i learned more about insurance from this thread than i ever wanted to know.
good stuff & thank you.
good stuff & thank you.
Risky Bidness--very boring, long read
- Thread starter Mephisto
- Start date
Mjolnir said:
Youre welcome.
Memphisto I really dont want to get into a Life Insurance debate. If you dont have it I dont care. You arent my client and if you dont want to protect your familys future and your Estate I could care less. Good luck with that, hope you dont leave behind any hungry children. And also "Cash Value" Life Insurance otherwise known as Whole Life can be used in so many different ways as an investment vehicle for retirement, zero spread loans, and as a base for someones investment pyramid it really is amazing, but Im sure you have never had enough sense or money to ever worry about it
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Buying insurance is a necessary evil, and while I like evil as much as the next guy, here is what you really need to know about the insurance industry.
1. It is tantamount to a casino. The most important thing you must understand about insurance is when you sign a contract with an insurance company you are placing a bet. The only difference between an insurance company and a casino is you don't get the free drinks from the busty cocktail waitress.
Everything else is the same. You're betting against the insurance company (and their minions of statisticians and actuaries with advanced mathematics degrees). When you buy life insurance you're betting that you'll die and the insurance company is betting you won't. Try to frame this any other way and you're being naive. Of course, you can call it hedging, but hey a hedge is still a bet.
A number of years ago I visited Howard Schwartz's bookstore in Las Vegas and picked up one of my favorite books on statistics called "Probabilities in Everyday Life" by John D. McGervey (Ivy Books). From chapter 12, page 158..."Every time you buy any kind of insurance, you are making a bet with the insurance company...Another obvious fact is that the insurance company doesn't offer you true odds on your bet, the company gets a "healthy house percentage"...Otherwise how could it pay its employees or finance those skyscrapers?" And from page 170..."We have seen that insurance is a bet that you expect (and hope) to lose; the only purpose of the bet is to save you from catastrophe. You are not well served by a policy that dilutes this basic purpose."
2. Since you're betting against the insurance company, it stands to reason that the insurance company is your adversary. I know you believe your agent is friendly because you always hear... "call or visit your friendly Allstate agent Haywood Jablomi" or "see your friendly State Farm agent Ben Overbich", but they desparately need you to bet against them and hey, who wants to buy insurance from a grouch. Note to "Agent0659", you don't seem very friendly.
3. Regarding permanent insurance (cash value, whole life, whatever)..."From the Federal Trade Commission using a method called the "Linton Yield.".... Of the premium dollar, only 15 cents goes to death benefits. Overhead absorbs 30 cents, and the remaining 55 cents, over half of every dollar paid in premiums, goes into the savings component. The average return paid to the consumer on this savings component, or cash value, was about 1.3 percent". Walter S. Kenton, How Life Insurance Companies Rob You (New York: Random House, 1982) page 72.
The aforementioned Andrew Tobias wrote a wonderfully pithy book about the insurance industry in the '80s called "The Invisible Bankers". It has long been out of print but the tenets remain practical today. Here's an excerpt..."It turns out, the insurance industry -- from insuring cars to bridges to Jimmy Durante's nose -- is fascinating. It's the ultimate casino.
Also from Tobias' book, he calculates that insurance companies return to their clients, in the form of claims paid, an average of about 50 percent of the total premiums collected. So if the insurance company wins they'll get a dollar, if you win you'll get 50 cents. That's a good bet??
Tobias once wrote about his book.. "They only want us to THINK it's boring," was the title of one of my chapters. Because the more boring we think it is, the less we'll look into it. And the less we look into it, the easier it is to take advantage of us."
4. Which is better, term or permanent insurance? Well, instead of getting into a rigorous analysis which would serve no one, the easiest way to answer this is to read what a number of insurance agents and financial planners believe. Go to www.financial-planning.com and search for discussions on permanent vs term. Here's a good one. http://financial-planning.com/phorum/read.php?f=4004&i=8665&t=8665. But there's a lot more if you take the time to look. And if you take the time to read these financial planners you will find that there is no consensus on when permanent is better than term.
What's the big deal? Well, they sell the product and they can't even agree when it's necessary. Furthermore, they make a lot more money selling permanent than term so it stands to reason the real answer lies much closer to term (if any at all). Rule of thumb....Insure to protect. Invest to provide. Invest with stocks or precious metals or mutual funds of mixed bonds/stocks or whatever floats your boat but don't for a minute think you'll get any decent return on a permanent life policy.
One more point on the "can't seem to agree" issue. Pick any 100 general surgeons randomly throughout the country and they'll all do the same procedure for taking out your gallbladder. Some will be more experienced, more skilled, some won't drink as heavily the night before, but the actual procedure is the same. Same principle with the mechanics who'll replace the transmission in your car or the tax guy who helps prepare your return. So why the hell can't insurance agents agree when someone needs cash value insurance? The answer is because you almost never need it and they can't come out and say it or they'll lose money (i.e. have no pigeon to bet against).
