your life without earning anything, by all means, laugh me out of town. But just in case you have not, what is your plan B?

    Reply
    • MMM June 2, 2011, 10:46 pm

      Actually it sounds like we DO agree. I said you can skip buying insurance once you can afford the consequences of any loss.

      And even better than buying insurance for losses, is becoming financially prepared for a loss BEFORE buying something. For example, save enough to easily replace your car before you even buy it. Save enough to not need a steady job BEFORE having children! I am glad I took this path, and although it is too late for most of us because we already have kids, I’d still highly recommend it to younger people just graduating today. Financial independence FIRST, then move on to the rest of your life!

      Reply
      • Alex in Virginia February 20, 2013, 5:54 am

        MMM,

        Your June 2nd reply post about being financially ready IN ADVANCE of a particular situation is amazing on its own merits. You have an incredibly clear and different way of looking at things!

        Alex in Virginia

        Reply
  • GL June 3, 2011, 3:13 am

    I only get insurance when the dealer has an ace showing and the cumulative count is +3 or higher. *g*

    Well, that, and the damned mandatory car insurance. (Somehow I doubt that’s what Henry Ford…) And then there’s the health insurance that’s mostly paid for by my employer – I think it costs me about $5 a month. I think I did fairly well in that respect… If you don’t mind my asking, MMM, what kind of insurance policies do you have?

    Reply
  • DDD June 4, 2011, 11:39 pm

    Quick question – you mentioned that both you and your wife are from Canada. Now that you have the money saved up, why not move back to Canada and take advantage of the free healthcare, free/cheaper education etc?

    Reply
    • MMM June 5, 2011, 3:06 pm

      That’s a good question! The families back in Canada sometimes ask the same thing. The only real reason is that it is way, way, way, way, nicer to live here in Colorado than it is in the Great Lakes region where we grew up. And on balance, it is still much less expensive to live in the Western US than in most Canadian cities, because things like housing, food, any sort of manufactured goods, and property taxes are so much lower here. It’s easy to save up any amount of money you might need just by taking advantage of the high wages and low cost of necessities.

      Reply
  • Jon June 6, 2011, 4:52 pm

    Great post. I was curious what you think about Umbrella insurance? It seems like it might not be a bad idea once you have significant assets – it is relatively inexpensive. A lawsuit could really put a damper on the most carefully laid early retirement plans. It also seems like it might be a good idea to establish a LLC for each rental property you own. Thoughts?

    Reply
    • jDeppen June 16, 2011, 7:57 am

      Good questions, I’d like to hear MMM’s thoughts too. I have an umbrella policy and it’s pretty cheap, $14.25/mo for $1 million (MMM would say it costs $2522 over 10 years excluding increases). It actually paid for itself in my case because I got a discount on other policies.

      I’ve heard about the LLC for each rental and think it’s a good idea but there is a big upfront cost depending on the number of rentals (I have 5).

      Reply
      • MMM June 16, 2011, 10:25 am

        This umbrella policy idea is new to me, so thanks for sharing. I’ll do some reading on it myself to get up to speed, since I plan to be a landlord for quite a while now – it is growing on me. It seems the wealthier and more involved you are with multiple tentacles in your local business community, the wiser such an idea would become.

        I had already heard of the “separate LLC for each house” idea, and some people in my area definitely do this – you can see it when scanning the public property records.

        jDeppen – I transferred your math correction into your main comment, so it’s simpler for future reading. Thanks again for the ideas!

        Reply
  • Bill June 8, 2011, 10:22 am

    This post strays too far into hyperbole, from the title, to the assertion that insurance companies make “a lot” of money off their policies, to the conclusion that the correct financial strategy is to buy as little insurance as possible.

    This is unfortunate because conceptually you are right, an insurance company will charge a premium to the insurance buyer, above the expected loss on the policy. That doesn’t mean an insurance buyer is bad at math or is making an unwise financial decision. They are simply exchanging a known expense larger than their expectation value for lower volatility. Painting with a broad brush bonds generally have a lower rate of return than stocks but in exchange have lower volatility. That doesn’t make a bond fund a bad investment only a different one. Depending on your risk tolerance it may even be a more optimal one. I know you’ve written in the past that paying down a mortgage is a wise financial decision. Economically you will, on average, come out far ahead by investing that money in equities instead. By prepaying your mortgage you are taken a lesser known return in exchange for a greater average more volatile return. The concept is completely analogous although you come down on the opposite side of the debate in that arena.

    It is important for people to think about insurance in terms of expectation value. You are absolutely right that some insurance can be priced so highly compared to expectation value that it never makes sense for anyone to buy it. Your dentist example is perfect, it makes no sense to buy “insurance” that covers an expense which occurs with 100% probability. That’s not insurance its a prepaid dentist visit.

    Another good example is insurance on consumer products. My wife just bought an Iphone and they offered her a two year insurance plan. The plan replaces her phone, a $700 item, but costs $250 up front. We’ve each owned a cellphone for 10 years, or 20 years of cellphone ownership. In that time we’ve only lost or broken a single phone. That’s a very unscientific 5% annual loss rate on phones. Her expected loss for owning an Iphone is 5% * 2 years * $700 or $70. I’ve never seen a one off consumer insurance policy that wasn’t grossly overpriced.

    So in theory I agree with your sentiment that insurance costs more than on average than bearing the risk yourself. I usually opt for high deductible plans for myself, I despise the fact that my medical insurance covers too many everyday expenses, and I turn down every policy that I get offered when purchasing a consumer good. But I don’t agree with your conclusion that insurance is bad, that insurance buyers should feel bad about their purchase, or that they are “bad at math”. It’s simply a personal decision about risk tolerance. If you are completely informed about the cost of your decisions and still want a no deductible gold plated medical plan more power to you.

    I don’t me to come off as overly critical, I think the topic is incredibly important and I agree that most people are quite ignorant of the economics underlying it. I think that one major reason for this is that the most costly insurance policies people are involved with are for medical coverage. Pricing in the health care market is completely opaque, there is no way to know what treatment costs so it cannot be compared to the cost of insurance.

