Why Is Insurance Worth It (Analytically)?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
pdavi21
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Re: Why Is Insurance Worth It (Analytically)?

Post by pdavi21 » Wed Dec 05, 2018 12:29 am

grog wrote:
Wed Dec 05, 2018 12:15 am
pdavi21 wrote:
Tue Dec 04, 2018 11:43 pm
What if all my relatives and myself forego insurance and save the premiums as additional contributions into our Asset Allocations with the understanding that we can loan money to each other? Is it functionally similar to insurance then?
And you're worried about the insurance company defaulting?
The insurance company has a more aggressive asset allocation, more fraudsters as policy holders, and less desire to see me succeed, albeit an infinitely larger pool, so possibly...

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raven15
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Re: Why Is Insurance Worth It (Analytically)?

Post by raven15 » Wed Dec 05, 2018 12:52 am

It is because the costs of economic disasters do not follow a normal distribution. They are like the distribution of economic wealth in a society, earthquakes, and financial crises, with a few tail cases one one side constituting a significant portion of the total damage. Most (of the time) people will never have a big need for insurance, but when they do, it will be so much swifter and greater than daily affairs could possibly lead them to believe that they will scarcely be able to comprehend it. In fact advancing along the income scale will also increase your need proportionately. "Fat insurance claims are relatively more common than fat millionaires" -Mandelbrot, probably out of context for this but still a good quote that seems like it should be in context and helps me win the argument by appealing to authority.

For that reason, I don't bother with deductibles less than a half year's income unless I have no choice. If I survive I can recover from those. However I do insure against liability, health, and other fat tail risks to the extent I can imagine them, and like Han Solo, I can imagine quite a bit. I pay $0.65/month for $1m renter's liability insurance, probably a joke and a total loss of $0.65 but hey ain't nobody touching the $1M I don't have :mrgreen:. Plus I think it was the same $0.65 for most of the way down the scale, so I just maxed it out since the price didn't increase.
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targetconfusion
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Re: Why Is Insurance Worth It (Analytically)?

Post by targetconfusion » Wed Dec 05, 2018 12:57 am

pdavi21 wrote:
Tue Dec 04, 2018 4:27 pm
Why do people have such a strong belief to promote a product with a statistically negative return (and negative risk) that isn't even 100% reliable on paying out in the event of a claim anyway?
Keeping with OP's numbers-based framing of this question, I'd argue insurance purchase could hold positive expected value for someone with what economists call a declining marginal utility function. In other words, our millionth dollar does less for us, we feel like, than our first one did.

Normally, when we talk about risk-adjusted return we're implicitly confining our thought experiment to a localized region of possibility where utility-per-dollar is quasi-constant. Here, Bogleheads tend to think like OP. Do we need, e.g., the car extended warranty? Perhaps not, if we're confident we could cover the repairs and would no more mourn those dollars' loss than we'd celebrate the foregone warranty premium.

For most of us, though, medical/automotive/liability events can be large enough to take us much lower on the utility-per-dollar curve. There, each lost dollar is much more painful than the one we'd have spent in insurance premiums prevent its loss. As a result, with the right utility curve shape, insurance purchase can be mathematically correct even while carrying negative expected value in dollars.

quantAndHold
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Re: Why Is Insurance Worth It (Analytically)?

Post by quantAndHold » Wed Dec 05, 2018 2:42 am

One of the hats I wore in the corporate world was risk management. There are essentially four ways to deal with a risk.
  • Accept the risk. You recognize that there is the risk of some event, and you choose to deal with the event when it happens. Usually this is the correct choice for a small risk. Going without an extended warranty for that new car would fit in this category. If the car breaks down, you can usually afford to fix it without too much heartache.
  • Avoid the risk. You recognize the risk, and avoid doing the risky thing. I’ve never taken up skydiving for exactly this reason.
  • Mitigate the risk. You take actions to reduce the risk. Eat healthy, wear seatbelts, etc. Note that this doesn’t completely remove the risk. It only reduces either the risk, or the impact if the risk occurs.
  • Transfer the risk. This is where insurance comes in. You transfer the risk to another party, in this case, an insurance company.
When you’re analyzing a risk, you have to evaluate not only the probability of the event occurring, but the impact if it does occur. Some of the things being talked about in this thread are low probability, but very high impact. As in catastrophic financial failure that will follow you for the rest of your and your family’s life. In the context we’re talking about, “self insure” isn’t a real thing, it’s a euphemism for accepting what could be catastrophic risk.

I personally would much rather pay a few hundred dollars per year for liability insurance that transfers the risk of me being wiped out by a lawsuit than risk being completely wiped out because of some freak moment of stupidity when I’m driving somewhere. And absolutely, I’ll pay a few thousand a year to keep from being wiped out if someone in my family gets cancer. The cost is high, but the cost reflects the fact that the probability of a large medical bill isn’t actually all that low.

pdavi21
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Re: Why Is Insurance Worth It (Analytically)?

