When does it make sense to get insurance?

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Quadalupe
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Re: When does it make sense to get insurance?

Post by Quadalupe »

Crusader wrote:
Sat Oct 03, 2020 12:09 pm
How do I determine whether a given event falls into the "event A" or "event B" category?
Check your bank account and your feelings. If you would say 'meh' and just pay the $$$, it's an event A category. If you couldn't pay the $$$ (either because you don't have the money or because spending the money would significantly alter your plans or life) it's an event B category. Self insuring is cheaper than insuring, but paying a small premium for peace of mind can be a perfectly fine reason (and even rational) as well.

Dave
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Re: When does it make sense to get insurance?

Post by Dave »

I don't think I'm adding anything new to the discussion, but I think about insurance as follows.

Generally speaking in the aggregate, yes, the insurance company is going to make a profit so taking insurance is a losing bet in the sense of the odds not being in your favor on the basis of that specific policy's cash flows. This isn't actually always the case, as insurance companies make profit in two ways: 1) writing insurance that pays more in premiums than payouts and operating costs and 2) investing "float", the premiums held by the insurance company during the insured period prior to payout, and earning a return on float. There are insurance companies that have no or little underwriting profit, but still do alright due to investing the float. So it's not always true that they make money strictly on premiums in vs. payouts out, but that plus investing returns on float.

Still, your point basically stands that it's generally a losing bet.

Two other factors to consider are adverse selection and moral hazard. With adverse selection, it's possible that you are riskier/less risky policy than the insurer knows off your provided information, which skews the bet again in either direction. E.g. if you are a more reckless driver than your demographics shows but your record doesn't indicate, the insurance would directionally make more sense. Moral hazard enters in that if you act more risky because you are insured, you get more bang for your buck in raising the odds of needing a payout without rising prices. I'd guess generally policies are able to incorporate moral hazard factors into premium costs, so this would require unusually variant behavior.

So big picture, yes, taking insurance is a losing bet in the narrow sense of looking at what you pay and what you are likely to get in that single transaction. But obviously it needs to factor into the bigger picture of your life. So I have always simplistically thought: "I only will take insurance if not doing so risks catastrophic loss".

I think this is what you've really been trying to ask, is how to evaluate when something presents a sufficiently large risk that it's worth taking a bet that by itself doesn't make mathematical sense. I tend to agree with ZAFCorrection that this is somewhat psychological because there is a gray area, but there are also a lot of situations where simple math can dictate. If you can swallow the absolute worst case scenario with your emergency fund or just a few months of income, then I think it's clear the insurance is not going to add value.

Unfortunately this covers most of the low-level, easy sort of situations like higher levels of car insurance, trip insurance, phone insurance, etc. Frugal people don't really need help with that anyways. The harder stuff is what level of medical insurance or say the situation you're evaluating where we get into the gray area of what you're comfortable bearing in the worst-case scenario.

In these harder-to-determine areas, I've always just spent time thinking long and hard about whether I'd really be OK with the worst-case scenario, and what that could really mean. Subjective, yes, but since by definition I determined it was a losing bet, I'm not sure how else to approach it.

An example of this was last year my wife and I were both self-employed and we decided to get the lowest-cost/coverage available, but still absurdly expensive (relative to what it provided), health insurance on the marketplace rather than going uninsured. It was a terrible, terrible bet, but we just weren't comfortable with the risk that our highly active lives may result in an injury* that took out our net worth in a way that'd permanently change the trajectory of our financial future.

*or that Kīlauea erupted when we were on the Big Island and we got hurt :D

Quadalupe
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Re: When does it make sense to get insurance?

Post by Quadalupe »

One thing that just came to mind as well: in some cases insurance might provide the illusion of safety, without actually providing it. If you insure for a big $$$ event (house burning down), I don't expect the insurance company to wire the money the day after. I expect them to fight the claims tooth and nail, to stall and to go to court if the claims are big enough to warrant the expenses.

ZAFCorrection
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Re: When does it make sense to get insurance?

Post by ZAFCorrection »

Another aspect that may be worth considering is one's personal valuation of risk. At any given point we have a baseline probability of death and dismemberment associated with being alive, our standard activities, and our health parameters. The guy who really can't tolerate any risk is the neurotic who constantly afraid of dying despite staying in his house all day. On the other end of the spectrum you have the extreme sports folks who get picked off fairly frequently but don't worry much about it.

If you are questioning the risk of something, you could ask if that risk actually needs to be mitigated below some threshold or if you are over-weighting it because it is unusual.

Alphaville
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Re: When does it make sense to get insurance?