    Reply
    • MMM June 8, 2011, 10:07 pm

      OK, Mr. Fussy, I added a question mark to the headline just for you, to tame the hyperbole a bit. ;-)

      Reply
      • TNT December 18, 2011, 2:06 am

        Hi Mr MM, great blog.

        I think you are way too lenient on that reply. Your assertion is, in general, quite correct, and if readers actually read your whole post, and ideally all your blog posts, they’d not ask such dumb questions as some of the above posts.

        Insurance absolutely IS about combining risks and thus flattening out the payment curve for anyone needing to claim, but anything short of a long term recurring liability like an illness (at least for you guys in the US of A, unlike us in the UK, who pay for our chronic healthcare out of taxes, but seem to pay less than you guys in the round) will almost certainly never cost in. As you say, insurance companies don’t only need to make a profit, they need also to pay their bills, rent or buy their buildings, pay their staff, pay their taxes – all coming out of our premiums.

        And they really do rely on fear factor and people not understanding the math. Ever see a TV ad for an insurance company explaining the statistical likelihood of your claims outweighing your premiums over your lifetime, or even a 10 year period? I thought not !!

        We self insure on most things these days, and have never ever taken out insurance on individual household items, and in the main would never have had to claim if we did, thus saving several thousand pounds, which by now would pay for any appliance or TV that now failed, several times over. This insurance in particular is all about the maths.

        Keep up the good work.

        Tony

        Reply
  • Spork October 13, 2011, 10:10 am

    I have long had this very same discussion with folks… and find it almost impossible to convince them.

    There was a time where I “retired” for a few years. (By retired, I mean I decided on my own to quit my job, move somewhere and set up shop, then sort of just waited for another job to come along. It’s one of those things one can do if one has a ‘stash.) I found that the difference in premiums on high deductible and low deductible insurance was such that in one year you saved enough to cover the deductible. One year! So, you save $10k or so in premiums… ‘stash it away as “this pays my deductible next year”… and you’re done. Forever. Now that extra $10k the next year can go towards… buying house… buying mutual funds… hell, you can set it on fire and stay warm if you really want to — it beats giving it to someone else for something you hope to never use.

    Reply
  • smurfett January 22, 2012, 8:14 pm

    I’ve heard that rather than buying life insurance, it’s better to buy disability insurance, and you’re way more likely to be disabled than losing your life.

    Reply
    • Tom October 18, 2013, 8:50 am

      Actually, you’re 100% guaranteed to lose your life.

      Reply
      • Kira July 4, 2014, 10:10 am

        I literally LOL’d when I read your response, but I know what smurfett meant to say because I’ve also read the statistic:

        “The truth is that during the course of your career, you are three and a half times more likely to be injured and need disability coverage than you are to die and need life insurance.”

        Still a moot point for a mustachian as far as wage losses go…

        Source: http://www.affordableinsuranceprotection.com/death_vs_disability

        Reply
  • Alan Jackson February 1, 2012, 3:52 pm

    A quick comment re health insurance:

    It’s unfortunately the case that when you are paying cash for medical expenses, you are paying 3-4 times what an insurance company would pay them. It is one of the big problems I have with the US healthcare system.

    In a way, I consider a high deductible insurance plan a form of membership where you get the same rates that everyone else does.

    Reply
    • MMM February 1, 2012, 5:36 pm

      Actually, you can get the same deals that the insurance companies get – I read an article about this once and there are in fact entire books on the subject. The basic idea is, you get in touch with your preferred hospital in advance and set up an account with them with the pre-agreed discount. They are happy to do this, since an individual with good credit is much easier to get money from than an insurance company, which makes a point of being annoying about every single claim.

      Reply
    • Richie Poor June 20, 2014, 10:07 am

      Getting cash discounts has worked well in many cases for me. Also check into medical tourism. Go ahead and get that root canal the day before you leave Costa Rica. Your wallet will thank you.

      Reply
  • JaneMD February 7, 2012, 9:44 am

    I have to disagree with that MMM on setting up the healthcare deal with a hospital. You cannot predict which hospital you will need or what type of procedure/specialist you will require and will still get slapped with a bill 3-4x the amount. I have personally watched this happen to people – and it happened to me once when I was mislabeled ‘self-pay.’

    Of note, you should never let your health insurance lapse if possible. Use COBRA or at least something. I got a new job and we decided not to cover my spouse since his job in a few months would be providing health insurance for much lower premiums. When we looked at the fine print, by allowing your insurance to lapse, you open yourself to denial for pre-existing conditions. We ended up paying for his COBRA – oh, and he’s an ex insurance broker so we aren’t bad at math either.

    Everyone needs to make some type of plan for continuing health insurance, period. You can play with the plan, the rate, the deductible based on your current age and health, but the natural conclusion to life is death. If you want to save some money, stop smoking. A pack-a-day habit is about $223 a month and killing you.

    Reply
    • Kira July 4, 2014, 10:16 am

      Isn’t one of the points of employer-provided health insurance the fact that all employees must be offered the plan, regardless of pre-existing conditions?

      Obviously there’s plenty of other variables to consider (e.g., time before next open enrollment, time before hire date, likelihood of needing the insurance before the new insurance kicks in, etc.), but I’m pretty sure your COBRA example in this case should have no impact on insurability through an employer.

      Reply
  • CanuckExpat March 18, 2012, 6:04 pm

    Nice write-up and good points. You might be interested in this book excerpt about insurance: http://www.theglobeandmail.com/globe-investor/personal-finance/the-lowdown-on-insurance-salesmen-and-warranty-peddlers/article1516009/singlepage/#articlecontent

    I like the idea presented there of thinking of insurance as a way of “smoothing across universes”, the conclusions are pretty much what you came to here, but with a bit longer explanation, and a bit less swearing. If the rest of the book is as good as that excerpt, I might be interested in reading it.

