Assuming insurance companies are profitable, insurance is a -EV bet for the consumer. The only reason to ever buy insurance is if the potential loss would be ruinously large. Gaps in unemployment simply don't generate that kind of huge loss the way a house fire, extended illness or million-dollar lawsuit would.
According to numbers earlier in the article, this pays out $536.50 * 24, about 6.7 weeks of pretax wages or 12.9% of your annual income.
If you put 10% of your income into an emergency fund, you can build it to the level of the payout from this insurance in a little over a year.
I was about to post but saw yours, so I'll reply with basically the same position.
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This will be a contrarian opinion, but personal insurance, in general is a ripoff.
You are taking a monthly bet (ie an insurance policy) against another party that an event will occur. The other party must administer the insurance and also make a profit, so the overall expected return is negative. The only smart reason to get these types of insurance is if you know you can make a claim in the short term (in other words you have insider information that you will be laid off soon).
The smarter thing to do is save and build up your own "rainy day" fund, where once you have funded it properly, you no longer have to pay into it.
That viewpoint ignores risk. You pay a small premium to shift a risk onto a different party. Whether it's a net benefit to you depends on both the premium and your valuation of the risk. Self-insuring is often not efficient.
It makes more sense if you think about a group of people. If there is a 1% chance of getting into a car accident that could cost $1 million in medical bills, it is economically inefficient to have 100 people keep $1 million each in liquid funds for such a contingency. Insurance creates value by allowing those funds to be allocated to more efficient purposes. Out of that value, the insurance company takes a cut to compensate it for its risk, and each individual gets some economic benefit for having shifted that risk to the insurance company.
Not saying that's the case here, but in general insurance creates value by eliminating inefficient contingency funds.
That makes sense for insurance where the "upside" (for lack of a better word) is very high - say, millions. Very few people could save millions in liquid assets, and for most of those who could, a million dollar event is still catastrophic enough that it makes sense to insure against.
But, as in this case, when the upside is capped at a fairly low number, which is entirely achievable in savings for most people who could afford the premium in the first place, savings are by a wide margin preferable.
Insurance only makes sense for events so unlikely to occur but so catastrophic if they do that any rainy day fund will not be sufficient - where an insurance company must, by nature of the costs, use the income from multiple people to cover the extremely rare instance of a claim.
As has been said, that is home and some health insurances are for. Most people will never live in a house that is destroyed that prompts a home insurance payout, and if you are someone who has their home destroyed, you will get back way more than you would put in in a lifetime because the average likelihood of it happening is so low. But not having the insurance would wipe out your wealth - you lose the house and writeoff the loss and have nothing left after the fact, and at best you spend an entire rainy day fund with a mortgage on the land to rebuild, and even then you are doing significantly more impactful damage than any rainy day fund could account for.
Same with catastrophic health insurance. Most people do not get debilitating diseases that don't kill you but will require lifelong care like Parkinson's or Dementia, but if you do get one of them you would be destroyed trying to pay the constant upkeep costs.
And strangely? enough, both are often best handled by the state. In some countries property owners are not insured privately but by the township to avoid problems where disasters wipe out multiple homes and some people do not have such a rainy day fund to afford to rebuild. And first world countries provide single payer healthcare to make up for the rare catastrophic conditions. If you want to have these costs borne out across the entire population to offset the individual costs when they happen to you, having them be society wide is often the least expensive option.
> Most people will never live in a house that is destroyed that prompts a home insurance payout, and if you are someone who has their home destroyed, you will get back way more than you would put in in a lifetime because the average likelihood of it happening is so low. But not having the insurance would wipe out your wealth - you lose the house and writeoff the loss and have nothing left after the fact, and at best you spend an entire rainy day fund with a mortgage on the land to rebuild, and even then you are doing significantly more impactful damage than any rainy day fund could account for.
Homeowners insurance has broadened considerably from simple catastrophic fire coverage. Most claims are relatively small, and can involve things like pet bites, stolen property, guests being injured, wind damage, etc.