Post by pdavi21 » Wed Dec 05, 2018 2:54 am

targetconfusion wrote:
Wed Dec 05, 2018 12:57 am
pdavi21 wrote:
Tue Dec 04, 2018 4:27 pm
Why do people have such a strong belief to promote a product with a statistically negative return (and negative risk) that isn't even 100% reliable on paying out in the event of a claim anyway?
Keeping with OP's numbers-based framing of this question, I'd argue insurance purchase could hold positive expected value for someone with what economists call a declining marginal utility function. In other words, our millionth dollar does less for us, we feel like, than our first one did.

Normally, when we talk about risk-adjusted return we're implicitly confining our thought experiment to a localized region of possibility where utility-per-dollar is quasi-constant. Here, Bogleheads tend to think like OP. Do we need, e.g., the car extended warranty? Perhaps not, if we're confident we could cover the repairs and would no more mourn those dollars' loss than we'd celebrate the foregone warranty premium.

For most of us, though, medical/automotive/liability events can be large enough to take us much lower on the utility-per-dollar curve. There, each lost dollar is much more painful than the one we'd have spent in insurance premiums prevent its loss. As a result, with the right utility curve shape, insurance purchase can be mathematically correct even while carrying negative expected value in dollars.
I like this explanation. Basically, the first 1k lost hurts a lot less than the last one, and insurance has a very high chance of losing the first one (or several), but a very low chance of losing the last ones.

It's still missing the bullet point that one's net worth can go negative and liabilities can go unpaid, but with the explanation that some have a moral obligation to pay debts, I can see why some are adamant about carrying insurance for events with the potential to severely reduce or wipeout net worth.

My main problem of understanding was that I don't value each 1k of my net worth (even the negative ones) differently, and I don't feel morally obligated to pay large debts...but I am probably in a minority in both aspects.

Nissanzx1
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Re: Why Is Insurance Worth It (Analytically)?

Post by Nissanzx1 » Wed Dec 05, 2018 3:07 am

I think insurance is one of the biggest scam jobs on the average American out there today. They are as effective (arguably more) as lenders at marketing their product. You can easily give 10-20-25% of your income away on these products (many of which you'll rarely if ever use).

Joe 6pk has no money because premiums eat it up, so he has to buy more insurance like extended warranties because there isn't any money left to fix his car when it breaks down, etc. At some point you have to say enough.

Health insurance is the real gotcha because you have to have it or bankruptcy could easily occur over something relatively minor. There needs to be more education in high schools on this topic. Life insurance alone can be so scamy, how's a lay person to navigate that type of product alone?

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Re: Why Is Insurance Worth It (Analytically)?

Post by jminv » Wed Dec 05, 2018 4:00 am

There are insurance like products that are terrible values which don't protect against low probability, high value events ie extended warranties. I think that's a separate issue most people can agree should not be bought.

As to standard health, life, auto, and home insurance:

You buy insurance to protect for low probability but ruinous events that you can't handle - or would prefer not to handle - by yourself.What happens if you experience multiple low probability but high value claims, ie, you end up being nowhere near the statistical average? Say you have assets of $5 million and claims of $6 million? You're now bankrupt. Then you die. Your family's now destitute. Your family's life will end up being far different from what they've experienced to date. Saying you're self insured really means that your plan for low probability but high value events is to be destitute. For slightly more probable events, you plan to surrender a signficiant portion of your net worth. Meanwhile, you could have purchased insurance for a small fraction of that cost.

I don't think you really understand all of the potential liability outcomes you are exposing yourself to by foregoing all insurance. You are too focused on the average outcome or small time (not far from the average) claims, not the type that bankrupt you and leave you and/or your family in penuary. Insurance has a cost and the purpose it to pool risk because not everyone's outcome will be average. You get insurance for the catastrophic tail risks that will ruin you or your survivors. Are you really 'self insured' from all potential perils, or just some of them, as you're too focused near the average and not at the extremes? Look at the worst outcomes and be realistic about how much they would cost. Now consider that multiple bad outcomes can occur simultaenously.

As an example, your decision to forego health insurance might be intelligent if you (and your family) are average. What if, instead, you're not average and require a major surgery, extended stay in the hospital, a transplant, cancer treatment, etc while simultaenously being unable to work? Those could wipe out all of your savings and more. It will also wipe you out even more than you would expect because you will not benefit from a negotiated rate. One of your examples was a $8000 bill. That's peanuts compared to what you could be hit with.