    Reply
  • Great Lakes Stash March 24, 2012, 6:54 am

    What about purchasing a whole life policy with built in dividends. Some can grow at 7% annually and offer dividends. At the end of a term you’ve got your stache right there, plus all the while it grew tax free AND is protected from creditors/lawsuits. Also if you die it pays. Not the worst thing ever.

    Reply
    • Richie Poor June 20, 2014, 10:11 am

      They often cap your earnings and the fees can be astoundingly brutal. Very nearly the worst thing ever.

      Reply
  • Matt May 17, 2012, 8:06 pm

    Here are links to two interesting legal alternatives to car insurance in Texas. I’m not a lawyer and I don’t understand all the ramifications of these alternatives, so I’m not giving legal advice. But I thought you might find the possibility interesting.

    Surety bond: http://www.statutes.legis.state.tx.us/Docs/TN/htm/TN.601.htm#601.121
    Deposit of cash or securities: http://www.statutes.legis.state.tx.us/Docs/TN/htm/TN.601.htm#601.122

    Reply
  • Brett May 23, 2012, 11:08 am

    Someone already pointed out insurance discounts (these are huge based on the claim statements I get, often less than 50% of “list price” is paid by insurance. I haven’t heard of negotiating a discount like this on your own as Mr. Mustache mentions, but maybe that would work. Auto insurance negotiates payments down aggressively as well in my experience.

    No one mentioned tax deductibility though. If you’re self employed you can apparently deduct your premium in most circumstances, employers deduct healthcare insurance but not direct compensation from their own taxes, and employee contributions to healthcare insurance are usually pre-tax dollars. That’s a 25% savings right there or whatever your federal marginal tax rate is plus state income tax right?

    I still agree with your general sentiment about insurance, but I think between the negotiating power and tax benefits, employer (including self employed) provided insurance is probably at least pretty neutral for an “average person”. Then you effectively have the healthy people subsidizing the unhealthy ones in any given pool.

    Reply
  • Brett May 23, 2012, 11:33 am

    Almost forgot, keep in mind that you, I, and many readers are the ones reaping insurance company profits everyday. There are quite a number of them included in the S&P 500 index.

    A corporation is just an entity to make money for shareholders by satisfying some consumer demand. And shareholders aren’t all monocle wearing cane carrying industrialists or the oppressive malignant “1%” force that popular culture likes to make them out to be. Often they are people just like me and you, though the wealthy people certainly control more capital than middle and lower class people overall.

    As consumers the most important thing to learn is which products we need to be demanding and which ones aren’t worth the money (cable TV, new cars, flashy jewelry, etc.) The more that this sort of living becomes popular (if it does) the more companies will cater to it by offering more products like bike trailers, high quality low cost groceries (google Aldi), kits to repair your electronics (google iFixit), etc. Companies just give people what they want really, they won’t keep trying to sell stuff that people don’t buy though they certainly will encourage more purchases with marketing.

    Reply
    • Mr. Money Mustache May 23, 2012, 3:12 pm

      Great points Brett, thanks!

      Your point about health insurance being tax-deductible for those of us that own our own small companies is a good one. In later articles I’m a big advocate of self-employment, and I’m also about to purchase a new health insurance policy for the family. I’d like to combine these two ideas in an upcoming post – hopefully having my fun little business (of which this blog is one “division”) buy its employees (Mr. and Mrs. Money Mustache) health insurance.

      Reply
  • Josh Triplett June 22, 2012, 3:22 am

    I agree with your post: only use insurance to cover catastrophic situations you can’t handle yourself, and for everything else think several times over before you decide you know better than the actuary pricing your insurance policy.

    However, I’d like to suggest one case in which a form of insurance does actually work out quite nicely: laptop warranties for computing professionals.

    I always purchase a 3+ year warranty on a laptop, with the added premium to have in-home service rather than having to ship it off for repair. And I plan my next laptop purchase to coincide with the warranty expiration date on my current laptop, so that I can always count on having my computer working. This represents an investment that, historically, has paid 200-500% returns for me.

    Laptop warranties, unlike most forms of insurance, charge everyone exactly the same amount regardless of risk. So, the person who occasionally checks their email and browses the web pays the same amount as the professional computer user. Thus, computer professionals fall squarely in the category of “You are riskier than the insurance company thinks you are”. This leaves aside the standard lack of quality present in most “consumer” products, mitigated somewhat by purchasing high-quality laptops such as ThinkPads.

    Over the lifetime of any given laptop, I will literally type several keyboards to death, go through at least one and probably multiple screens (due to wear, *not* breakage; I take good care of my tools), wear out at least one moving part such as a hinge or latch due to mechanical failure, and go through at least one and probably multiple motherboards (because the highly integrated nature of modern laptops means almost any component repair turns into a motherboard replacement). By the end of its lifetime, each of my laptops turns into the Laptop of Theseus: if you’ve replaced every component on a laptop, can you still call it the same laptop?

    Counting both the cost of these components and the cost of the labor involved in performing these repairs, the warranty pays off after about 1 significant repair. And over the lifetime of the warranty, I will typically require a couple of repairs per year. So, 200-500% return, rough estimate.

    All that said, don’t buy an “extended warranty” from Best Buy; buy your laptop from the manufacturer, without the overhead added by Best Buy, and buy your warranty from the manufacturer as well.

    Reply
    • Mr. Money Mustache June 12, 2013, 3:30 pm

      Nicely put, Josh.. sounds like you understand the principles of insurance perfectly: buy it even on low-cost items like laptops – IF you are very sure you are gaming the system :-)

      Reply
  • Sarah July 3, 2012, 7:19 am

    I would never go without good health insurance on my husband, because as you say, he is riskier than he looks. We’ve been together11 years and he has been in the hospital or emergency care roughly once a year during that time. He’s terribly accident prone. Luckily he usually has insurance through his employer.

    Reply
  • Alek July 26, 2012, 1:56 pm

    Hi MMM,

    Love the blog! I consider myself fairly financially savvy but I have been trying to educate my fiancé and your blog is MUCH better at explaining why we should invest in index funds, why a used car is better, how credit cards work, etc.

