Insurance: A Tax on People who are Bad at Math?

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For more casual sampling, have a look at this complete list of all posts since the beginning of time or download the mobile app. Family Wife Laura Stewart divorced. By investing in a single stock you could have great gains or great losses or anything in between. Love reading your blog: Wellmark Blue Cross Blue Shield: Insurance of all types — car, house, jewelry, health, life — is a crazy field swayed by lots of marketing, fear, and doubt.

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Gastric Sleeve is covered. Blue Cross of Alabama: Blue Cross of Arkansas: Per Policy Bulletin insurance requires BMI over 36 and failed structured weight loss program. Blue Cross of California: Gastric Sleeve and StomaphyX are investigational and not covered.

Blue Cross Blue Shield of Delaware: Insurance requires LOMN, cardiac, pulmonary and psych clearance and sleep apnea work-up.

Blue Cross Blue Shield of Florida: Per Policy Bulletin insurance requires five-year history, 6 month diet, psych evaluation, and TSH showing no endocrine disorders. Blue Cross Blue Shield of Georgia: Blue Cross Blue Shield of Illinois: Blue Cross of Blue Shield Massachusetts: Blue Cross Blue Shield of Michigan: Blue Cross Blue Shield of Minnesota: Blue Cross Blue Shield of Mississippi: Per Employee Access Policy Bulletin insurance requires five-year history of morbid obesity, documentation of failed diet attempts and TSH.

Blue Cross Blue Shield of Nebraska: Per Policy Bulletin 1. Per Corporate Medical Policy insurance requires physician documentation of weight loss measures over the past 5 years, three-year weight history and psych evaluation. Limited to one procedure per lifetime. Blue Cross Blue Shield of Oklahoma: Blue Cross Blue Shield of Tennessee: Gastric Sleeve may be covered on case by case determination.

StomaphyX is investigational and not covered. Blue Cross Blue Shield of Texas: Blue Shield of California: Per Policy Bulletin insurance requires 6 month diet supervised by Primary Care Physician or physician other than a bariatric surgeon , medical evaluation by PCP, psych evaluation and two year history.

Per faxed policy insurance requires 3 month multi-disciplinary diet approach, psych evaluation, cardiac evaluation, pulmonary evaluation and post-op program.

Per faxed policy insurance requires initial history and physical exam with office notes and any lab work done Highmark Blue Cross: Per Policy Bulletin G insurance requires physician supervised 6 month diet and exercise program and psych evaluation.

Per Policy Bulletin insurance requires five-year history of morbid obesity, 6 month diet and exercise program and psych evaluation. Per Policy Bulletin insurance requires 6 month medically supervised diet, Primary Care Physician clearance and psych evaluation.

Per Policy Bulletin Per Utilization Management at Pacificare, this is a general exclusion on the policy but should be submitted with LOMN, PCP, pulmonary, cardiac and psychiatric clearance along with three year history of diets tried and outcomes. Per Policy Bulletin CP. Per fax transmission insurance requires three-year history, 6 month diet supervised by physician other than surgeon and psych evaluation.

Per Policy Bulletin 58 insurance requires 6 month diet, psych and documentation of willingness to comply. No set policy bulletin. Each case to be evaluated individually. And even better than buying insurance for losses, is becoming financially prepared for a loss BEFORE buying something. For example, save enough to easily replace your car before you even buy it.

Alex in Virginia February 20, , 5: You have an incredibly clear and different way of looking at things! GL June 3, , 3: Well, that, and the damned mandatory car insurance.

Garrett June 30, , May the variance be ever in your favor, GL! DDD June 4, , Quick question — you mentioned that both you and your wife are from Canada. MMM June 5, , 3: The families back in Canada sometimes ask the same thing. The only real reason is that it is way, way, way, way, nicer to live here in Colorado than it is in the Great Lakes region where we grew up. And on balance, it is still much less expensive to live in the Western US than in most Canadian cities, because things like housing, food, any sort of manufactured goods, and property taxes are so much lower here.

Jon June 6, , 4: I was curious what you think about Umbrella insurance? It seems like it might not be a bad idea once you have significant assets — it is relatively inexpensive.

A lawsuit could really put a damper on the most carefully laid early retirement plans. It also seems like it might be a good idea to establish a LLC for each rental property you own. It actually paid for itself in my case because I got a discount on other policies. MMM June 16, , This umbrella policy idea is new to me, so thanks for sharing. It seems the wealthier and more involved you are with multiple tentacles in your local business community, the wiser such an idea would become.

