Gil’s Musings

Insurance is a Racket!

I get numerous opportunities to come to this conclusion, but being in the investment business, most people think I’m pro-insurance. If you’ve ever tasted Paregoric, you know it’s only better than the alternative. Shifting risk is very expensive. I have found self-insurance (or taking the risk myself) to be the more profitable choice. Now, I’ve never faced a major calamity either. But even so, large deductibles allow for covering catastrophic losses, and leave the minor claims to be absorbed.

I have several points of reference arguing for larger deductibles. In 1986, I spun out my new Chevy Blazer on an icy road in Boerne. The relatively minor $1700 repair bill was not too bad considering my $250 deductible. Then my agent broke the news that my premiums were going up with the claim, since I was obviously no longer “low risk”. My premiums would rise by $500 per year for three years, with no more claims. That means it was going to cost me $1750 to make a $1700 claim (3x$500 +$250). I withdrew my claim and paid out of pocket. I asked my agent why I did not have a $1000 deductible. He said it was probably a good idea. He should have mentioned that sooner. I fired him on the spot.

My new agent put me in the same $1000 deductible policy which lowered my annual premiums by almost $800. That was 25 years ago, with nary a claim. That means the willingness to accept a $750 additional loss at any moment has paid me $20,000 plus interest ($800x25yrs). And that’s tax-free.

I took my son, Brian, to lunch at one of our favorite Cajun places before he returned to TCU this past July. His car was broken into while we dined, and several items were stolen, including two laptops and some of his girlfriend’s jewelry. My $7800 homeowner’s claim was whittled down to a check for $1018, after deductibles and depreciation. So I changed my deductible.

With an increase in deductible from 2% of home value to $15,000 flat, my premium has dropped by 41%. The difference in my old deductible and my new deductible will mean I do run an additional risk. But eight years from now that financial risk will have paid for itself with the lowered premiums and any savings beyond that will be tax-free profits. Furthermore, I made my last homeowner’s claim 15 years ago. This cycle would have already repeated itself twice by now if I had been thinking. And even if I do get stung, I already have the savings from the auto policy above to use in escrow against any new claim in this new deductible game. Overall, I’m home free no matter what because I have already saved the other $20,000 and that’s much larger than the new increase in my homeowner’s deductible. I use the term “tax-free” because savings are dollars on which you have already paid tax.

Just food for thought….

UPDATE (12/16/13): My son Brian has now graduated from TCU and is a workin’ man! As such, he is a newfound target for insurance agents, two of whom have recently taken him to lunch. Brian makes a decent salary, but he has no mortgage, no wife yet (he’s engaged), no kids, no car payment, and no student loans. And he needs life insurance? For what? As Brian began asking me about life insurance, I stopped him and asked if the agent had told him about whole life and maybe universal life with a loan instead of doing a Roth IRA. He said. “how’d you know”? I have simply already heard the pitch. It’s pretty predictable when you understand that Term Insurance has no commission, and Whole Life Policy and Universal Life Policy commissions can exceed 80% of your first year’s premium.

I’m no rocket scientist, but I do know how agents get paid, and accordingly how they think. I went on to ask Brian if he had ever heard the saying that “When all you sell is hammers, every problem looks like a nail”? He said no, but he totally understood what I meant with the question.

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