    I have a specific question about auto insurance (if there is already a post on this that I missed I apologize). As you say it is required to carry liability- so how much should we get? 50k? 100k? What about the medical aspect? (I guess I should know if my health insurance covers that aspect but am still covered by parents until 26).

    I am going to do some independent research but would greatly appreciate your insight and expertise.

    Reply
    • Kira July 4, 2014, 10:24 am

      Alek, auto insurance minimums are determined by each state.

      Reply
  • NW August 14, 2012, 12:22 am

    Your blog is my bible!
    I need opinions on long-term care insurance. Husb and I are early 50’s, good health, not into over-insuring but don’t want to think about being in a situation in our later years of needing assistance to the point of running out of funds and having to sell the house. Needing in-home or nursing home care is not in either of our family’s histories so far, and if it comes to that at the end, who cares, but who knows what the future and our aging bodies hold? Am I falling for the fear trap? What are your opinions?

    Reply
  • Charlie August 28, 2012, 6:31 pm

    I like the blog and enjoy all of your articles, but this particular article I feel contains very dangerous advice. Insurance is actually an instrumental tool of society in which risk is allowed to be pooled and can be mitigated for very small amount. Yale finance professor and economist Robert Schiller (look him up) agrees. Also, as far as the insurance companies go, their profit margins aren’t as high as some politicians would have you believe (you can do your own research, or see this article: http://money.usnews.com/money/blogs/flowchart/2009/08/25/why-health-insurers-make-lousy-villains)

    No life and health insurance combined with you getting cancer and dying leaves your wife not only broke, but likely bankrupt or in debt along with her having to provide for your children. Are stats going to protect you from that?

    Your “STATISTICALLY you are likely to win” argument doesn’t hold water. Let me put it to you this way. Would you play Russian roulette for $1,000 a trigger pull? Because statistically you are likely to win right?

    Reply
    • Mr. Money Mustache June 12, 2013, 3:27 pm

      Wait a minute – this article doesn’t say “don’t ever get insurance”. It says, “it is usually profitable to self-insure if you can afford the consequences of not having insurance”.

      So if you’re talking about me in particular: I DO have medical insurance, because the largest possible medical expense would eat up a good portion of my savings (in other words, I can’t really afford the consequences).

      But I do not have life insurance, because having me die would just make my wife and son wealthier – they would keep all our investments, but have one less guy raiding the fridge and buying stuff.

      Reply
  • Clemens September 10, 2012, 11:27 am

    Statistically, most people make an average loss on insurance policies, because that’s how insurance companies make money.

    In terms of a statistical distribution function, buying insurance lowers the mean of the distribution but also makes it much more narrow. So when buying, say, flood insurance, I lose money on average, but I gain a cap of what I have to pay should my home get flooded.

    Reply
  • Craig December 11, 2012, 7:40 pm

    If people who buy insurance are bad at math people who buy lottery tickets are totally mathematically challenged!

    Reply
  • CALL 911 February 14, 2013, 6:51 pm

    One critical frequently overlooked insurance MMM failed to mention is one you ALREADY have! You have good credit, or you wouldn’t be here. You have credit cards, because they pay you 1-5% of the purchase price of the things you buy anyhow, just like MMM. Really read those terms and conditions. Every decent credit card automatically provides a lot of insurance. Don’t buy car rental insurance – the card covers it (suplementally after your primary car insurance). Don’t buy consumer good insurance – the card extends the manufacturer warranty by a year (insurance!). Bought a plane ticket? Free life insurance if a common carrier kills you! Ordered something that never showed up or came broken? The card will cover it – insurance!

    Reply
    • KF October 1, 2014, 7:31 pm

      Unfortunately, I don’t think *any* credit cards provide liability insurance for rental cars – they do usually provide collision insurance, but that’s not going to help you if someone sues you for personal injury. During the years when I didn’t have a car (and thus no auto insurance of my own), I paid for the rental car agency’s insurance since it would cover the liability as well as the collision. I sure wouldn’t pay for it when I already had auto insurance of my own, though!

      Reply
  • emperor joh March 1, 2013, 7:32 am

    Just found the blog a month ago and working my way from the original post so please forgive the delayed comment. How do you feel about home warranty plans on an older home (1968) for someone with only a midget money mustache living in an area where it gets hotter than Satan’s crotch in the summer? Moving isn’t a viable option for the foreseeable future. I think I am going to call and try to negotiate a policy or just the AC and central heat. We’ll see

    Reply
    • CALL 911 March 23, 2013, 4:37 pm

      The insurance companies know a lot about likely hood of repair, and costs of repair – at least in aggregate. They make money by taking in more than they pay out, either because they use fine print to refuse to pay, or they know how often a given policy will demand payment, and budget for it. Unless you know something they don’t know (bias), or you can’t possibly bear the cost of replacement, you should never buy insurance. I would save aggressively for an emergency fund (which can be used for A/C emergencies too) and skip the insurance.

      Reply
      • emperor joh June 12, 2013, 12:18 pm

        Thanks CALL 911, I am doing just as you advised. I knew that, just needed the confirmation.

        Reply
  • Michele March 25, 2013, 10:16 am

    So, my husband and I just switched insurance companies for about the millionth time is the last few years (you can almost always find a better price every six months to a year by being a new customer.) Seeing as we are planning to retire in a bit of a different way than most people (young and living without a stable home base) we thought it might not be a bad idea to talk to them about different financial options. What a disaster! The guy wouldn’t talk about anything but whole life insurance as the “best” investment for us, but I didn’t see the price until after we left…$900/month per person! We’re still laughing about it a month later.

    Reply
  • Max Schneider June 12, 2013, 11:19 am

    “Would you play Russian roulette for $1,000 a trigger pull? Because statistically you are likely to win right?”

    Of course not – because the result could be disastrous.

    Reply
    • Alek June 12, 2013, 11:21 am

      What if it were $100,000? $1,000,000? $10,000,000? I might accept the odds for enough of an incentive, one that sets me up with FI for the remainder of my life. It also depends how many chambers there are ;)

      Although the more I think about it, the more this wouldn’t be worth it to me. Money is just money, whereas time spent living is priceless.