5. Back to the casino. The insurance industry will never frame it this way. They'll tell you they're selling you "peace of mind". This goes back to the fear factor they'll promulgate. They'll say that your loved ones are protected if you die unexpectantly and if you don't die, we'll that's pretty good too, isn't it? 'Gee, Mable, I'm sleeping so much better at night since that friendly insurance agent sold me a universal life policy. No I don't understand a damn thing about it but at least I have peace of mind'.
6. More about your friendly insurance agent.
Here's what Ronald Kessler wrote about all the excess premiums that are not paid out in benefits.
"Most of this intercepted money is not saved, but provides a living to the many unnecessary insurance workers.
You don't call the agent. The agent comes to you. Typically, he makes ten telephone calls before he gets an appointment. Only one in two appointments leads to a sale....The agent may drive out to your house two or three times. The last trip will be to deliver the policy in person. He may take you to lunch or help you with your personal financial problems. He sells a lot of snake oil. If the bankers went through the same selling process to obtain an account, the nation's banks would go bankrupt. Agents who sell the greater number of policies may be rewarded with a trip to Hawaii-on top of commissions that range from 25 percent to as much as 130 percent of the first year's premium....On top of these commissions, the managers of the companies get commissions called 'overrides.'" Ronald Kessler, The Life Insurance Game (New York: Holt, Rinehart and Winston, 1985) pg 8-9
This is too complicated an answer to get into except that I'll say (politely as I can) you're wrong, completely wrong, under the conditions I outlined in my first post with regard to health insurance. I'm not talking about the hypochondriac "you have a sniffle and go to the doctor" or the person with a history of chronic illness (such as diabetes).
With regard to "protect your assets" I really don't know how to answer. After your deductible's paid each is (we're assuming, check the fine print) an equal policy. Like I said before, if you're too poor to keep money in a money mkt to cover the high deductible for the unlikely catastrophic event then just keep paying the high premiums; stay poor, fine by me.
Edit..and by the way, where the hell did i advocate self insurance?
A healthy male under 50 who doesn't smoke or have chronic illness or family history of heriditary illness or work on an off-shore oil rig or indulge in Evel Knievel behavior doesn't need low deductibles and he'll always do better with the highest deductible over time unless he's a very unlucky sumbitch.
There is always exception to the rule. But the exception is still not the rule.
Agent0659 and Mags are on different sides of the bell curve than I so our persistent bickering likely won't change each other's opinions, so ce la vie. And remember, I'm not giving advice but just relaying an opinion, dydd and all that.
One more thing, insurance companies invented another equally egregious product called variable annuities. I might write about that one of these days if there's any interest.
1. It is tantamount to a casino. The most important thing you must understand about insurance is when you sign a contract with an insurance company you are placing a bet. The only difference between an insurance company and a casino is you don't get the free drinks from the busty cocktail waitress.
Everything else is the same. You're betting against the insurance company (and their minions of statisticians and actuaries with advanced mathematics degrees). When you buy life insurance you're betting that you'll die and the insurance company is betting you won't. Try to frame this any other way and you're being naive. Of course, you can call it hedging, but hey a hedge is still a bet.
A number of years ago I visited Howard Schwartz's bookstore in Las Vegas and picked up one of my favorite books on statistics called "Probabilities in Everyday Life" by John D. McGervey (Ivy Books). From chapter 12, page 158..."Every time you buy any kind of insurance, you are making a bet with the insurance company...Another obvious fact is that the insurance company doesn't offer you true odds on your bet, the company gets a "healthy house percentage"...Otherwise how could it pay its employees or finance those skyscrapers?" And from page 170..."We have seen that insurance is a bet that you expect (and hope) to lose; the only purpose of the bet is to save you from catastrophe. You are not well served by a policy that dilutes this basic purpose."
2. Since you're betting against the insurance company, it stands to reason that the insurance company is your adversary. I know you believe your agent is friendly because you always hear... "call or visit your friendly Allstate agent Haywood Jablomi" or "see your friendly State Farm agent Ben Overbich", but they desparately need you to bet against them and hey, who wants to buy insurance from a grouch. Note to "Agent0659", you don't seem very friendly.
3. Regarding permanent insurance (cash value, whole life, whatever)..."From the Federal Trade Commission using a method called the "Linton Yield.".... Of the premium dollar, only 15 cents goes to death benefits. Overhead absorbs 30 cents, and the remaining 55 cents, over half of every dollar paid in premiums, goes into the savings component. The average return paid to the consumer on this savings component, or cash value, was about 1.3 percent". Walter S. Kenton, How Life Insurance Companies Rob You (New York: Random House, 1982) page 72.
The aforementioned Andrew Tobias wrote a wonderfully pithy book about the insurance industry in the '80s called "The Invisible Bankers". It has long been out of print but the tenets remain practical today. Here's an excerpt..."It turns out, the insurance industry -- from insuring cars to bridges to Jimmy Durante's nose -- is fascinating. It's the ultimate casino.
Also from Tobias' book, he calculates that insurance companies return to their clients, in the form of claims paid, an average of about 50 percent of the total premiums collected. So if the insurance company wins they'll get a dollar, if you win you'll get 50 cents. That's a good bet??