What if all those health issues happened, your ran down your savings ('self insurance') to fund it, and then in the end you still died? Since you also decided to forego employer provided life insurance, your family would be left destitute. No savings, no life insurance, and maybe even stuck with extra bills as your family went into debt to try to save your life? Those are possible outcomes that you are ignoring. Some people would then say that if it would cost too much, they just wouldn't go through with the treatment. I've seen that on here before. That's not a clever answer, since that means the cost of foregoing life insurance is one's actual life or one's quality of life. Your family might also not be too pleased with your decisions to forego all insurance, leave them with nothing as a result, and end up having to move to a crummy area, kids have a hard time, can't pursue their dreams to the extent they could otherwise have, etc etc.

Now what if the reason you were in the hospital in the first place is because you were in a very bad car accident, for which you were at fault? There is a person filing a claim against you who was permanently disabled as the result of your actions. How will that go? If you have lots of assets, you won't have any after just this one incident. You'll also be worrying about a lawsuit while in the hospital when you'd be worrying less if you were insured.

Sometimes homes are protected from creditors. What if, at the same time you are undergoing a very expensive treatment and not working, your house burns down? Now your family has nowhere to live and has to pay for an apartment/house while also having to pay to clear the property of the burnt remains. Now let's say that at the same time, someone was injured or died or - the worst outcome financially - permanently disabled trying to save your family from the burning house or was hit by falling debris, etc and files a claim against you?

On top of all this, you might owe taxes and/or penalties for converting your assets into dollars you can use to pay off your creditors. If you have illiquid assets (rental properties, house if it gets that bad, etc), you might also be subject to a liquidity discount, ie, you accept the first offer rather than waiting because you need the money now, not later.

If it were me, I would at least carry health insurance for you and your family, regardless of level of income. This is protecting your human capital that you can use to rebound. It's also not replaceable once extinguished.

fourkids
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Re: Why Is Insurance Worth It (Analytically)?

Post by fourkids » Wed Dec 05, 2018 4:44 am

because any catastrophic event without it can bankrupt you.

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corn18
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Re: Why Is Insurance Worth It (Analytically)?

Post by corn18 » Wed Dec 05, 2018 5:44 am

pdavi21 wrote:
Tue Dec 04, 2018 5:40 pm
Katietsu wrote:
Tue Dec 04, 2018 5:33 pm
Do you have a plan if you are diagnosed with cancer or are severely injured in an accident?
One option is to (EDIT: not receive care). I'm sorry if that sounds offensive to anyone. Another is to not pay the medical bills. Another is Bankruptcy.
This is incongruent with my moral values.

But, your hypothesis has made me reconsider my insurance needs. I think I will look at higher deductibles and maybe dropping comp/collision on my cars. Been paying those for decades and made one claim. Now I can afford a new car without help from insurance. And why do I have a 1% deductible on my home owner's insurance? I have a mortgage, so have to have it, but I will look at increasing the deductible.

Other than the above statement, a very helpful thread.

pdavi21
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Re: Why Is Insurance Worth It (Analytically)?

Post by pdavi21 » Wed Dec 05, 2018 6:49 am

corn18 wrote:
Wed Dec 05, 2018 5:44 am
pdavi21 wrote:
Tue Dec 04, 2018 5:40 pm
Katietsu wrote:
Tue Dec 04, 2018 5:33 pm
Do you have a plan if you are diagnosed with cancer or are severely injured in an accident?
One option is to (EDIT: not receive care). I'm sorry if that sounds offensive to anyone. Another is to not pay the medical bills. Another is Bankruptcy.
This is incongruent with my moral values.

But, your hypothesis has made me reconsider my insurance needs. I think I will look at higher deductibles and maybe dropping comp/collision on my cars. Been paying those for decades and made one claim. Now I can afford a new car without help from insurance. And why do I have a 1% deductible on my home owner's insurance? I have a mortgage, so have to have it, but I will look at increasing the deductible.

Other than the above statement, a very helpful thread.
If it's any consolation, I feel I understand your point of view better, and see why holding yourself accountable for your debts has value that's not monetary...a huge intangible benefit of insurance.

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Re: Why Is Insurance Worth It (Analytically)?

Post by Grt2bOutdoors » Wed Dec 05, 2018 7:15 am

Daryl wrote:
Tue Dec 04, 2018 8:12 pm
Phineas J. Whoopee wrote:
Tue Dec 04, 2018 5:41 pm
I feel it has a second, perhaps more important aspect. If, by my actions or inactions, I injure somebody, or even just damage their property, the responsible thing, the right thing, is for me to compensate them, although money can never completely compensate for an injury or a death.

Therefore, I view insurance as a way to protect myself from adverse events, and as a way to protect my fellow human beings from me.
+1

A fair bit of the insurance that I purchase is for the benefit for third parties. I have a very small car; however, 3,000 lbs @ 65 mph can still do a lot of damage depending what I hit! Should I survive the accident, I hope that I can be an advocate for any victims and their families, working with them to help them recover / replace what was lost (to the extent possible).