You can insure for almost everything, but the simple things you insure for with homeowners insurance are more food for the insurance racket than anything, because all those incidental costs are, like the superposter said, better covered with rainy day funds because you will experience several in your lifetime. In that case, better to manage your own money than give it to someone else just to give back to you after taking a cut. You would never have day to day homeowners insurance and not get catastrophic coverage, but you would certainly (and probably should, unless all insurance providers available to you are racketeering on the small stuff for profit) consider the reverse.
Except, believe it or not, that is what people want and expect now from a homeowners policy.
Simple Fire (HO-0) or slightly broader coverage (HO-1) essentially don't exist anymore for individual homeowners. HO-2 (Where the company says "We insure you for the following (long list) of things).") is also somewhat unusual now. People don't buy them unless they are very price sensitive.
The most common type sold is HO-3, where the the carrier says "We insure basically everything, with the following exclusions (like earthquake and flood)."
(Actual policies are much more complex, but that's the basic idea.)
And in fact, you do get the best of both worlds, because any carrier allows you to choose a high deductible, like $5,000 or more. So you can self insure the small stuff, (which the carrier doesn't want to deal with anyway, because of the overhead of settling a loss) and feel comfortable if say a pipe breaks during the winter while you are on vacation and causes $20k of damage, you are not going to have to come up with that money somehow.
In general: insurance premiums aren't held in cash, they're invested. An insurance company
1) has access to better investments than you do, and
2) has the diversification and scale to be unfazed by transient market downturns
If you attempted to self-insure through a savings account or other low-risk investments, you'd need to pay higher "premiums" to account for the lack of returns.
If you attempted to self-insure through index funds, you'd be SOL if your "claim" fell in, say, 2008.
Large corporations whose finances are similar to insurance company finances can and do practice self-insurance, where the "big pool of money" is held by the company and an insurance company is just contracted to do the paperwork.
Thank you for writing this. To add another couple of points to yours:
- Insurance companies have a much much better handle on any given risk than you do
- Insurance companies have the scale to mean they are charging you only for the insurance you need; for insuring against costs that are variable and unpredictable, you are highly likely to over-save or under-save
- Insurance companies are prevented from price-gouging the difference (mostly, and in theory anyway) via a competitive market
But self-insuring for, say, $10000, allows you to deal with all risks less than $10000, not just those listed on a policy. In other words, self-insurance offers a pool across different risks, while commercial insurance pools the same risk across different people.
Also, commercial insurance creates bad incentives leading the insured to take more risks.
And there's asymmetry of information, where the insured knows the risk is greater than the insurance company knows. That means the insurance company needs to charge more to make up for the dishonest people.
> But self-insuring for, say, $10000, allows you to deal with all risks less than $10000, not just those listed on a policy.
Have you checked what e.g. a long-term medical disorder will cost you year on year? For cancer, $10,000 is a drop in the bucket, and will not even cover your medical bills if you have additional money to go live in India while curing it.
Costings for cancer for the NHS in the UK are £40,000 per cancer patient per year - floating significantly up and down depending on the type of cancer, etc etc - suggesting that it's not solely down to the US's private healthcare system.
You can find similar examples of nearly unbounded. unexpected costs for nearly every type of insurance. Personally, I put a lot of stock in not dying when I don't have to, and not having to spend the rest of my life in a squat because of something I could've insured against.
Unemployment insurance generally has a limit (even if the risk you are trying to insure against is not). Is that limit within the reasonable bounds of self insurance? Probably so for many people, but maybe not for others.
Insurance is good for the really huge stuff, like giant medical bills or a house fire. For little stuff, there are so many risks that if something happens, it's probably not listed on whatever policies that you do have.
But most people do self insure most risks that are as small as $10k. The most popular forms of insurance are for risks that are much larger and could not easily be self-insured.
For instance, with home insurance, the potential risk would be hundreds of thousands of dollars to replace a house that was entirely destroyed. With health insurance the potential risk is millions of dollars to treat something like cancer. With car insurance, the potential risk is hundreds of thousands of dollars of liability if you injure someone. You can't exactly expect someone to keep millions of dollar lying around to cover the possibility that they get cancer or their house burns down.