Post by Alphaville »

Quadalupe wrote:
Sat Oct 03, 2020 1:39 pm
One thing that just came to mind as well: in some cases insurance might provide the illusion of safety, without actually providing it. If you insure for a big $$$ event (house burning down), I don't expect the insurance company to wire the money the day after. I expect them to fight the claims tooth and nail, to stall and to go to court if the claims are big enough to warrant the expenses.
sure, there’s an incentive to not pay, but insurance is a highly regulated industry, and fraudulent insurers could quickly find themselves in trouble with both regulators and consumer lawyers (class action lawsuits).

of course, if the government is in the pocket of this or that sector of the economy, things can get hairy. democrats complain that republicans side with big corporations, republicans complain that democrats side with the trial lawyers, and here we are in an imperfect world, battling it out daily to figure out who gets what when.

insurance companies might become insolvent and fail as well, because profit is not guaranteed, but in the case of the usa, states can guarantee insurance coverage in this event. eg see: https://www.annuity.org/annuities/regul ... ociations/

we’ve also had cases where the federal government steps in, as when aig was bailed out during the 2008 financial crisis, having assumed the risk for tens of billions of mortgaged backed securities. while this was an outrage at the time, the company survived and the government eventually made money on the rescue. it was a labyrinthine plot. see: https://www.thebalance.com/aig-bailout- ... ts-3305693

Scott 2
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Re: When does it make sense to get insurance?

Post by Scott 2 »

Short answer - get the travel insurance. It's not very expensive if you shop around. Reputable insurance companies are not in the business of denying valid claims.


Longer answer - Insurance makes sense when:

1. It protects you from a catastrophic risk, you cannot otherwise afford, without creating undue hardship today. A good example of catastrophic insurance you might not buy is long term care. While the downside is pretty terrible, Medicaid (in the US) catches you and the insurance is very expensive. At the point you need it, quality of life is poor. Probably a bad deal.

2. You get into a better risk pool than you personally provide. This can be a clear financial win - take someone with chronic illness buying health insurance that costs less than their annual medications. In this case, it typically is not the insurance company losing money on you. Rather, other members of the pool are subsidizing the cost of insuring you. Another example might be if you are especially hard on phones, maybe the over-priced replacement plan is worth it. Conversely, joining that bad risk pool when you are extremely careful is probably not worth it.

3. It removes bullshit from your life. Bad driver, renting a car? Maybe buy the rental company's insurance, instead of counting on your credit card company. That way you aren't stuck between two large corporate entities when something goes wrong. Going on Medicare? Get the supplement plan that covers everything, so there's no arguing between your hospital, insurer and the government about who should pay what. Etc. Concerned about a spouse's money management skills after you die? An annuity might be worth it.


In my experience, the area where wealthy people effectively save on insurance, is bumping up their deductibles. Maybe the home owner's policy doesn't kick in until $20k, or the health insurance plan has a $10k deductible. They tend not to skip it entirely, or even shop entirely on price. Bullshit is a big consideration. Most will have an umbrella policy, yes for financial protection, but also so the insurer's lawyers fight someone taking them to court.

I'm actually a little surprised to read Sclass used price as the defining criteria for health insurance. That is an area where the remove bullshit and protect from catastrophe factors are essential. The cheapest plans are probably going to fall short. Think being locked out of seeing that specialist or paying 20% of a $50k course of medicine. Or - being forced into trying less effective, but inexpensive medicines first, before you can fail into the $5k/dose one your doctor really prefers. Meanwhile time ticks by and your condition worsens. Yikes.

IMO the cheap insurance choice carries another danger for the frugal person, who might be discouraged from seeking timely medical care, hoping to avoid the big financial hit. Even if they "can" afford it. My plan has a relatively small $2500 deductible, yet I personally am guilty of this.
Last edited by Scott 2 on Sat Oct 03, 2020 3:16 pm, edited 1 time in total.

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Ego
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Re: When does it make sense to get insurance?

Post by Ego »

You may want to look at what travel medical insurance actually covers. Generally the insurance companies pay to stabilize patients then return them to their home country for treatments. The moment the insured person touches down on home soil the travel insurance is no longer responsible. So, their liability is limited to the cost of triage and a plane ticket home. Some policies do not include air-ambulance flights if you didn't select the add-on, so you are on the hook for everything after an in-country physician determines you are sufficiently stabilized to travel. I believe they all have a clause that says they will not pay if you refuse their advice to return home.

Laura Ingalls
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Re: When does it make sense to get insurance?

