Insurance Poor and Self-Insuring

by Mr. Cheap

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I had a grandfather who would worry about the potential problems that might crop up in life, and bought extensive amounts of insurance to try to protect himself. He felt this was the prudent, safe way to navigate life. In part due to the extensive insurance coverage he purchased, he was never able to save very much money, had to work at an intensely physical job (he was the caretaker at a cemetery) well into his late 60′s (because he couldn’t afford to retire) and died from a heart-attack on the job.

Who says hard work never killed anyone? That’s why Mr. Cheap avoids work like the plague (and because of this has a pair of the softest hands around…).

An alternative approach to life may have been to purchase insurance to deal with catastrophes, save all of the other money that you may have spent to insure against minor emergencies, then dip into these savings if a minor emergency occurs. This is called self-insuring and it’s a very good idea.

A series of commercials out right now (in Toronto anyway) show an insurance agent going about their life when they’re approached by someone who enthusiastically starts asking them about all the things insurance protects them from, then starts brow-beating the reluctant agent to sell them some insurance. In real life (off the TV), insurance agents tend to be very hard-sell. People work hard to sell you things you don’t need. I rarely get the hard sell when I’m looking at bread and eggs in the grocery store.

Future Shop / Radio Shack / Best Buy type stores push their extended warranties hard. They do this because it’s a bad deal for consumers and is likely to be pure profit for the store.

Years ago a woman came to visit my parents and tried to convince them to buy life insurance on my father (who was the sole breadwinner at the time). My mom told the sales-woman that she’d completed teachers’ college and that her diploma was all the insurance she needed if something happened to my dad (she’d go back to work). The saleswoman didn’t have an answer to that and that was the end of that sales pitch.

Look over your insurance and see what you can live without. If your DVD player breaks, are you going to be in dire straits? No, then don’t get insurance. If your car breaks a headlight, can you afford to pay $75 to get it repaired? Yes, then raise your deductible. Are you a couple with two incomes, no kids and life insurance? Why would the surviving spouse need cash in case of death? Would the bulk of your wealth go up in flames if the family home burned down? Then maybe it’s a good idea to get insurance with a VERY high deductible to deal with that risk.

If your view of insurance is “wouldn’t it be nice to get a bit of cash if this happened?” then you aren’t purchasing insurance, you’re gambling. And much like casinos, the insurance company has a lot of very smart people working very hard to make sure they come out ahead of you. Sunlife and Manulife employ so many nice people (who will reluctantly sell to you if you beg them), maintain such large buildings and pay such a nice rising dividend because they take in more money then they pay out. An insurance company couldn’t operate if this wasn’t the case.

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{ 28 comments… read them below or add one }

1 Four Pillars

I’ve done some of these steps – I never get the extended warantee and I’ve increased my house and car insurance deductible.

Does anyone have any opinion/knowledge on pre-paid funerals? I don’t really see the point unless you know your family doesn’t have much money.

2 Nobleea

As has been said before:
Insurance is to PROTECT wealth. Not to CREATE it.

I have a good friend who insures everything from his dog to his tires and TV. He is not a risk taker but they make a lot of money so they probably don’t miss it.

3 CheapCanuck

In the odd instance I purchase new instead of used I never purchase an extended warranty. Paying a 20-30% premium to protect a product with a failure rate of less than 5% makes no sense to me.

When we used to rent I never purchased content insurance either. The few items I own that I actually care deeply about couldn’t be replaced anyway in the event of theft or fire.

4 moneygardener

Great post and fabulous industry to be invested in. I despise insurance though, and only take it out if I legally must.

5 Cross the River

Wasn’t it also Ned Flanders who said he didn’t believe in insurance when his house burnt down since it equals to gambling? (And then goes to Las Vegas with Homer in another episode… go figure)

I do agree with Nobleea: protect not create, unless you own Manulife/Sunlife shares.

Extended Warranties: Your credit card sometimes offers one but more importantly, most provincial consumer protection act already provide for those. So in fact, by getting an extended warranty, you are paying for a second insurance. The only problem is that if your DVD breaks (for example), you’ll have to threaten (or sue) Futurshop to fix it under provincial laws, after their 3 month basic warranty is past.

Very good post

6 Four Pillars

Stupid Flanders! :)

7 WoolyWoman

“Thatís why Mr. Cheap avoids work like the plague”….. yikes, can’t wait to see what happens first year of grad school :):):) (hahahaha).

Ok so I bought the extended warranty on my new laptop and I am going to need it 4 months into the purchase! So I am glad I did buy this one, but I don’t usually on cheaper items. The other thing I do for more expensive items is to compare costs and to find these items which offer a reasonable warranty included so I don’t have to pay extra for one.
As for life insurance I swear the bank nearly had a heart attack when I said I didn’t have life insurance aside from life insurance on my mortgage. I still don’t (touch wood), but am considering it now that I am to be a mom AND I am carrying uninsured (i.e. no life insurance protection) debts.