EV isn't everything; you also have to consider risk.
If you put too much of your bankroll on the line, making even repeated high +EV bets will eventually lead to ruin with probability approaching 1. There's another element at play here due to your finite bankroll; that element is usually called "risk."
Even though it's -EV, insurance can have a real benefit to the buyer through removing their exposure to otherwise ruinous risk.
That's not the same position. You're saying you should get insurance only when EV is positive. Parent is saying you should get insurance only when the insured outcomes would be ruinous, despite negative EV.
It's perfectly possible the bet is good for both sides, just as it is possible the bet is bad for both sides.
You are equating money with utility.
A 1 in 1000 bet that I'll get 1001 times my money back if I play with my life's savings is a terrible terrible bet for me to make even though it has a positive average return. It's also a bad bet for the bookies because they will lose on average.
The larger the cost the more likely it'll be worth taking out insurance.
There's another smart reason to take out insurance: taxes.
Eg my health insurance allows me to spend 300 bucks per year on new glasses. Why don't they just cancel this and make the health insurance 300 bucks cheaper? Because my employer buys the insurance with pre-tax money, I presume.
Not everyone in the covered group wears glasses, so the cost to the insurance company is less than $300 * N. Offering that is a nice benefit to the people who do need glasses.
In the meantime, Zenni is sending me good-looking properly made glasses for as little as $30/pair shipped. (Single vision, polycarb, titanium memory alloy frames. Arrived 4 days after I ordered them last week.) So much of the $300 is really going to line the pockets of Luxottica https://en.wikipedia.org/wiki/Luxottica
> Assuming insurance companies are profitable, insurance is a -EV bet for the consumer.
Not necessarily. Most insurers pretty much break even on the insurance, and make their money on investing the premiums. Auto in particular.
> The only reason to ever buy insurance is if the potential loss would be ruinously large. Gaps in unemployment simply don't generate that kind of huge loss the way a house fire, extended illness or million-dollar lawsuit would.
The loss doesn't have to be large in absolute terms. It's what the financial effects would be.
If you lose your job and have no savings, and your expenses exceed your state unemployment benefits, what do you think will happen? Lose you home maybe, take a job you are not suited for, and lose a huge amount of your lifetime earnings? It's not the absolute amount, it's the timing.
> According to numbers earlier in the article, this pays out $536.50 * 24, about 6.7 weeks of pretax wages or 12.9% of your annual income.
That's for their example, it depends on several criteria. Go to the site and play with the quoter!
> If you put 10% of your income into an emergency fund, you can build it to the level of the payout from this insurance in a little over a year.
Sure. And how many people do that today? Ummmm....
> Sure. And how many people do that today? Ummmm....
Can you explain why you think people will act like rational actors and buy insurance rather than act like rational actors and save that same money in mutual fund for emergencies?
I never understand arguments that boil down to "people' won't do X smart thing, they'll do Y smart thing because I support Y".
Sometimes people are forced to buy insurance. In the UK it is mandatory to have car insurance (else the police will literally take away and crush your car). My mortgage demands that I take out home insurance. And of course the state provides a kind of health and unemployment insurance which is mandatory for UK taxpayers.
In many (most?) jurisdictions you can post a bond for liability insurance. This is typically used by fleet managers etc, but is also available to HNW individuals.
Essentially you prove to an insurer (by posting a bond) that you can and will pay for any third party damage you cause, and in return they give you a practically free (or cheap, super-high-deductible) policy.
In the UK you can post a bond in lieu of having motor insurance, but it's something like £250,000 so rather out of the range of the ordinary car driver. (It's mainly used for commercial vehicle fleets as you say.)
Sure.
Because, at the rate you pay premiums, it would take somewhere between 8 and 20 years to save up the full coverage amount.
So either
a) You had to have started saving as early as possible, or
b) You have to save a much larger percentage of your income to catch up
Also, you might have rational purpose for not saving that much, so you can deploy your income in a more productive way.
Similarly, why would people get a car loan? Just save up and pay cash!!!!! Why waste money on interest payments (particularly when interest rates on loans were much higher.)