Tobias once wrote about his book.. "They only want us to THINK it's boring," was the title of one of my chapters. Because the more boring we think it is, the less we'll look into it. And the less we look into it, the easier it is to take advantage of us."
4. Which is better, term or permanent insurance? Well, instead of getting into a rigorous analysis which would serve no one, the easiest way to answer this is to read what a number of insurance agents and financial planners believe. Go to www.financial-planning.com and search for discussions on permanent vs term. Here's a good one. http://financial-planning.com/phorum/read.php?f=4004&i=8665&t=8665. But there's a lot more if you take the time to look. And if you take the time to read these financial planners you will find that there is no consensus on when permanent is better than term.
What's the big deal? Well, they sell the product and they can't even agree when it's necessary. Furthermore, they make a lot more money selling permanent than term so it stands to reason the real answer lies much closer to term (if any at all). Rule of thumb....Insure to protect. Invest to provide. Invest with stocks or precious metals or mutual funds of mixed bonds/stocks or whatever floats your boat but don't for a minute think you'll get any decent return on a permanent life policy.
One more point on the "can't seem to agree" issue. Pick any 100 general surgeons randomly throughout the country and they'll all do the same procedure for taking out your gallbladder. Some will be more experienced, more skilled, some won't drink as heavily the night before, but the actual procedure is the same. Same principle with the mechanics who'll replace the transmission in your car or the tax guy who helps prepare your return. So why the hell can't insurance agents agree when someone needs cash value insurance? The answer is because you almost never need it and they can't come out and say it or they'll lose money (i.e. have no pigeon to bet against).
5. Back to the casino. The insurance industry will never frame it this way. They'll tell you they're selling you "peace of mind". This goes back to the fear factor they'll promulgate. They'll say that your loved ones are protected if you die unexpectantly and if you don't die, we'll that's pretty good too, isn't it? 'Gee, Mable, I'm sleeping so much better at night since that friendly insurance agent sold me a universal life policy. No I don't understand a damn thing about it but at least I have peace of mind'.
6. More about your friendly insurance agent.
Here's what Ronald Kessler wrote about all the excess premiums that are not paid out in benefits.
"Most of this intercepted money is not saved, but provides a living to the many unnecessary insurance workers.
You don't call the agent. The agent comes to you. Typically, he makes ten telephone calls before he gets an appointment. Only one in two appointments leads to a sale....The agent may drive out to your house two or three times. The last trip will be to deliver the policy in person. He may take you to lunch or help you with your personal financial problems. He sells a lot of snake oil. If the bankers went through the same selling process to obtain an account, the nation's banks would go bankrupt. Agents who sell the greater number of policies may be rewarded with a trip to Hawaii-on top of commissions that range from 25 percent to as much as 130 percent of the first year's premium....On top of these commissions, the managers of the companies get commissions called 'overrides.'" Ronald Kessler, The Life Insurance Game (New York: Holt, Rinehart and Winston, 1985) pg 8-9
This is too complicated an answer to get into except that I'll say (politely as I can) you're wrong, completely wrong, under the conditions I outlined in my first post with regard to health insurance. I'm not talking about the hypochondriac "you have a sniffle and go to the doctor" or the person with a history of chronic illness (such as diabetes).
With regard to "protect your assets" I really don't know how to answer. After your deductible's paid each is (we're assuming, check the fine print) an equal policy. Like I said before, if you're too poor to keep money in a money mkt to cover the high deductible for the unlikely catastrophic event then just keep paying the high premiums; stay poor, fine by me.
Edit..and by the way, where the hell did i advocate self insurance?
A healthy male under 50 who doesn't smoke or have chronic illness or family history of heriditary illness or work on an off-shore oil rig or indulge in Evel Knievel behavior doesn't need low deductibles and he'll always do better with the highest deductible over time unless he's a very unlucky sumbitch.
There is always exception to the rule. But the exception is still not the rule.
Agent0659 and Mags are on different sides of the bell curve than I so our persistent bickering likely won't change each other's opinions, so ce la vie. And remember, I'm not giving advice but just relaying an opinion, dydd and all that.
One more thing, insurance companies invented another equally egregious product called variable annuities. I might write about that one of these days if there's any interest.
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I sell mainly health insurance. A very hot product for me has been the HSA, health savings account. I.R.S. says you can take a 100% write off on the savings, up to a certain maximun per year.
As far as life insurance goes I do sell some, not much. I've had two younger clients die, very sad. One had 1/2 mill and the other 50K, guess whose familly is in financial trouble today.
As far as life insurance goes I do sell some, not much. I've had two younger clients die, very sad. One had 1/2 mill and the other 50K, guess whose familly is in financial trouble today.
I'm also in favor of term insurance for those with kids (younger client makes me assume he had kids) so I think we agree. Seriously, why even buy a policy for 50K death benefit if you've got kids, funeral expenses will take a huge chunk of that.
I'm not as knowledgeble about HSAs as you probably are so I can't really comment on that.
I'm not as knowledgeble about HSAs as you probably are so I can't really comment on that.
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