Thanks again for the ideas! David Herr August 30, , 6: An Umbrella policy that protects your savings is critical — the liability limits for the typical auto policy do not come close to the amount you would be sued for in a major car accident. Term life insurance is a necessity if you may have a taxable estate, and its cheaper to get when younger. If you get a serious illness and the treatment you want is not covered by medical insurance a situation which I believe is going to become more common , you can sell the policy for a discount to its face value, and depending on how serious the situation is, the discount might not be that much.

Term life insurance is also relatively cheap, with most of the price being dictated by actuarial considerations, and very modest profits. Whole life policies are much more expensive, and not worth it. Build savings on your own, not through an insurance policy. Insurance policies are to cover risks, and should be structured to be as simple as possible — the risk becomes reality, the insurer sends you a check. Seth January 20, , Did you ever make a decision on an umbrella policy? People carry little liability insurance auto, home, or business and end up liquidating significant personal assets because of lawsuits.

You should check and see what assets you own would be exempt in your state, but usually savings accounts, investment accounts non-IRA or K , and property other than personal residents could all be up for grabs.

As jDeppen pointed out the cost is minimal compared to what is protected: Bill June 8, , This is unfortunate because conceptually you are right, an insurance company will charge a premium to the insurance buyer, above the expected loss on the policy. They are simply exchanging a known expense larger than their expectation value for lower volatility.

Painting with a broad brush bonds generally have a lower rate of return than stocks but in exchange have lower volatility. Depending on your risk tolerance it may even be a more optimal one. Economically you will, on average, come out far ahead by investing that money in equities instead. By prepaying your mortgage you are taken a lesser known return in exchange for a greater average more volatile return.

The concept is completely analogous although you come down on the opposite side of the debate in that arena. It is important for people to think about insurance in terms of expectation value. You are absolutely right that some insurance can be priced so highly compared to expectation value that it never makes sense for anyone to buy it. Another good example is insurance on consumer products. My wife just bought an Iphone and they offered her a two year insurance plan.

So in theory I agree with your sentiment that insurance costs more than on average than bearing the risk yourself. I usually opt for high deductible plans for myself, I despise the fact that my medical insurance covers too many everyday expenses, and I turn down every policy that I get offered when purchasing a consumer good.

If you are completely informed about the cost of your decisions and still want a no deductible gold plated medical plan more power to you. I think that one major reason for this is that the most costly insurance policies people are involved with are for medical coverage.

Pricing in the health care market is completely opaque, there is no way to know what treatment costs so it cannot be compared to the cost of insurance. MMM June 8, , Fussy, I added a question mark to the headline just for you, to tame the hyperbole a bit.

TNT December 18, , 2: I think you are way too lenient on that reply. Insurance absolutely IS about combining risks and thus flattening out the payment curve for anyone needing to claim, but anything short of a long term recurring liability like an illness at least for you guys in the US of A, unlike us in the UK, who pay for our chronic healthcare out of taxes, but seem to pay less than you guys in the round will almost certainly never cost in. And they really do rely on fear factor and people not understanding the math.

Ever see a TV ad for an insurance company explaining the statistical likelihood of your claims outweighing your premiums over your lifetime, or even a 10 year period? We self insure on most things these days, and have never ever taken out insurance on individual household items, and in the main would never have had to claim if we did, thus saving several thousand pounds, which by now would pay for any appliance or TV that now failed, several times over.

This insurance in particular is all about the maths. Spork October 13, , I have long had this very same discussion with folks… and find it almost impossible to convince them. By retired, I mean I decided on my own to quit my job, move somewhere and set up shop, then sort of just waited for another job to come along.

I found that the difference in premiums on high deductible and low deductible insurance was such that in one year you saved enough to cover the deductible. Tom October 18, , 8: Kira July 4, , Alan Jackson February 1, , 3: It is one of the big problems I have with the US healthcare system.

In a way, I consider a high deductible insurance plan a form of membership where you get the same rates that everyone else does. MMM February 1, , 5: Actually, you can get the same deals that the insurance companies get — I read an article about this once and there are in fact entire books on the subject. The basic idea is, you get in touch with your preferred hospital in advance and set up an account with them with the pre-agreed discount.