Some people could do that, some couldn't.
Now you have an option you didn't have before.
> Not necessarily. Most insurers pretty much break even on the insurance, and make their money on investing the premiums. Auto in particular.
That's surprising to me. I'm not familiar with the industry but logically I'd expect that if the company is breaking even that means that after operating costs they are paying out the rest the money in claims, so what's left to invest?
If they're not just breaking even, and are building large cash deposits, surely they would be needed quickly in the event of a sudden burst of claims, so their investment options would have to be a lot of more liquid.
Insurance is a business with a strong, predictable, and constant cash flow. People are paying premiums virtually every day of every month.
Payouts are more sporadic. So you're able to invest and make money on those premiums until needed for payouts.
But wait, you don't need to liquidate those investments to make your payout. Just don't invest your incoming cash flow, and pay out from that instead?
Bigger blip than usual and not enough cash flow to handle outgoing expenditures? Borrow against your illiquid assets at fantastic rates because of your predictable cash flow and solid asset portfolio. Gives you enough runway to either pay that debt down with a longer timeframe of cash flow or to liquidate those assets, if servicing that debt is worse than your asset return.
^^ General thought process of insurance. Geico is special in trying to maintain a breakeven on premiums vs payouts and source all profit from investment income. But doing so allows them to have competitive premiums in most risk pools, amass a large amount of market share, and provide Berkshire Hathaway with enormous liquid assets to invest. Many insurance companies bake a target profit margin into their actuarial models, and derive profit from a mix of premiums and investments. But the higher your premiums, the lower your market share, and the less capital/leverage your investment arm has available. So it's a balancing act based on business priorities.
>> Not necessarily. Most insurers pretty much break even on the insurance, and make their money on investing the premiums. Auto in particular.
>That's surprising to me. I'm not familiar with the industry but logically I'd expect that if the company is breaking even that means that after operating costs they are paying out the rest the money in claims, so what's left to invest?
Well, see http://www.insurancejournal.com/news/national/2015/08/10/377... for example. GEICO had a 99%+ combined ratio. (Combined means it includes other expenses, not just claims). Claim payments would be about 2/3 of that, then costs relating to handling claims about half the remainder, then the rest more typical overhead.
GEICO might also be able to get your car repaired cheaper than you could get it repaired if you self-insured as well. So yes, auto insurance is a good deal.
That's a "good" year for a very healthy insurance company. if there is a big hurricane and thousands of cars get destroyed, they might have a combined ratio of 120% plus that year. They do try to get 6%+ investment returns on the premiums...which is basically their profits.
>If they're not just breaking even, and are building large cash deposits, surely they would be needed quickly in the event of a sudden burst of claims, so their investment options would have to be a lot of more liquid.
That why the State makes sure they are adequately reserved against loss, and/or reinsured properly.
> this pays out $536.50 * 24, about 6.7 weeks of pretax wages or 12.9% of your annual income
um this is not true. I'm not vouching for this at all, I don't know this company and I can't coast for 5 months even on half the salary, but the article and their calculator says 50%.
> Assuming insurance companies are profitable, insurance is a -EV bet for the consumer.
This isn't sweepingly true. Consider:
* two actors who are trying to maximize the rate at which their wealth grows (expected utility)
* they have the same risk preferences
* one has more money than the other
then it follows that there may exist liabilities that the wealthier party is willing to buy from the poorer party. Insurance can unconditionally make all parties better off.
This is interesting, but it seems like it would appeal to a different demographic than HN. If you're younger and have highly desired skills in the market, the numbers just don't add up for this. However if you're older and concerned that a layoff might leave you out of work for multiple months, it could make sense.
Just playing with some numbers, if you work in "Information" in California and make $100k, you're looking at just over $100/month in payments according to their calculator. Say you get laid off two years from now, you would have paid $2,400 for the insurance. Payments don't kick in for two weeks, and only add $511/week over what normal unemployment would give you, so you would have to remain out of work for 7ish weeks to break even.
Meanwhile, you'll be paying for 24 weeks of coverage. And, so, 24 times $511 means, the maximum payout is $12,264 in taxable income, so maybe $8,000 in net cash.
