The Smart Way to Think About Insurance

Recently a client of ours reached out for a second opinion on whether they should buy a certain insurance policy, which was being strongly recommended to them by an insurance salesman. After a careful review, their PFG advisor concluded that it was his opinion that they will be able to self-insure, citing that if the need for this insurance were to come up, they could finance the event out of pocket. He concluded by saying that if he were in their situation, he would not buy the insurance.

This client then responded to the insurance salesman that they would not buy the policy. Upon getting this answer, the salesman expressed strong disagreement in the other direction, stating that he felt not getting this policy would be a big mistake!

With these diverging opinions, who is right? Should you get AppleCare on your next iPhone? Should you insure your next plane tickets? Should you buy long-term care insurance?

The purpose of this blog post is to teach the principles that govern insurance, including when it is necessary, and when you might be overpaying for something you don’t need.

The Truth About Insurance: When It’s Smart—and When It’s Just a Waste

Here’s a simple but often-overlooked fact: every time you purchase insurance, you’re statistically agreeing to lose money. That is how the system is designed. Insurance companies—essential and well-run as they may be—don’t exist to lose money. They exist to make a profit, and they do. Insurance companies are the smartest statistical, actuarial, and risk calculating entities in the world. And in almost all cases, they price their policies to ensure they will make a profit, which means that most policy holders will lose money.

But losing money is your goal when you buy most insurance. Think about it: when you buy insurance of any kind, generally you hope never to use it. When you buy life insurance, do you hope to use it? What about auto insurance? What about flood insurance? The best-case scenario is that you “wasted” your money, because needing that coverage would mean something went wrong, or something bad happened.

But more importantly, when you buy insurance, statistically you will lose money.

Insure What You Can’t Afford to Lose

The smart approach to insurance is not avoiding it altogether, but rather being strategic about what you insure. The right time to buy insurance is when the financial impact of a worst-case scenario would be devastating—something you simply couldn’t afford to handle on your own.

For example, when you are buried in student loans, mortgage payments, and practice debt—with little to nothing saved for retirement—and you have a young family, you can’t afford to die! In that case, buying life and disability insurance makes perfect sense. Consider malpractice insurance: can you afford a multi-million dollar lawsuit? If not, get insurance! (regardless of whether your license or bank demands it or not). It is wise to insure against risks you cannot afford to take.

Contrast those examples to these:

• Should you buy AppleCare for your next iPhone? If the phone breaks, could you afford to fix it?
• Should you pay extra for a protection plan on a $40 basketball at Dick’s Sporting Goods? If it pops, can you afford to buy another?
• Should you insure your plane tickets? If your plans change, can you cover the change fee?

If the answer is “yes, I can afford the worst to happen,” then the answer to the insurance question is “no, you probably don’t need insurance.”

As you can imagine, adding insurance, an extended warranty or “coverage” of any kind to ordinary purchases is a slick way for financially savvy corporations to add decimals to their bottom line.

What About Long-Term Care Insurance?

Let’s zoom out to a bigger picture—retirement. Most Americans struggle to retire comfortably. Many can’t even afford to miss a paycheck, let alone fund 30 years of retirement. So the fear of needing long-term care—like assisted living or nursing home services—looms large. Those costs can be eye-popping. On a recent visit to a retirement community with my mom, the highest level of care cost around $8,000/month. That’s a serious number to most people!

But here’s the nuance: most people won’t need that level of care, and those who do often won’t need it for long. For our clients at PFG—if they follow our financial plan—this isn’t a surprise expense. That $8,000/month might be less than what they’re already planning to spend in retirement.

So do they need to buy long-term care insurance? The black and white of the decision is that most PFG clients will be able to afford to retire and therefore can “self-insure.” (“Self-insure is when you tell the salesman, “No, I don’t need AppleCare. If my phone breaks, I can afford to buy a new one”).

Bottom Line: Be Smart, Not Scared

Insurance is a tool. Used wisely, it can protect you from financial ruin. Used emotionally, it can quietly drain your resources while giving you a false sense of security.

When you buy your next iPhone, say no to the AppleCare with confidence. Now you know why!