They are happy to do this, since an individual with good credit is much easier to get money from than an insurance company, which makes a point of being annoying about every single claim. Richie Poor June 20, , Getting cash discounts has worked well in many cases for me. Also check into medical tourism. Go ahead and get that root canal the day before you leave Costa Rica. Your wallet will thank you. JaneMD February 7, , 9: I have to disagree with that MMM on setting up the healthcare deal with a hospital.

Of note, you should never let your health insurance lapse if possible. I got a new job and we decided not to cover my spouse since his job in a few months would be providing health insurance for much lower premiums.

When we looked at the fine print, by allowing your insurance to lapse, you open yourself to denial for pre-existing conditions. Everyone needs to make some type of plan for continuing health insurance, period. You can play with the plan, the rate, the deductible based on your current age and health, but the natural conclusion to life is death. If you want to save some money, stop smoking. CanuckExpat March 18, , 6: Nice write-up and good points. You might be interested in this book excerpt about insurance: If the rest of the book is as good as that excerpt, I might be interested in reading it.

Great Lakes Stash March 24, , 6: What about purchasing a whole life policy with built in dividends. Also if you die it pays. Not the worst thing ever. They often cap your earnings and the fees can be astoundingly brutal. Very nearly the worst thing ever. Matt May 17, , 8: Here are links to two interesting legal alternatives to car insurance in Texas.

But I thought you might find the possibility interesting. Brett May 23, , Mustache mentions, but maybe that would work. Auto insurance negotiates payments down aggressively as well in my experience. No one mentioned tax deductibility though. Then you effectively have the healthy people subsidizing the unhealthy ones in any given pool.

Almost forgot, keep in mind that you, I, and many readers are the ones reaping insurance company profits everyday. A corporation is just an entity to make money for shareholders by satisfying some consumer demand. Often they are people just like me and you, though the wealthy people certainly control more capital than middle and lower class people overall.

The more that this sort of living becomes popular if it does the more companies will cater to it by offering more products like bike trailers, high quality low cost groceries google Aldi , kits to repair your electronics google iFixit , etc. Money Mustache May 23, , 3: Your point about health insurance being tax-deductible for those of us that own our own small companies is a good one.

Money Mustache health insurance. Josh Triplett June 22, , 3: I agree with your post: And I plan my next laptop purchase to coincide with the warranty expiration date on my current laptop, so that I can always count on having my computer working. Laptop warranties, unlike most forms of insurance, charge everyone exactly the same amount regardless of risk.

So, the person who occasionally checks their email and browses the web pays the same amount as the professional computer user. By the end of its lifetime, each of my laptops turns into the Laptop of Theseus: Counting both the cost of these components and the cost of the labor involved in performing these repairs, the warranty pays off after about 1 significant repair.

And over the lifetime of the warranty, I will typically require a couple of repairs per year. Money Mustache June 12, , 3: Sarah July 3, , 7: I would never go without good health insurance on my husband, because as you say, he is riskier than he looks. Luckily he usually has insurance through his employer. Alek July 26, , 1: I consider myself fairly financially savvy but I have been trying to educate my fiancé and your blog is MUCH better at explaining why we should invest in index funds, why a used car is better, how credit cards work, etc.

I have a specific question about auto insurance if there is already a post on this that I missed I apologize. As you say it is required to carry liability- so how much should we get? What about the medical aspect? I guess I should know if my health insurance covers that aspect but am still covered by parents until I am going to do some independent research but would greatly appreciate your insight and expertise. NW August 14, , Your blog is my bible! I need opinions on long-term care insurance.

Am I falling for the fear trap? What are your opinions? Charlie August 28, , 6: I like the blog and enjoy all of your articles, but this particular article I feel contains very dangerous advice. Insurance is actually an instrumental tool of society in which risk is allowed to be pooled and can be mitigated for very small amount.

Yale finance professor and economist Robert Schiller look him up agrees. No life and health insurance combined with you getting cancer and dying leaves your wife not only broke, but likely bankrupt or in debt along with her having to provide for your children. Are stats going to protect you from that? Let me put it to you this way. Because statistically you are likely to win right? But I do not have life insurance, because having me die would just make my wife and son wealthier — they would keep all our investments, but have one less guy raiding the fridge and buying stuff.