      Reply
      • Mr. Money Mustache June 12, 2013, 3:27 pm

        Good hypothetical question, because it plays fear against statistics and logic just like we all have to do when making insurance choices.

        The logical answer would be “Yes”, only if the value of your expected loss of life is less than your expected gain in finances.

        For example, say you had a gun with 4 billion chambers, only one bullet, and a $1 million reward for a single trigger pull. As a 21-year-old just getting started financially, I would surely accept that bet. 1:4,000,000,000 is sufficiently low that you don’t even worry about it – there is a greater chance of sudden death due to zebra stampede. With 100 chambers or less, only a desperate person would probably play the game. With a six-shooter, Russian Roulette is always ridiculous unless you play it to avoid an even more certain death.

        Insurance is a little different though – the consequences of not having it are only financial, not brain-splattering.

        Reply
  • Max Schneider June 12, 2013, 11:24 am

    @ IT guy: *Your* laptop is an investment, if you didn’t have the cash (for whatever reason) you’d even buy it on credit, simply because *for you* it isn’t a consumer good but a tool of the trade. The premium for “Same day repair at your place repair” is so much lower than the lost earnings if you had to mail the thing to the company that the insurance is worth the premium of insuring it.

    (On the other hand most people could simply get a new one – or in case the stash is too little they could get away with a used hand me down for the time being)

    Reply
  • JBS July 20, 2013, 11:06 am

    Social Security is insurance as well. Life insurance (widow/widower benefit) if you have kids as well as disability insurance for everyone. One must read policies closely as the insurance companies are fully aware of these benefits and sometimes will only pay benefits for costs Social Security does not cover. Social security benefits are rarely mentioned in the “How much life insurance do I need” calculators available on the internet and provided by insurance companies and agents. You can see estimated benefits by using the quick calculator at the Social Security website. You can use these monthly numbers to either reduce or eliminate your requirements for life and disability insurance. My father paid for part of college using such benefits after my grandfather died.

    Reply
  • Rema August 7, 2013, 8:16 pm

    My husband became eligible for employer-sponsored dental insurance for the 1st time 4 months ago. The biweekly premiums for our family of 4 work out to about $450/year. When I compared our spending last year to our projected spending this year (we all fairly fanatically get twice-yearly cleanings, the kids need sealants, and we also have orthodontic expenses and 2 minor dental surgeries that are needed), and after I made sure that our regular dentists would accept the insurance (yes, yay!), we signed up. So far, we have saved $400 compared to what we would have spent without the insurance, and I estimate that we will end up saving about $800-$1000 for the year (depending on if we run up against policy limits). I’m not sure how the insurance company profits from this arrangement, and maybe this works out better for us because it is an employer-sponsored plan vs. a private one and economies of scale prevail. My advice would be to carefully evaluate any insurance plan you are offered based on your own real-world numbers. They must work out for some people (as appears to be the case with our family) or wouldn’t the market for them disappear as disappointed customers failed to renew?

    Reply
  • Joe August 20, 2013, 8:31 am

    I have really enjoyed your blog so far, but for you to say that carrying life insurance for those of us who haven’t retired yet is extrememly dangerous and ignorant. Carrying a term life policy to secure the goals I have for my family on both my wife and I is one of the best things I feel like we have done. We aren’t at the point yet of financial independence. We don’t have all of our student loans paid off nor do we have a house yet. The amount I spend a month in life insurance to fully guarantee that either of us would be financially independent without one another in the unlikely event of a premature death is far less than the pain and strain that one of us dying would have on the other.

    I vehemetly disagree with your assertion that insurance in all forms is a tax on people bad at math. I have life insurance because our current budgetary and obligatory constraints mandate that we have it. I have it to lower my budgetary variance in unlikely event that something tragic happens.

    Reply
    • Mr. Money Mustache August 20, 2013, 9:13 pm

      I understand your point, Joe.. but as you read through this blog you might see that I prioritize learning to live through statistics, rather than fear-based “what-if” scenarios.

      After all, the same line of reasoning causes some people to drive around in SUVs and forego bike riding in a misguided pursuit of safety, even though a cyclist has a far longer life expectancy than a the driver in the “safe” SUV.

      By far the most likely outcome of skipping insurance, is an instant and permanent boost in your wealth, reducing your need for any form of insurance and increasing your security every single month.

      The second point is on the role of hardship in our lives. Sure, a life insurance payment might protect a survivor from financial hardship – from having to work harder to earn their own money. But is such hardship something to run from? I’d argue that hardship and struggle are the building blocks of a happy life – and that survivors with life insurance payments could easily end up LESS happy than survivors who had to build up their own wealth without insurance.

      Just like some of us have to earn our own money when reaching adulthood, and others get it handed to them as a trust fund. Does the self-made person lead a less fulfilling life because of the added hardship?

      Don’t answer now – but read on, learn some Stoicism and a bit of Dalai Lama, then see what you think in a year or two!

      Reply
  • Mister Shankly August 22, 2013, 8:23 pm

    MMM, love this article and the discussion it has stimulated. I live in southern California where there is a higher, yet unpredictable likelihood of earthquakes. Consequently, I have purchased earthquake insurance as I statistically see a greater possibility of one happening now since we are long overdue. The terms of the insurance are something that I’ve grappled with for a while, and I thought I’d throw out the details to have you apply your math and logic to see if it’s worth it. The estimate (and coverage) to rebuild the structure of my home in the event of a catastrophic earthquake is roughly $300k. The insurance premium is $1365 per year. The deductible is a staggering $65k. My current stash allows me to self insure up to the deductible amount but not the full replacement cost without depleting a significant amount of the stash. I plan on building up a separate fund for the replacement cost of the home in a conservative mutual fund and then canceling the insurance once this is done. However, I do the math on the cost of insurance premiums over the next 40 years plus the deductible roughly adjusted for inflation and it comes out to be a better deal than self-insuring the entire rebuilding amount. Am I delusional on this or is earthquake insurance still a better deal (even with its ridiculous deductible)? In other words, saving $1365/year to self insure with a potential $300k hit in the stash doesn’t seem to make sense.