I work for an insurance company. We often have an underwriting loss (premiums don't cover claims!)
Then your underwriters are mispricing the business to obtain market share.
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Re: Why Is Insurance Worth It (Analytically)?

Post by Call_Me_Op » Wed Dec 05, 2018 7:33 am

pdavi21 wrote:
Tue Dec 04, 2018 4:27 pm

I don't see what I am missing.
You are missing the whole point of insurance - to protect against catastrophic loss.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

Dandy
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Re: Why Is Insurance Worth It (Analytically)?

Post by Dandy » Wed Dec 05, 2018 8:09 am

For most insurance, maybe all if you are lucky it is a losing deal. You pay premiums for home insurance and never have a fire, major theft etc. Pay for health insurance and all you get is an occasional cold. Never have more than a fender bender but paid all that auto insurance.

I think most people try to pay a modest price to protect their families/assets from a major setback. I buckle my seat belt, try to buy cars rated high for safety others feel they don't need to buckle and are ok driving older, less save vehicles even though they could afford to own safer ones.

If you have an car accident that is your fault and severely injure a person or two it could wipe out all your assets or enough to make you weep. If you get a life threatening illness it could drain your assets and limit your ability to earn a living.

Usually, young, healthy, talented people that haven't experienced much in the way of risk gone bad undervalue protection. that is why they are the most likely not to see the need for health insurance -- until they get really sick and can't get it or lose a job and can't get one because of illness.

Not having basic insurance coverage is rolling the dice and hoping you don't get snake eyes.

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corn18
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Re: Why Is Insurance Worth It (Analytically)?

Post by corn18 » Wed Dec 05, 2018 8:13 am

quantAndHold wrote:
Wed Dec 05, 2018 2:42 am
One of the hats I wore in the corporate world was risk management. There are essentially four ways to deal with a risk.
  • Accept the risk. You recognize that there is the risk of some event, and you choose to deal with the event when it happens. Usually this is the correct choice for a small risk. Going without an extended warranty for that new car would fit in this category. If the car breaks down, you can usually afford to fix it without too much heartache.
  • Avoid the risk. You recognize the risk, and avoid doing the risky thing. I’ve never taken up skydiving for exactly this reason.
  • Mitigate the risk. You take actions to reduce the risk. Eat healthy, wear seatbelts, etc. Note that this doesn’t completely remove the risk. It only reduces either the risk, or the impact if the risk occurs.
  • Transfer the risk. This is where insurance comes in. You transfer the risk to another party, in this case, an insurance company.
When you’re analyzing a risk, you have to evaluate not only the probability of the event occurring, but the impact if it does occur. Some of the things being talked about in this thread are low probability, but very high impact. As in catastrophic financial failure that will follow you for the rest of your and your family’s life. In the context we’re talking about, “self insure” isn’t a real thing, it’s a euphemism for accepting what could be catastrophic risk.

I personally would much rather pay a few hundred dollars per year for liability insurance that transfers the risk of me being wiped out by a lawsuit than risk being completely wiped out because of some freak moment of stupidity when I’m driving somewhere. And absolutely, I’ll pay a few thousand a year to keep from being wiped out if someone in my family gets cancer. The cost is high, but the cost reflects the fact that the probability of a large medical bill isn’t actually all that low.
This is a neat post. We did something very similar in the world of aviation. We didn't have the option to transfer the risk, but the rest of the thought process was the same.

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Re: Why Is Insurance Worth It (Analytically)?

Post by knowledge » Wed Dec 05, 2018 11:10 am

Because the real world doesn't work analytically. Eating, can be considered negative EV, from a purely analytical mindset. Protections against catastrophic risks is worth it when you add in emotions.

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Re: Why Is Insurance Worth It (Analytically)?

Post by JackoC » Wed Dec 05, 2018 11:31 am

pdavi21 wrote:
Tue Dec 04, 2018 4:27 pm
It seems that many people are very adamant about insurance being 100% non negotiable, you must have it in the following categories:
1. Health Insurance
2. Property Insurance
3. Supplemental Car Insurance (above legal minimum)
4. Umbrella Liability
The health insurance market in the US (considering both ACA/private and employer provided, not to mention outright govt provided like Medicare/Medicaid) functions too much differently than the other types of insurance to be compared directly in general.
-many people get health insurance below cost via employers (employees in general are paying in reduced wages but you don't generally get any more money if you individually turn down the employer's contribution to insurance cost)
-many people now get Premium Tax Credits to pay for ACA policies
-medical insurance pricing is much more tightly regulated than life, auto, home, etc. insurance such that many people (older and less healthy) *do* get positive expected value from health insurance, sometimes even if they are paying full price for the insurance.
-there are pricing arrangements between health ins co and health providers that have no broad analog in other insurance markets. As mentioned above you can be charged 2>10 times as much for a health service if not insured, even if you didn't hit the insurance deductible. You don't get a bill 10 times higher from the home repair contractor because you don't have homeowners insurance.