Post by Laura Ingalls »

Crusader wrote:
Sat Oct 03, 2020 12:09 pm
Ok, let me try from a different angle. Let's say I have a house. I understand that stuff can break in this house (e.g. my fridge, let's call this event A), causing unexpected expenses. If stuff breaks, I have enough money to buy a new fridge. This is a risk I am willing to make when buying a house. I have effectively "insured myself" against such an occurrence, I don't need outside help. But, this house is in Hawaii, and there is a chance that a volcano will wipe out my house at any time (let's call this event B). I don't have enough money to buy another house and I would end up homeless, so then I pay an amount of money into a pool of money that is managed by an insurance company (i.e. outside help), at a cost that is higher than if I had "a lot" of money to not need their help.

How do I determine whether a given event falls into the "event A" or "event B" category?
If you live in United States and it’s health care related assume it is an event B. It 100% ok to have a high deductible and turn it into an event A. IMO It’s really not logical to forgo it unless your net worth is very low and you are very young and totally willing to take on bankruptcy.

My current health insurance doesn’t cover anything outside the USA. I buy health only travel insurance and just use the coverage on my credit card for the actual travel arrangements.
Last edited by Laura Ingalls on Sun Oct 04, 2020 4:25 pm, edited 1 time in total.

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Sclass
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Re: When does it make sense to get insurance?

Post by Sclass »

Scott 2 wrote:
Sat Oct 03, 2020 3:14 pm

In my experience, the area where wealthy people effectively save on insurance, is bumping up their deductibles. Maybe the home owner's policy doesn't kick in until $20k, or the health insurance plan has a $10k deductible. They tend not to skip it entirely, or even shop entirely on price. Bullshit is a big consideration. Most will have an umbrella policy, yes for financial protection, but also so the insurer's lawyers fight someone taking them to court.

I'm actually a little surprised to read Sclass used price as the defining criteria for health insurance.
It’s all about how much you have in your bank account. I wasn’t really clear about this. I’d self insure medical but by having a high deductible policy (I mislabeled it as “cheap”) gives me negotiated rates that are absorbable.

I currently own a home right next to the Bobcat fire. No fire insurance. I can rebuild the place on my dime. I haven’t lost a minute of sleep over the place.

Oddly I do relate to your bullshit factor. I do pay the $25 insurance to Hertz rent a car. I could easily replace their tin can car when it gets damaged but somehow I pay up happily.

So I think I have some inconsistencies.

Alphaville
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Re: When does it make sense to get insurance?

Post by Alphaville »

Sclass wrote:
Sun Oct 04, 2020 3:54 pm
So I think I have some inconsistencies.
i’m still on a “fooled by randomness” kick, and by that i mean i’m reading it slowly. so lemme offer you a quote from there i *just* ran into:
NNT wrote:If Pyrrho cannot stop being human, I do not see why the rest of us should resemble the rational man who acts perfectly under uncertainty as propounded by economic theory.
:lol:

and of course, he’s right!

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Sclass
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Re: When does it make sense to get insurance?

Post by Sclass »

Not to get too OT but @Alphaville might like The Bed of Procrustes by NNT. It’s a great laugh.

Basically a book with hundreds of these one liners.

Scott 2
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Re: When does it make sense to get insurance?

Post by Scott 2 »

@Sclass - an extremely high deductible health insurance policy makes much more sense to me. One of the options I may consider, is combining one with a concierge medicine membership. That would help overcome my hesitancy to see the doctor (by pre-paying), and make the doctor experience much lower bullshit.

Dental insurance is another one I don't think wealthy people buy. In my area, most of the dental offices offer a membership program. It's essentially a discount for pre-paying the semi-annual cleaning/exam and annual x-rays. It also locks in a lower rate for cash pricing on the dental work. From what I can tell, the packages makes way more financial sense than dental insurance. I presume pricing counts on some percentage of patients failing to show up, as well as removing the hassle of dealing with an insurer.

Alphaville
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Re: When does it make sense to get insurance?

Post by Alphaville »

Sclass wrote:
Sun Oct 04, 2020 5:02 pm
Not to get too OT but @Alphaville might like The Bed of Procrustes by NNT. It’s a great laugh.
haaahaaaaa yesss! that was my start, loved it, then i backtracked to the beginning of it all. black swan will be next.

thanks for the recommendation anyway! i’m always looking for good, fun ideas.

Crusader
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Re: When does it make sense to get insurance?

Post by Crusader »

Thank you for everyone's input (and I learned what insurance "float" is). In the end I did decide to get the insurance. I found this provider that is pretty cheap:

https://safetywing.com/

Anyway, I asked myself how much the worst case scenario hospital bill would set me back and the answer is "by quite a lot, more than I would be comfortable with". I also thought about large corporations, which DO get insurance for, say, their building burning down. If it didn't make sense financially, I would think that something as optimized as a corporation for profit would not waste money on it.

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