So, at the 7 year mark (or maybe right now), just start questioning whether a simple, ordinary savings account would have been the better idea.
And, oh yeah, you don't get 24 weeks coverage until you've paid for coverage for 6 months. Otherwise, you just get back maybe $600 at best, and then The End. So you'd better have six months living expenses (or a solid job), AND $600 to pay into the policy, before even bothering, otherwise you're still screwed.
No, I just meant in general. Under the circumstances that you're fully employed for 7 or 8 years, and never need to make a claim, the maximum payout is always 24 weeks of unemployment supplements. Therefore, after 8 years, you might have paid more than you'll ever get back, even with incremental raises during that lengthier period of time.
I played with the numbers - for GA for $120,000 for "information". It was $50 a month. Not bad for an extra $785 a week. It would give me some breathing room not to take the first job offer and to be more picky. I might also be willing to stay at a job I like instead of leaving at the first whiff of distress.
For a large number of people, I totally agree. However for, say, a software developer in Silicon Valley I doubt it would take nearly that long unless they wanted it to. Note that for non-tech industries the monthly premium goes up significantly (+$40 for Leisure and Hospitality, for example), so the break even time gets longer.
Interestingly, the numbers seem to indicate that they expect people employed in Public Administration to have the easiest time finding a new job. The premium payments for that are less than half what they are for IT.
> Those who work in public administration would pay the least: $34.75.
That tells you everything you need to know about which jobs are relatively unrelated to merit.
> But many people can’t or don’t save enough to add up to the $12,875 or so that IncomeAssure may pay out to a $100,000 earner in New York
I don't care who you are: you need to have more than 1½ months' salary saved up. If you don't, your life is going to suck, badly, at some point.
Honestly, this seems like a product best used by folks in their first few years of work. If you've been working longer than that, you sure better have better savings.
In your first few years of work, you should be structuring your life so that major expenses like car & housing are minimized (you're not used to better, and you likely don't have a family to drive around & frolic in green space) & you can build up a cash cushion. It just seems like there is just no frontier for which this makes sense, other than "person who knows their job is going away at 6mo+1day".
Even then it's way better to save that money... After you save it once you have it forever, and can use it to borrow against.
eg. Save it for a down payment, when you buy your place with the insurance money you saved, get a credit card for the amount you used for downpayment, and then rebuild your savings using the credit card for your emergency fund.
That would be a great idea. Everyone is saying that you should have an emergency fund - and I agree - but I would rather not have the gap in income that would cause me to use my emergency fund.
They should really offer this through employers directly (like medical insurance). That can reduce the cost for insurance company as well as employers to offer severances if something goes bad. The key here is events like layoffs at many companies is rare enough that it might make sense to turn this in to severance coverage as opposed to unemployment coverage.
It's really odd that their examples are people in the 100K+ range, for whom the benefits are absolutely minimal after you account for the 6 month initial required period & the benefit cap. This is the demographic likely to have both savings to draw on, access to loans (eg a HELoC like the author), family support, ability to fight an eviction or foreclosure... Even in lower income brackets, it's so unlikely to be worthwhile compared to simply saving for the initial 6 months that I'm not surprised that "IncomeAssure has existed for five years, [and] there are about 1,000 active policyholders".
“It has been disappointing that we haven’t been able to find a cost-effective way to get the word out that this exists,” Mr. Sterling, SterlingRisk’s chief, said.
And here we are; they found their cost-effective marketing campaign for their crappy product. I hope the author got lunch paid for at least.
You should not be so cynical.
The insurance kicks in to supplement state benefits, for people who would otherwise max out on them (most states give at most around $400/w). So it only makes sense for people at middle or higher incomes.
The benefits are not "absolutely minimal". The premiums might be, say $800/y, and the benefits $10,000 if you are unemployed 24 weeks. Is it a lotto ticket? No. But for people afraid of job loss without that amount saved up, do you have a better suggestion?