    Reply
    • Mr. Money Mustache August 23, 2013, 10:58 am

      Great question! I’d probably still skip the insurance in that case, but you could always make a compromise and delay the cancellation until you are at the stage that $300k is not such a big deal to you.

      Some comfort would be had by looking at the other big earthquakes and what percentage of the houses they fully destroyed.

      Also, given the chance in an earthquake zone, you could eventually even buy or build a house that is designed to survive one (a stiff enough one-story structure with enough steel bracing is actually able to survive a huge shake and jostle without damage, as long as the ground doesn’t give out directly beneath it). And in Southern California, where outdoor and indoor weather are identical, you can have a much smaller house and live more outside, which saves replacement cost as well.

      Reply
  • Lee Hayward October 19, 2013, 6:54 am

    MMM, in the UK, the insurance companies are weird. We have a concept called 3rd party, 3rd party fire and theft and comprehensive insurance. 3rd party (I assume) is the same as your liability insurance – i.e. it covers the other parties damages only. I went to a price comparison website and tried looking for 3rd party car insurance. Best quote came in at about £300 per year. Then I changed to comprehensive insurance, with legal protection, protected no-claims bonus and road-side recovery – with £1000 excess (the most you can get) – best quote came in at £230 per year (with excess capped at £650 – not the £1000 I asked for).

    So in the UK, it seems the insurance companies think you are a lower risk if you ask for comprehensive insurance ??!!

    Reply
    • Everett October 29, 2013, 1:43 am

      We have a similar phenomenon in the USA. Each state requires a different amount of liability insurance. Agents typically just set you up with the minimum, but if you insure for more liability than the minimums I’ve found it to be cheaper, as the actuaries have determined those carrying more liability are to some extent less of a risk.

      Reply
  • Liam G December 3, 2013, 7:35 pm

    MMM, This post is totally worth an updated repeat (especially after the ACA takes affect). Anyway, my wife and I have been working on our pencil-thin mustache’s over the past two months or so. I decided to tackle one ‘utility’ per month in 2014. First was to switch cell phone providers from VZ to Republic. Totally awesome switch.

    Next was the cable bill (Comcast: I told them the $64.95/month they were charging was outrageous and I was prepared to switch to a smaller, local mesh-network provider for $29.95/month. Comcast immediately switched me to a $29.99/month plan). I then decided, what the hell, let’s see what I can do with the insurance, probably not much.

    Well, foolish me. Mine is a pencil thin mustache of PEACH FUZZ right now, and I have been schooled and humbled by your post. One hour of my time spent working with insurance calculators has yielded a savings of $30/month for car insurance and $22/month for home owner’s insurance (55% and ~30% savings respectively). That monthly savings is approximately $600/year, or calculated another way, 2.5 hours of my time per month at work.

    The changes I’ve made in the past three weeks, because of your blog, have given me a cumulative three weeks extra vacation in 2014.

    Reply
  • Jerry May 8, 2014, 7:23 am

    Hey,

    I really like the blog. This is the first blog I every really have read or commented on. You give a different perspective on a number of points. I happen to already do a number of the same things. One is health insurance, where I purchased a high deductible plan. Another is Life Insurance—no brainer. If you assets such as home are paid off, and you have significant saving/investment, than you don’t need it. Owe a lot on your home, little savings, you’re the primary income earner, than you absolutely need it.

    Most companies especially larger one do exactly what you are talking about. They call it being self insured. Companies basically pay themselves the premiums setting aside the monies for when various incidences occur.

    I skimmed through most of the replies here, and didn’t notice anyone mentioning Disability Insurance. It’s very expensive compared to Life Insurance. It can be also very important as many people will have one life event where they can not work for an extended period of time. If you haven’t already saved enough for at least six months of not working, this may be a good idea to get.

    Any thoughts, comments, suggestions on Disability Insurance?

    Thanks,
    Jerry

    Reply
    • Mr. Money Mustache May 9, 2014, 11:16 pm

      I’d say if you haven’t saved enough for six months of non-work, you just buckle down and get that saving done.. and keep on going until you reach 25 years of expenses and are financially independent! :-)

      Seriously – having less than 6 months of living expenses in investments you can tap is cause for moving back into your parents’ basement, not buying an insurance policy for a false sense of security.

      Reply
  • Alan May 13, 2014, 8:31 pm

    Hello MMM, just started reading the blog recently, and already a big fan. I happen to work at an auto insurance company, and in my daily job I get to speak to people involved in auto losses, and read through claims reports. So, I am constantly exposed to insurance, and super aware of accidents, and thus I carry high liability limits. Exceedingly high liability limits. Which, as I am about to explain, I don’t think is a problem. But I would like to hear your take on it.

    Most states have a minimum level of liability coverage that is required on an auto policy. In some states, these minimum limits are extremely low (in Pennsylvania the minimum injury liability is only $15,000 and property damage liability is $5,000) In the event you are responsible for an auto accident, and the damages and/or injuries (and lost wages, loss of use, long term care, pain and suffering, etc.) are higher than your liability limits, then the person(s) that you injured (and their expensive attorney) can reject settling with your insurance company, and instead come directly after you and your ‘stash. All your assets are now on the table; savings, home(s), stocks, retirement savings, car(s), and future earnings. I am not ready to retire, I clearly have a ways to go, but I don’t want to endanger my future, or my wife and children by not being covered in the rare chance that I cause a disaster when driving my clown car.

    In many cases, going from the state minimum coverage, to a higher liability coverage doesn’t add a lot of cost. In my personal case, Virginia state minimum coverage for auto liability is $25k/$50k/$20k (per person bodily injury/total bodily injury per incident/property damage per incident) and would cost me $133 every 6 months. To upgrade to good coverage of $300k/$300k/$100k, would cost $164 every 6 months. That is only an extra $31 every six months, or $5 a month; which I can afford by avoiding eating 1 fastfood hamburger every month. As a company, we recommend $300/$300/$100 for people who own a home.