8 Four Pillars

Wooly – you should look at getting term life insurance to cover the mortgage as well – much cheaper than mortgage insurance

9 EmperorCoder

Another way not to need insurance is not to buy expensive stuff. I don’t feel sorry when I spill milk on my “brand new” second hand sofa.

10 thickenmywallet

I once asked someone why insurance salespeople were so aggressive. Their commission is staggering- it is equal to the first year of your premium in some cases so no one wonder the entire industry wants to over-insure you.

11 Gates VP

Hey WoolyWoman:

I bought the extended warranty on my laptop (though I wouldn’t buy it on a Desktop). The reasons were two-fold, one I bought it on credit and really needed it to work for the 2 years while I paid it off (it was a really bad time for cash flow: changing jobs, moving, etc.)

But the big reason is that laptop parts and repairs are expensive and difficult to fix. I’m a tech nerd. I can disassemble and reassemble computers from parts, but it’s a real pain to fix laptops. What’s more is that laptops are significantly more susceptible to damage than regular computers b/c they’re always moving about. Most desktops can be fixed “piecemeal”, but laptops need specific parts and they have specific shelf lives (if you didn’t buy a second battery, you’ll need one to keep going past the third year). So I actually think that it’s reasonable to grab the 3-year warranty and just consider part of the cost of the laptop. (and assume that you’ll need a new one in three years)

But I’m definitely with Mr. Cheap here on “self-insurance”. Lots of people don’t seem to get the concept of say, not planning to need insurance in retirement (b/c you have money) or not needing insurance if you don’t have dependents. My wife and I just got married in December and we’ve thought about the insurance thing a few times. But it turns out there’s no point!

My company insures me for 2x my annual salary and that’s all we need. If I die, she has enough money to go back to school and study whatever she wants. If she dies, well, I’m the only one with a paycheque anyways. If we both die in a fiery blaze… well… come to think of it, we still have to do the post wedding will… either way, we don’t have any debt (and again 2x annual salary should cover my burial).

End of the day, we only have renter’s insurance b/c my apartment burning down would definitely be “catastrophic” enough to justify the cost. Of course, I just finished living in a hotel for 3 weeks (with co-workers staying at an ExtendStay) and I can tell you from experience that it’s pretty surprising what you can “do without” :)

12 Mr. Cheap

Gates: Congrats on getting married!

13 BeThisWay

I don’t think insurance is gambling, I think it’s buying peace of mind. Everyone’s tolerance level for risk is different. Insurance is not an evil thing, but you absolutely should only buy what you need, and be informed.

I agree that self-insuring for smaller risks by taking high deductibles is very smart. I do think that life insurance is a great idea for anyone with a family, and if you spoke to as many devastated families as I have you might think differently, too. Sure, the newly single Mom can go to work, but unless she lives somewhere that pays their teachers what they’re worth (which does not exist) she’ll probably have to take her already traumatized kids to live in a smaller home and make other frugal changes while struggling to make ends meet.

People who summarily dismiss insurance are closed-minded, and that’s understandable given the lack of integrity of some agents. But there are good agents out there. I was one for nearly fifteen years, now retired.

No one I’ve ever met who’s collected on insurance has been upset they have it, but I’ve met plenty who didn’t who were pretty darn upset. And when I had to go to a funeral and give my condolences to a shattered family, it felt good to be the one walking in with a six or seven figure check.

To the person who asked about pre-paid funerals, you usually get a discount for doing it ahead of time. When my stepmother was dying we went to the funeral home and they would have given us a 25% discount if we’d been able to get everything settled before she passed. We weren’t able to (money was not foremost on our mind anyway), but my Dad has now taken care of all of his needs so we won’t have to.

14 Janie Malloy

As a professional consumer advocate in the death care industry I do not recommend prepaying for funeral services or buying insurance. Why? When you buy insurance the salesperson usually makes a commission, when you prepay for a funeral you lose any interest your money accrues, as the funeral homes are not in the habit of applying the interest to your funeral expenses. Also, prices go up, coffins change models yearly, like cars, and families usually end up paying more at the time of death, and it’s not like they can take their business elsewhere – their money is committed. That is why they can claim to give 25% discounts – they can make it up when the corpse sits in their cooler and a family can’t argue. The only time to pay for anything in advance is to secure a cemetery plot that you absolutely must occupy. Self insurance is definitely the way to go – take out a payment on death savings account and put your executor’s name on it. This account will accrue interest and will give your family the ability to go to any funeral home and avoid being gouged. Also, prepaid trusts are often raided, stolen or mismanaged; do an internet search if you don’t believe me, it is not that uncommon. $40 million in prepaid funeral trust money was recently “lost” due to inept trust fund management. Plan your funeral, determine the expenses, and set the money aside, or contribute to the fund, just like the only other inevitable – taxes.

15 Uncle B

Marketplace does in the TD bank and others on mortgage insurance – This is a “must see” for Canadians

16 Brian Poncelet,CFP

Hi Q4P,

You don’t talk about disability insurance. Is this something you may, in the future?