Taking those together, you can't make a blanket statement that insurance has negative expected value when it comes to health insurance, compared to the actual avoided cost of not buying it. As a result of the positive expected value for some, it's even more negative in expected value for others (paying the full freight, younger, healthy). But some of the positive expected value for some people is made up by taxes/govt borrowing so is exogenous to individual insurance purchase analysis.

For the other types of insurance it tends to be more straightforward: can you afford the financial hit of an uninsured loss? Although for liability it's also somewhat more complicated, because the potential financial damage increases the more you have. Anyway when it comes to car comprehensive/collision it's pretty simple: you shouldn't have it if you can take the total loss of your car in financial stride, and assuming there's no lender requiring it (a drawback to the anyway disappearing case of '0% financing').

And even with health insurance for some people the question comes down to the same. We'll pay around $18.5k for health insurance for a couple in 2019, $3k/$6k deductible $6.5k/$13k out of pocket limit, HSA compatible. The HSA feature saves $2k+ in income tax. There's a further state income tax deduction for all in medical costs including the insurance, though typically we wouldn't reach the federal deduction level. There's some $100's to a few $k savings in years of no major illness due to the 'list price'/'insured price' thing. But $10k+ at least is to get that $13k out of pocket limit, when $100'ks to few $mil medical treatments are not that far fetched a possibility. If there was a much cheaper plan with say a $100k out of pocket limit we'd buy it, but there isn't. Medical insurance is also a much less complete market in terms of product offerings that some other kinds of insurance.

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Re: Why Is Insurance Worth It (Analytically)?

Post by VictoriaF » Wed Dec 05, 2018 11:44 am

pdavi21 wrote:
Tue Dec 04, 2018 4:27 pm
I consider myself to have enough assets (and not too much-for liability) to be "self-insured".
I have the legal minimum for car insurance and nothing else. I have even turned down employer sponsored health because I am currently statistically likely to pay in more than I claim out (including tax breaks). I would consider adding liability insurance as my after-tax holdings increase.

EDIT: I have kids and wife. Forgot to add kids have free gov't health insurance. Inconsequential, as I'd gladly drop it (or add it) as income changes.
I don't understand:
- You have sufficient assets to pay high costs in absence of insurance.
and
- Your children receive free government insurance?

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Re: Why Is Insurance Worth It (Analytically)?

Post by TSR » Wed Dec 05, 2018 11:46 am

Regarding the possibility of bankruptcy and other forms of debt avoidance, I have sat in post-judgment discovery depositions before (as a lawyer, not as a debtor, thankfully), and it's not a pretty sight: "Does your wife own any jewelry? How many televisions are there in your home? Have you given anything of value to any family members in the last five years? What did you give your children for Christmas last year? Do you have any mistresses or paramours to whom you have given gifts in the last five years?" Most people describe the experience as "proctological," for lack of a more polite word. Lawsuits and bankruptcy are messy, chaotic, and very frequently embarrassing. These effects are often far worse than the financial effect of going back to merely zero. This indignity can span years, during which some people close themselves up in their homes, dodging subpoenas and creditors, hoping for a few days of peace. I've seen a lot in my years of legal practice, so I won't judge you for saying that you feel no strong moral calling to pay the "big debts" --- I get what you mean. But please don't think that anyone will make that process easy on you. Insurance can help avoid losing years of your life and your sanity to this process. You might (or might not) reasonably place some value on that.

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Re: Why Is Insurance Worth It (Analytically)?

Post by grog » Wed Dec 05, 2018 11:49 am

megabad wrote:
Wed Dec 05, 2018 10:08 am
Yes, at least more so. You have created a larger pool. You have essentially described the basic process of creating a mutual insurance company (ie. Liberty/Amica, etc).
Of course insurance companies also take care of things like writing up forms and contracts, processing and adjudicating claims, etc. Managing a pool of common assets with your relatives and managing the disputes that may arise sounds like a nightmare. Like probate court but worse.

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Re: Why Is Insurance Worth It (Analytically)?

Post by Shallowpockets » Wed Dec 05, 2018 11:53 am

"Analytically" should also include common sense. If you can afford to self insure, you can easily pay for insurance.

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Re: Why Is Insurance Worth It (Analytically)?

Post by dknightd » Wed Dec 05, 2018 12:18 pm

pdavi21 wrote:
Tue Dec 04, 2018 4:27 pm

EDIT: I have kids and wife. Forgot to add kids have free gov't health insurance. Inconsequential, as I'd gladly drop it (or add it) as income changes.
With a wife and kids you might want to add life insurance.