    Now, I personally carry higher limits, $500k/$500k/$100k, which only costs $176 for the liability every 6 months, or $43 more than state minimum. I also have an umbrella policy with $1 million liability on top, for an additional $60 every 6 months. Am I overprotected? Yes. Have I seen cases where the payout easily exceeds state minimums? Every day. Have I seen situations where the damages from an accident have soared past $500,000 dollars? Not every day, but more times than I would like. Would I recommend everyone get the highest limits they can? No, but realize that a single bad accident can quickly siphon away hard earned savings. I am a good driver, so is my wife. We would be fine with a lower coverage. But, just seeing what I see every day, I just can’t see not paying the extra $12 a month to have $1.5 million in protection. I know it is a numbers game, but I see the results of people who lose that game every day I go into the office.

    I also would like to point out, that my rates aren’t going to be the same as everyone, but the general principle for auto insurance is that going from “no coverage” to “bare bones coverage” is the vast amount of expense. Going every step away from “bare bones” to “ultra premium Cadillac” will be incremental differences in the premium.

    In Colorado, I believe the state minimums are $15/$30/$15. So my question for MMM is, What limits do you have on your liability coverage? Are you going to consider changing them after this post?

    And please, feel free to ask any questions of me.

    Reply
    • JBS May 13, 2014, 9:52 pm

      Isn’t the reason it is so cheap to add on additional liability insurance is because your own actuaries have calculated that such payouts are exceedingly rare across the population you insure?

      Reply
      • Alan May 14, 2014, 5:40 am

        Yes. That’s how they calculate my rate. It’s based off the fact that they KNOW small payout loses occur more frequently than huge payout losses. And I KNOW that I cannot afford a huge payout loss.

        For businesses, there are actually commercial policies available that work with that knowledge in mind. You can get a commercial policy where you self-insure up to a certain point, say $50k, and then any losses over that amount the insurance company will pay. Basically, it is a deductible for liability coverage. Those options are really affordable, compared to plans that pay for any loss.

        Personal auto insurance doesn’t work that way. I know that I can’t afford to give someone else $300k today, tomorrow, or anytime. Will it happen? Probably not, based off my driving history, age, gender, martial status, credit score, blah blah blah. But they are called accidents for a reason. People don’t get in their clown car, drive home, and intentionally hit the 6 year old who chased her ball into the street.

        Don’t get me wrong, I’m not trying to fear monger, or sell new insurance policies. I just want to make sure that everyone realizes that the jump from basic state-mandated coverage to some actual coverage is not too different. In most every state, you are going to have to pay insurance. Why not pay for something that covers your ass(sets).

        Reply
  • Brikenjon July 19, 2014, 8:39 am

    Wouldn’t a fourth reason be if your employer subsidizes the insurance sufficiently and/or the premiums are paid as a before tax deduction?

    For instance, looking at my last paycheck of last year, I paid $151.68 for vision insurance for my wife and I last year, and that was pre-tax. That would be closer to $200 for the same amount in after tax money. My insurance paid $205 towards my annual eye exam and a year’s supply of contacts. That puts us past the break even point before even including my wife.

    My dental insurance was $180 for the year and my employer paid $420. Medical was $3700 and my employer paid $14600. Even if the insurance company is raking in 50% of the premiums as profits compared to the risk, I’m only paying 20-30% of the premiums (before taxes), so I should be riskier than what I’m paying for, even though I’m not riskier than the insurance company thinks I am.

    Reply
  • missj August 16, 2014, 11:59 am

    tell me what you think about this? I have a highly specialized trade with a very high likelihood of permanent injury/disability (compared to typical jobs). Just last year alone 2 of my coworkers were permanently disabled and had to leave the field FOREVER. They may be able to be retrained into a different type of work but likely none of their specialized skills will apply, so their wage will drop drastically. Maybe they can consult for our industry, or be a greeter at WalMart, but that is about it. The trade off is we make $90,000 per year plus bonus on a 2 year technical degree….I came out of school with only $13,000 in debt which I paid off in 2 years. So I realize my job is high risk, but I feel I am compensated fairly for it. I’m not willing to leave the industry until I retire because there is absolutely nothing else I could do to make even close to this much money without going back to school.

    so in knowing the risks I decided to hedge..way back when I was a new graduate at barely 23 years old I bought a long term disability policy with level premiums. It is relatively cheap since I bought it so young. I used NorthWestern Mutual which is a company that pays annual dividends to policy holders. last year my annual dividend was $893 which directly offsets my premiums. The dividends tend to go up each year, which means in effect the premiums go down each year. My premiums are $77 per month this year and I can expect them to be the same or less next year. Of course it is always possible that the dividend could go down, but every year in the 10 years I’ve owned the policy it has gone up. If I wanted to buy a similar policy today it would cost me $159 per month because I am now older. The policy would pay me $3,800 per month which is about 75% of my after tax earnings, and because I pay my premiums with after tax dollars any disability benefits I receive would not be taxable. So, I’d be basically set financially if I were disabled. The policy pays me until 65 if I become permanently disabled.

    If I had to guess, I’d say my chances of becoming permanently disabled if I continue this job full time until age 65 are about 25-30%. This is based on direct observation of co-workers and information from my union. Obviously, I want to find a way to retire early to avoid on the job injury, but I feel that given my specific situation the $77 a month is a pretty cheap peace of mind. I think the Insurance company has greatly underestimated the risk to those people in my field and should probably exclude us from their policies, but as of yet they do not so I take advantage of their ignorance.

    thoughts?