Regards,

Brian

17 Mr. Cheap

Brian: Mike and I both think disability insurance is a good idea. That being said, I don’t carry any (I’m a starving grad student with no dependents, if I become disabled I’d have a lot more options than a family man would).

I haven’t done enough reading on it to do much of a post about it (other than saying it sounds like a good idea, and moneysense said in one article that most people are OVERINSURED for life insurance, and UNDERINSURED for disability insurance).

Maybe we can get a post out of Mike? :-)

18 Four Pillars

Brian – I have disability insurance from work which is pretty good plus I bought some extra ( from work). I have this on my list of things to blog about but I really know much about it since I haven’t needed to learn.

It’s a great idea for a post but whether it will happen?

Of course if you wanted to do more guest posts then that might be a great topic.

Mike

p.s. – Cheap – disability insurance is for yourself as well as dependents. How will you support yourself if you can’t work?

19 Mr. Cheap

Mike: My plan is to move in with you!

20 Jim

I’m a grad student but my wife works. We got supplemental disability insurance on her through Insure Your Future (http://www.disabilityinsuranceadvisor.com./) that was really affordable. We found that benefits through the disability insurance she got through work were taxable as regular income. If she got injured or sick, we would only take home 42% of her salary versus the 60% the policy pays. Now we’re covered over 90% with the supplemental so we’d be able to keep living as we are.

21 Four Pillars

Cheap – as long as you can still change diapers then you are welcome! :)

Mike

22 Mr. Cheap

Mike: hmm… I’ll have to do my best to stay healthy until your kids are out of diapers :-) .

Jim: So she’s the only one covered? There wouldn’t be anything if you became disabled? And its provided as a percentage of the workers income, not a fixed amount? What’s the longest they’d keep paying for (e.g. if it was a lifelong disability, would they pay forever?)

23 Jim

We decided to only cover my wife since she makes the bulk our collective income right now. Disability insurance is based on what the insured makes, since the purpose is to replace income if you can’t work. Short term disability insurance usually covers up to 90-180 days. After that, a long term policy is needed. The duration of payments can be specified in the policy. As you might expect, the longer the payouts, the higher the premium. The key thing is to run all the variables with an agent and see what makes sense for you.

24 Jim

One more thing, as with anything else, if you look into it, don’t tie yourself to one company. Use an agent that gets quotes from all over so you can compare. The guy we used (see above) sent us quotes from several providers with different options that really helped clarify where we needed to be.

25 Mr. Cheap

Jim: Interesting. I have enough in emergency savings that would cover me for more than 90-180 days. The only possibility I’d really need coverage against is never being able to work again (worst case scenario I could start liquidating investments and live off of them for ~5 years).

26 Four Pillars

I think both of you guys should look into disability insurance.

Mr. Cheap – if you could never work again – what would you do?

Jim – you should insure for future income as well – what if you are disabled and your wife is no longer your wife?

27 Karolyn Chapman

I speacialize in Disability and Long Term Care Insurance, and I am obviously a huge proponent of both of them. It is very important to cover a risk this large. 1 in 3 people will become disabled for 90 days or longer before the age of 65. How many people have enough savings to financially survive if they are not able to work and bring home a paycheck? not many…and those who do have savings, what about inflation? what about your increase in medical expenses?

This stuff can be expensive, but look how big that risk is. If you do become disabled, your benefits will well exceed your premium cost. If you NEEDED Disability Insurance now, you would not be able to get it. Don’t let yourself get to that point.

Things to look for in a policy:
1. noncancable & guaranteed renewable policies- this means the insurance company can not change your benefits or premium once the policy is in force.
2. True Own Occupation Definition of Disability – this will pay you benefits if you are unable to do the substantial and material duties of YOUR job..even if you can go do something else, the ins. co. still pays you full benefit.
3. Residual (Partial Benefits) – if you suffer a loss of income b/c of an injury or illness & you are still at work, the policy will pay you out a portion of your benefit, to help make you whole.
4. COLA (Cost of Living Adjustment) – this is your built in inflation protection. If you become too sick or injured to work, your benefits will increase each year to help keep up with pace of rise in living costs.
5. Future Increase Options – this gives you the option to buy more coverage as your income increases through the years, and it does not matter what your health is. This protects your medical insurability.

As I said before, this stuff can be expensive, but there are options you can choose to have a lower premium right now while your starting out. Also, there are pretty inexpensive programs for some grad. students and working your first year. And mixing group with individual can help bring down the cost, but you will never get the “best” coverage all through group insurance. Read those policies carefully. I often work with clients who think they are fully covered, and we come to find out the benefits of their group policy is very limited.

Please fill free to ask me any questions about this insurance and/or the different carriers.

28 Robert

I don’t believe in insurance it takes the edge off of life.

Seriously when do you take personal responsibility for what happens in your life. There isn’t a fix for every disaster. How many times do read about real disasters and the insurance companies fail to pay. Was is wind or flood, what was the cause etc. If I could buy a simple policy that said, if my house is a total loss they will pay $300.000 no questions asked I’d buy that. I’d really prefer to just self insure and protect myself.
Dont’ say it can’t be done, I do it.

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