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Re: Why Is Insurance Worth It (Analytically)?

Post by PVW » Wed Dec 05, 2018 12:39 pm

Grt2bOutdoors wrote:
Wed Dec 05, 2018 7:15 am
Daryl wrote:
Tue Dec 04, 2018 8:12 pm
Phineas J. Whoopee wrote:
Tue Dec 04, 2018 5:41 pm
I feel it has a second, perhaps more important aspect. If, by my actions or inactions, I injure somebody, or even just damage their property, the responsible thing, the right thing, is for me to compensate them, although money can never completely compensate for an injury or a death.

Therefore, I view insurance as a way to protect myself from adverse events, and as a way to protect my fellow human beings from me.
+1

A fair bit of the insurance that I purchase is for the benefit for third parties. I have a very small car; however, 3,000 lbs @ 65 mph can still do a lot of damage depending what I hit! Should I survive the accident, I hope that I can be an advocate for any victims and their families, working with them to help them recover / replace what was lost (to the extent possible).

I work for an insurance company. We often have an underwriting loss (premiums don't cover claims!)
Then your underwriters are mispricing the business to obtain market share.
Or underestimating the risk. Merced Property & Casualty is a recent example that went under because of the fire damage in Paradise, CA.

megabad
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Re: Why Is Insurance Worth It (Analytically)?

Post by megabad » Wed Dec 05, 2018 12:57 pm

pdavi21 wrote:
Wed Dec 05, 2018 12:30 pm
Shackleton wrote:
Wed Dec 05, 2018 8:18 am
I'm sorry, but if your plan for the unexpected is to let a doctor and medical facility treat you, then blithely say you plan to not pay the medical bills, I consider that theft. Unethical and despicable behavior.

After reading a few more of your posts, I can only hope you are trolling. That would be the generous assumption.
It's not theft. It's not illegal. It's unethical. No I am not trolling. I am honest about being unethical. If you have a 100k liability policy, get sued for 10 billion, and don't pay, is that theft too? Is declaring Bankruptcy theft too?
Just like to point out that I agree that in the case originally presented (emergency medical care) that this is not theft nor is it illegal. Most hospitals are legally required to stabilize emergency patients. It could, however, be very expensive to do as you suggest. If you choose not to pay someone your legally owed debts, they can pursue legal action against you. So I would not call you a thief, but I would probably call you broke (potentially forever broke if you get sued for 10 billion).

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Re: Why Is Insurance Worth It (Analytically)?

Post by Grt2bOutdoors » Wed Dec 05, 2018 1:21 pm

PVW wrote:
Wed Dec 05, 2018 12:39 pm
Grt2bOutdoors wrote:
Wed Dec 05, 2018 7:15 am
Daryl wrote:
Tue Dec 04, 2018 8:12 pm
Phineas J. Whoopee wrote:
Tue Dec 04, 2018 5:41 pm
I feel it has a second, perhaps more important aspect. If, by my actions or inactions, I injure somebody, or even just damage their property, the responsible thing, the right thing, is for me to compensate them, although money can never completely compensate for an injury or a death.

Therefore, I view insurance as a way to protect myself from adverse events, and as a way to protect my fellow human beings from me.
+1

A fair bit of the insurance that I purchase is for the benefit for third parties. I have a very small car; however, 3,000 lbs @ 65 mph can still do a lot of damage depending what I hit! Should I survive the accident, I hope that I can be an advocate for any victims and their families, working with them to help them recover / replace what was lost (to the extent possible).

I work for an insurance company. We often have an underwriting loss (premiums don't cover claims!)
Then your underwriters are mispricing the business to obtain market share.
Or underestimating the risk. Merced Property & Casualty is a recent example that went under because of the fire damage in Paradise, CA.
True - mispricing occurs when companies attempt to garner more marketshare and/or fail to account for the true cost of replacement.
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mnnice
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Re: Why Is Insurance Worth It (Analytically)?

Post by mnnice » Wed Dec 05, 2018 1:24 pm

Call_Me_Op wrote:
Wed Dec 05, 2018 7:33 am
pdavi21 wrote:
Tue Dec 04, 2018 4:27 pm

I don't see what I am missing.
You are missing the whole point of insurance - to protect against catastrophic loss.
+ a number I cannot count to :wink:

If you can’t honestly answer the question of what would I do if I came home from work and my house was gone? What would I do if I was diagnosed with a rare and expensive to treat illness? You are not self-insuring your self-deluding.

Also with the new tax law it will be harder to claim a casualty loss essentially eliminating the small backstop on loss of personal property built into the tax code.

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Re: Why Is Insurance Worth It (Analytically)?