    Reply
    • vr August 29, 2014, 3:19 am

      I wonder what job in earth is so important that keeps the worker wondering day after day about whether they will be able to walk on their own legs when retired? I think that a job with that high risks for 90k a year without any employer paid insurance is complete madness…

      I’m no MMM by a long shot and am commenting only from the view angle of plain common sense…

      Reply
      • missj August 29, 2014, 9:27 am

        good points thanks for the comment. there is employer paid insurance. we actually have an amazing benefits package thru my union/work. the short term and long term disability would cover 50% of my wages, but I would have to pay taxes on the benefits so I’d be living on like 30% of my current wages.

        The types of disabilities that we suffer from are generally hand/wrist/arm shoulder so it’s not like quality of life would be ruined, but our dominant arm would be fairly useless for fine motor tasks like typing, sewing, buttoning jeans.

        We all make choices and tradeoffs in this life. There are a lot of people who work deadly jobs for less money than me. My friend works on windmills (for windpower) he has 2 co-workers who have died from falls and he makes less money than me. My entire lineage came from mining and every decade or so there would be an accident where several miners died, and they made less money than me (not to mention chronic health issues from working in the mines). I have many friends in logging who make less money than me and their lives are on the line every day, one of the husbands of my friends is paralyzed from the waist down from a tree falling on his legs and he is lucky to be alive. One of my other friends is police officer and her life is on the line every day. Many of my patients work in a factory where people die or are permanently disabled every year. I have countless friends who have served in Iraq and Afghanistan who make much less money than me and their lives are on the line every day. I come from a very blue collar socio-economic background. I count myself among the lucky to enjoy a comfortable wage working indoors in a climate controlled setting with acceptable bodily risks. So, I might have to wear sweatpants and dictate my letters in old age…we can’t all be bankers and day traders…

        Reply
  • vr August 29, 2014, 3:11 am

    Funny thing, I’ve been thinking about insurances a lot for the past few years. Just soon as I started a full time job after graduating, the companies have been calling me regularly about appointments to “check my insurance status” :) They do have all these fancy stuff, but when you think of it, why do you need it for?

    In here, we have mandatory car insurance for each vehicle on the road which pays for the other halfs bills and medicals in case of a bad crash, you can also get a full insurance which covers your own bills also. But as we have very great and ‘cheap’ public medcare, that’s not necessary unless you are driving a 30k+ Mercedes or something. There’s also one for deer crashes/thefts/car burning down/etc. Well, what’s the chance you hit a deer when you watch your speed and avoid night time driving when dark? You can get a very good alarm for 100€ which scares off 99% of the junkies and other jerks. You drive a car worth of couple thousands for a reason, so burning down is not a worlds end (what is the chance your car burns down if you maintain it regularly anyways?) :)

    When I got my mortgage, they offered me an insurance for the unfortunate case I dropped dead or a complete veggie, etc, the insurance would have paid of the rest of the loan and the apartment/house would have gone to my relatives debt free. Now lets see about that, when I drop dead or go to a caring home being a veggie, what does it matter to me who gets the house? My parents and rest of my family live over 100km away having apartments of their own, my maybe-future-wife is able to keep living in the apartment because the law says she can keep paying the mortgage in my behalf. So no real reason to pay several hundred a year for this.

    Travel insurance? Don’t take expensive stuff with you and most important, don’t get yourself into dangers when drunk. Maybe the lowest cost of insurance if flying far abroad, one that covers costs of an unfortunate hospital stay or medical airplane transfers back to homeland, etc. Also, many employers and other associations offer this one free in return of membership, which you may need anyhow.

    Reply
  • Trying Baddassity from China September 26, 2014, 3:08 am

    Just found your blog and it ROCKS!
    Would’ve killed to have known it earlier.

    I just wanted to chip in to the talks about whole life insurance.

    I didn’t buy one for myself because as someone else mentions,
    the rates are not good for an adult, but I actually got a whole
    life policy for my daughter when she was 2 years old, and
    made myself the beneficiary.

    We pay in less than 20,000 by the time she is 18, and it will be
    good for 200,000 throughout her life until she can cash
    the full 200,000 in at age 100.

    The thinking is not that I thought I would outlive her (haha)
    but that once she has children of her own she can switch the
    beneficiary from me to them.

    Spending 20,000 now and giving my grand kids (or anyone
    else that we like) 200k while protecting my daughter from
    uninsurability sounded good to me at that time.

    My daughter was a preemie, so her rates are awful, but I
    think babies that were healthy at birth should be able to
    get a much better rate.

    You could argue that I could be doing the same thing
    with Vanguard ETF’s, but when she was diagnosed with
    epilepsy, I was happy she already had a life insurance policy.

    Also,
    Insurance money is usually considered in a different
    tax bracket, so I think leaving a bit of your money
    through a life insurance policy may lessen inheritance
    taxes in some cases for people who need some estate
    planning. (No lawyers needed for buying insurance)

    We are far from being there yet, seeing now that the
    current tax exemption for inheritance is 5M, but this
    may change for the worse any time.

    Some countries impose a really low threshold for
    inheriting without any taxes, and America may just
    go there yet within next century. But life insurance is usually
    always offered a separate bracket.

    Also as an immigrant I know that my native country
    does not allow you to get a mortgage on a house
    without a life insurance policy.

    I probably wouldn’t have thought of it if she didn’t
    come the way she did.

    Right now she is the picture of health but doctor
    says he still sees anomalies on her EEG.

    Hope this adds to the discussion.

    Reply

Leave a Reply

To keep things non-promotional, please use a real name or nickname
(not Blogger @ My Blog Name)

The most useful comments are those written with the goal of learning from or helping out other readers – after reading the whole article and all the earlier comments. Complaints and insults generally won’t make the cut here, but by all means write them on your own blog!

connect

welcome new readers

Take a look around. If you think you are hardcore enough to handle Maximum Mustache, feel free to start at the first article and read your way up to the present using the links at the bottom of each article.

For more casual sampling, have a look at this complete list of all posts since the beginning of time. Go ahead and click on any titles that intrigue you, and I hope to see you around here more often.

Love, Mr. Money Mustache

Ads

$25 Unlimited Smartphone
The Lending Club Experiment
A $500 Signing Bonus... WTF?
How to Start a Blog

latest tweets