Clemens September 10, , In terms of a statistical distribution function, buying insurance lowers the mean of the distribution but also makes it much more narrow. So when buying, say, flood insurance, I lose money on average, but I gain a cap of what I have to pay should my home get flooded. Craig December 11, , 7: If people who buy insurance are bad at math people who buy lottery tickets are totally mathematically challenged! Money Mustache December 12, , Yeah, that would be a polite way of putting it.

This article makes him come across as someone you would actually get along with although other MMM converts who originally followed DR will know better: CALL February 14, , 6: Really read those terms and conditions. Every decent credit card automatically provides a lot of insurance. Bought a plane ticket? Free life insurance if a common carrier kills you! Ordered something that never showed up or came broken?

The card will cover it — insurance! KF October 1, , 7: Just found the blog a month ago and working my way from the original post so please forgive the delayed comment. I think I am going to call and try to negotiate a policy or just the AC and central heat. CALL March 23, , 4: The insurance companies know a lot about likely hood of repair, and costs of repair — at least in aggregate.

They make money by taking in more than they pay out, either because they use fine print to refuse to pay, or they know how often a given policy will demand payment, and budget for it. Michele March 25, , So, my husband and I just switched insurance companies for about the millionth time is the last few years you can almost always find a better price every six months to a year by being a new customer.

Seeing as we are planning to retire in a bit of a different way than most people young and living without a stable home base we thought it might not be a bad idea to talk to them about different financial options. Max Schneider June 12, , Alek June 12, , I might accept the odds for enough of an incentive, one that sets me up with FI for the remainder of my life.

It also depends how many chambers there are ;. Money is just money, whereas time spent living is priceless.

Good hypothetical question, because it plays fear against statistics and logic just like we all have to do when making insurance choices. As a year-old just getting started financially, I would surely accept that bet. With chambers or less, only a desperate person would probably play the game. With a six-shooter, Russian Roulette is always ridiculous unless you play it to avoid an even more certain death.

Insurance is a little different though — the consequences of not having it are only financial, not brain-splattering. On the other hand most people could simply get a new one — or in case the stash is too little they could get away with a used hand me down for the time being. JBS July 20, , Social Security is insurance as well. One must read policies closely as the insurance companies are fully aware of these benefits and sometimes will only pay benefits for costs Social Security does not cover.

You can see estimated benefits by using the quick calculator at the Social Security website. You can use these monthly numbers to either reduce or eliminate your requirements for life and disability insurance. My father paid for part of college using such benefits after my grandfather died. Rema August 7, , 8: My husband became eligible for employer-sponsored dental insurance for the 1st time 4 months ago.

When I compared our spending last year to our projected spending this year we all fairly fanatically get twice-yearly cleanings, the kids need sealants, and we also have orthodontic expenses and 2 minor dental surgeries that are needed , and after I made sure that our regular dentists would accept the insurance yes, yay!

My advice would be to carefully evaluate any insurance plan you are offered based on your own real-world numbers. Joe August 20, , 8: Carrying a term life policy to secure the goals I have for my family on both my wife and I is one of the best things I feel like we have done. The amount I spend a month in life insurance to fully guarantee that either of us would be financially independent without one another in the unlikely event of a premature death is far less than the pain and strain that one of us dying would have on the other.

I vehemetly disagree with your assertion that insurance in all forms is a tax on people bad at math. I have life insurance because our current budgetary and obligatory constraints mandate that we have it. I have it to lower my budgetary variance in unlikely event that something tragic happens.

Money Mustache August 20, , 9: I understand your point, Joe.. By far the most likely outcome of skipping insurance, is an instant and permanent boost in your wealth, reducing your need for any form of insurance and increasing your security every single month. The second point is on the role of hardship in our lives. Sure, a life insurance payment might protect a survivor from financial hardship — from having to work harder to earn their own money.

But is such hardship something to run from? Just like some of us have to earn our own money when reaching adulthood, and others get it handed to them as a trust fund. Does the self-made person lead a less fulfilling life because of the added hardship? JL March 24, , The principle behind insurance is the same as the one behind investing in index mutual funds instead of individual stocks.

By investing in a single stock you could have great gains or great losses or anything in between. By investing in an index mutual fund, you narrow the potential range of losses or gains because the gains and losses of individual stocks cancel out to some extent.

Not carrying insurance is like investing in a single stock. Insurance is, in essence, combining your individual stock i. So then, why do you recommend only minimal insurance, while recommending mutual funds? This seems like a contradiction. Money Mustache March 25, , 9: Insurance has a relatively high inefficiency the operating expenses and profit that the insurance companies keep for themselves. If you self-insure for things that have a relatively low cost cars, watches, higher deductible on your house, etc.