Post by Whocares1000 » Wed Dec 05, 2018 1:49 pm

And as for morals of not paying your bills, realize that the legal system operates in legality, not morality. There are people who do not owe a bill because of identity theft but are forced to pay anyways because they could not make a legal argument to not pay. There are others who owe money but get out of legally being forced to pay because they have a legal argument which allows them to not pay.

That said, if you do not pay a medical bill OR if you injure someone in an accident that is your fault, you will eventually be taken to court and if you cannot come up with evidence or a legal argument on why you are not liable for the bill/injuries, the judge (or jury) will issue a judgement against you. Inability to pay is not a legal argument BTW. Now you can hire a lawyer but that will be money out of your pocket and does not guarantee that the judge (or jury) will not rule against you. If a judgement against you is issued, the creditor then can legally start to take your assets, starting with the easiest to find (local bank accounts and wages). At this point, there will not be any warning. If the creditor cannot find any assets, they can then force you into a debtors exam (and you legally cannot refuse to do that under penalty of jail) where you can be forced to divulge any assets you may have or any that you may have tried to hid. Another poster explained what can be asked in a debtors exam. You really lose control of your financial life at this point.

Now you mention Bankruptcy. I just love how people throw out declaring Bankruptcy as if it is a simple easy thing to do and then you can get on with your life. It is neither simple, easy, and you certainly cannot move on with your life. It is a painful experience that I rank right up there with divorce. I know this from the personal experience of having gone through the process many many years ago.

First off, you will have to do credit counseling before you can even apply. If they see that you have the assets to pay a bill, they will not recommend bankruptcy anyways and my not give you the forms you need to declare bankruptcy. If you manage to get past that, you will need a lawyer which is not cheap and will cost you up front. You might think you can do it without an attorney BUT that will really complicate the process. If you do declare bankruptcy, you might have 2 choices:

1) Chapter 7 - This is liquidation Bankruptcy and is as it says. You have to liquidate all assets which are not protected by law (which is not much) and those funds are used to pay your creditors. Once you are liquidated, then the debts might be discharged (see later). If you have more assets than debts, you cannot protect your assets using this chapter. You also cannot use Chapter 7 if your family does not meet the income tests

2) Chapter 13 - You can use this if you are not eligible for Chapter 7 or if you want to try to protect assets. In this case, you use up any extra income that is above poverty level (and trust me, they use the IRS numbers to figure disposable income which means you are barely subsisting). This can last for up to 5 years and then anything left over might be discharged.

To declare bankruptcy, you have to fill out a voluminous amount of forms which get into every aspect of your personal financial life. You do not want to try to hide anything either. The trustees get paid based on what they can collect for the creditors so they are experts in finding assets and if you lie on your forms, you can end up in prison. Ask Denny Hecker about that one. He may be on parole by now. Once the forms are filed, you will have to meet with the trustees and any creditors who show up where it will be like a debtors exam.

If you get through all that, as I said before, your debts might be discharged. If you have any debts that were secured by collateral (home and car), you either have to reaffirm those or give up the asset. There are also certain debts that by law you cannot discharge such as certain taxes and student loans. There is another group of non-dischargable debts where the debt was incurred due to negligence. Now if you are trying to avoid paying hospital bills, this will not apply to you. However, if the bill is a liability bill from an accident that you were found negligent, you an sure that the creditor and/or their attorney will fight to have the Bankruptcy Court declare the debt non-dischargable. Now you will have to pay your attorney even more try to get the debt discharged (how much I cannot say but I would assume a couple of thousand more). If you fail, then you went through the whole process above and still owe the debt/judgement so you are back at square one.

If you manage to get through the process, then you cannot declare bankruptcy again for 8 years. That means if something else happens in the meantime, you will have to pay them back.

In the end, I would rather have insurance than go through all that above.

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Re: Why Is Insurance Worth It (Analytically)?

Post by Whocares1000 » Wed Dec 05, 2018 1:59 pm

pdavi21 wrote:
Wed Dec 05, 2018 1:49 pm
Whocares1000 wrote:
Wed Dec 05, 2018 12:56 pm
pdavi21 wrote:
Wed Dec 05, 2018 12:30 pm
Shackleton wrote:
Wed Dec 05, 2018 8:18 am
pdavi21 wrote:
Tue Dec 04, 2018 5:40 pm
I'm sorry, but if your plan for the unexpected is to let a doctor and medical facility treat you, then blithely say you plan to not pay the medical bills, I consider that theft. Unethical and despicable behavior.