Yes; take the premiums you would've paid for 6 months (effectively without coverage during that time regardless), save them, and reduce your living expenses to allow you to build up the cash cushion from there. If you're in that income bracket you really should be able to structure your expenses so you can save a decent amount, even in a high-cost city (there are minor exceptions to this, for instance child support obligations, but moving to a shittier apartment or not going out to eat for N months to build up savings is a valid alternative to incurring an extra recurring expense like this if you're living on the margin of insolvency anyway).
Unlike these benefits, depleting savings isn't taxable income, and again, in that bracket you might even be able to wrangle in tax-advantaged savings (eg saving in a Roth account that gives you extra option value, converting to a Roth at your now-lower income bracket & withdrawing the principal, withdrawing home equity, etc). Once you figure in the fact that it's paying out effectively 1/4 of your income, after taxes, for 6 months max, minus the state unemployment benefits, it really does look to be a minimal payoff.
> Yes; take the premiums you would've paid for 6 months (effectively without coverage during that time regardless), save them,
Well, that gets you about 5% of the way there.
> save them, and reduce your living expenses to allow you to build up the cash cushion from there. If you're in that income bracket you really should be able to structure your expenses so you can save a decent amount, even in a high-cost city (there are minor exceptions to this, for instance child support obligations, but moving to a shittier apartment or not going out to eat for N months to build up savings is a valid alternative to incurring an extra recurring expense like this if you're living on the margin of insolvency anyway).
Not so easy for many people.
> Unlike these benefits, depleting savings isn't taxable income, and again, in that bracket you might even be able to wrangle in tax-advantaged savings (eg saving in a Roth account that gives you extra option value, converting to a Roth at your now-lower income bracket & withdrawing the principal, withdrawing home equity, etc).
There can be tax benefits for this insurance product as well (See PLR-112680-11 for example). There can be penalties for withdrawing savings from tax-advantaged accounts.
> Once you figure in the fact that it's paying out effectively 1/4 of your income, after taxes, for 6 months max, minus the state unemployment benefits, it really does look to be a minimal payoff.
Your math is iffy. You double counted the State benefit.
It's
State benefits + Insured benefits = 50% of your former salary for up to 24 weeks.
In states (like Florida) where State benefits don't last 24 weeks, the insured benefit would be an initial supplemental benefit, and then a full 50% replacement.
So for say someone in NY previously making about $2,000/w, the state will pay ~$420/w and this insurance would pay around $580/w, for up to 24 weeks. Again, not a bonanza, but still very helpful for people who don't have (or don't have enough) significant savings they can easily access. If the benefits were much higher, the premiums would be much higher as well (TANSTAAFL). It's a trade-off to make an affordable product that is sufficiently useful.
There is a premium calculator on the site. For some people this policy is useful and necessary, for others, maybe not. You can lecture all you want about how people should have a significant emergency fund always available, but unfortunately, many people find that too difficult. So this is an alternative.
Why should we? The state seems to be handling that one pretty well.
Of course, now that it exists, I live in one of those states which will likely make it mandatory to purchase, because someone, somewhere in the legislature or one of their cronies, will make obscene amounts of money off of it.
Actually, the issue the insurance most directly addresses in that case is that CA unemployment benefits max out at $450/w. So people making more, or much more, than ~$50k year would have a very significant income shortfall, as a percentage of income.
"Let’s say you live in New York and earn $100,000 annually."
wtf ?
I didn't read the rest of the article after that statement.Too divorced from reality.
How about you start with "Let's say you work at a part-time temp agency doing manual labor for $8 an hour and your hours are restricted to 30 hours a week.You are socially trapped at the moment and see no way out"
Ok, you're right. Those people should not be considered. Only "normal people" who make $100,000 a year should be.....and the down votes to this post agree!
The real answer to this absurd nonsense is that all this can be done via algorithms to determine who is the biggest liability, which helps these "insurance companies" to choose who to accept and not to accept. This benefits the companies but defeats the purpose of insurance in the first place.
According to numbers earlier in the article, this pays out $536.50 * 24, about 6.7 weeks of pretax wages or 12.9% of your annual income.
If you put 10% of your income into an emergency fund, you can build it to the level of the payout from this insurance in a little over a year.