For people without many millions, health insurance is still a worthwhile investment for exactly the reasons you mentioned. Nathan February 21, , 6: As the comment above points out, you are risk pooling in a similar manner to a mutual fund. The profits then come from investing those premiums until the losses need to be paid. There are, of course, losses happening every day, but premiums are coming in every day as well.

That allows companies to have a decent amount of your money growing to keep premiums low. It is not for everyone in every situation, but you are painting with a very broad brush. Paul February 21, , Buying insurance is not analogous, under most circumstances, to investing.

Insurance shifts risk from one party to another. One buys insurance so that the risk of loss is shifted to someone else. If an insurance company is run efficiently, and risk is priced correctly, the return during the float period provides a better return compared to some alternative use of the capital. When you buy insurance you are simply betting that if a loss occurs during the policy period you are better served financially if someone else has to pay the loss.

Only you can make the decision to make that wager based on your own individual financial situation. However, as MMM points out, in a lot of situations, the risk of loss is quite low and self-insurance is the better long term wager. For instance, it might be perfectly rational for a young healthy person not to carry health insurance, despite our government making it unlawful to do so.

Mack February 21, , 3: I think a broad brush is perfectly permissible here. Any insurance not mandated by law is a statistically great way to separate yourself from hard-earned dollars. Those potential investment earnings are absolutely included in what that insurance really costs.

Any company that can afford television commercials is making a TON of money. Nathan February 22, , 7: Of course the premiums are based on what they believe they can make on investments, that was not my point. Sans investment income, auto insurance is not profitable. And while I can afford the loss of my vehicle, the payout since I have low premiums due to less driving is MORE than I could get on investing the difference in collision premium in compounding interest over the next 10 years.

Will you come out ahead with insurance? Will having insurance break the bank for a Mustachian or ruin their chance to retire early? It can, however, prevent a several hundred thousand dollar loss from ruining your financial independence. The minimal cost is worth it to many people. You may have failed to notice, however, that many of the top rated insurers do not.

Mack February 22, , 9: Again, drawing a line between money spent on premiums and potential investment income given to the insurer is fallacy. As you say, statistically you will not come out ahead, so why purchase the insurance? Anyone is welcome to insure all they like — I understand risk aversion. But the people who act as their own insurers in these cases will statistically end up wealthier.

Mister Shankly August 22, , 8: MMM, love this article and the discussion it has stimulated. I live in southern California where there is a higher, yet unpredictable likelihood of earthquakes. Consequently, I have purchased earthquake insurance as I statistically see a greater possibility of one happening now since we are long overdue. My current stash allows me to self insure up to the deductible amount but not the full replacement cost without depleting a significant amount of the stash.

I plan on building up a separate fund for the replacement cost of the home in a conservative mutual fund and then canceling the insurance once this is done. However, I do the math on the cost of insurance premiums over the next 40 years plus the deductible roughly adjusted for inflation and it comes out to be a better deal than self-insuring the entire rebuilding amount.

Am I delusional on this or is earthquake insurance still a better deal even with its ridiculous deductible? Money Mustache August 23, , Some comfort would be had by looking at the other big earthquakes and what percentage of the houses they fully destroyed. And in Southern California, where outdoor and indoor weather are identical, you can have a much smaller house and live more outside, which saves replacement cost as well.

Linda August 22, , 1: Mr Shankly — this is a late reply — I have personal experience of an earthquake here in Christchurch, New Zealand in The main damage to our house was that it sunk quite markedly into the ground due to liquifaction look it up!

We spent 5 years in communication with our insurers, and in the end had to use a lawyer to help us get a settlement. We were paid out in cash, and we are planning to rebuild at a time when it suits us.

Due to the nature of the land the house is built on we need to have foundations that will withstand another quake — this is much more expensive than the standard foundation it was originally built on. Christchurch was built on a swamp — lucky us! We are very grateful that we were fully insured, but some others in this city were not so lucky — they are left with houses that they cannot afford to repair as they were not insured — therefore they can only sell for a much reduced value.

Lee Hayward October 19, , 6: MMM, in the UK, the insurance companies are weird. We have a concept called 3rd party, 3rd party fire and theft and comprehensive insurance. I went to a price comparison website and tried looking for 3rd party car insurance.

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