After reading a few more of your posts, I can only hope you are trolling. That would be the generous assumption.
It's not theft. It's not illegal. It's unethical. No I am not trolling. I am honest about being unethical. If you have a 100k liability policy, get sued for 10 billion, and don't pay, is that theft too? Is declaring Bankruptcy theft too?
This would depend on the situation. If you are not work $10B and have no chance to make that amount of income, then no it would not be theft. If you are worth $20B and tried this, even if not theft, it would be morally wrong.
So if you are worth 200k. 100k in home equity and 100k in retirement plans, is it horribly unethical to not caryy health insurance and not pay a 50k ER visit. What about 500k. Paying how much is ethical? Charging how much is ethical? While I agree the more you pay (are insured to pay), the more ethical your behavior, it is irresponsible and incorrect to arbitrarily draw a line in the sand and say one legal action is ethical and one is not. That is "trolling" on your part big time.
If you can afford to pay the bill then ethically and morally, you should pay it. So yes, it would be ethically wrong to not pay the $50k bill. However, if you do not have the assets, then you can try to be moral all you want, you cannot pay the bill. It the creditor will not work with you at that point, then you might be bankrupt. However, it would be stupid for you to go bankrupt on the $50k bull because you might protect your retirement plan but in 48 of the 50 states, you would be required to sell your home and use that equity to pay the debt. That is the risk you take by not having insurance. Even if we remove morality and ethics from this, legally you are responsible for the bill. Even with the larger bill, you would still have to pay whatever assets (or your disposable income for 5 years) toward the debt before it can be discharged in Bankruptcy

In the end, not having insurance puts your assets at risk. If you want to take the risk, that is fine but if you have assets to pay the bill that you did not insure against, don't expect much sympathy from others when you have to pay the bill. I would rather pay the small, known risk (the insurance premium) to transfer the large unknown risk (the peril) to the insurance company in situations where it makes sense (Health, Liability, Life, and Disability).

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Re: Why Is Insurance Worth It (Analytically)?

Post by montanagirl » Wed Dec 05, 2018 2:00 pm

To me it's buying access to a huge pot of money that I don't have. Or renting it, whatever.

Especially true with Medigap insurance, but I guess it applies to all insurance.

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Re: Why Is Insurance Worth It (Analytically)?

Post by pdavi21 » Wed Dec 05, 2018 2:15 pm

A lot of debtors will just write it off. I know many people who have not paid bills and never had any consequences. I know people who have not paid court judgements as well...although they have had negative consequences. I also have a family member who has declared bankruptcy and foreclosure. They are currently very wealthy (without illegally hiding assets). They made it back.

There is a third reason besides incremental value of wealth varying and ethics I'm starting to see. It's fear of the drastic financial situations you discussed. Probably promoted by the Insurance companies.

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Re: Why Is Insurance Worth It (Analytically)?

Post by VictoriaF » Wed Dec 05, 2018 2:22 pm

pdavi21 wrote:
Wed Dec 05, 2018 2:15 pm
There is a third reason besides incremental value of wealth varying and ethics I'm starting to see. It's fear of the drastic financial situations you discussed. Probably promoted by the Insurance companies.
You have to admire insurance companies for concocting nonexistent scenarios such as:
- Multi-hundred-thousand dollar medical bills
- Automobile accident liabilities
- Real property destroyed in fire or flood.

Victoria
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Re: Why Is Insurance Worth It (Analytically)?

Post by pdavi21 » Wed Dec 05, 2018 2:32 pm

VictoriaF wrote:
Wed Dec 05, 2018 2:22 pm
pdavi21 wrote:
Wed Dec 05, 2018 2:15 pm
There is a third reason besides incremental value of wealth varying and ethics I'm starting to see. It's fear of the drastic financial situations you discussed. Probably promoted by the Insurance companies.
You have to admire insurance companies for concocting nonexistent scenarios such as:
- Multi-hundred-thousand dollar medical bills
- Automobile accident liabilities
- Real property destroyed in fire or flood.

Victoria
You forgot a massive drop in the stock market which has happened (several times to some) to 100% of people.
Death will also happen 100% of people.

Why don't they sell insurance for those...oh wait, THEY DO!

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Re: Why Is Insurance Worth It (Analytically)?

Post by pdavi21 » Wed Dec 05, 2018 2:35 pm

VictoriaF wrote:
Wed Dec 05, 2018 2:22 pm
pdavi21 wrote:
Wed Dec 05, 2018 2:15 pm
There is a third reason besides incremental value of wealth varying and ethics I'm starting to see. It's fear of the drastic financial situations you discussed. Probably promoted by the Insurance companies.
You have to admire insurance companies for concocting nonexistent scenarios such as:
- Multi-hundred-thousand dollar medical bills
- Automobile accident liabilities
- Real property destroyed in fire or flood.

Victoria
Property insurance doesn't cover floods, and automobile liability coverage is typically 20-100k depending on state.

quantAndHold
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Re: Why Is Insurance Worth It (Analytically)?

Post by quantAndHold » Wed Dec 05, 2018 2:39 pm

pdavi21 wrote:
Wed Dec 05, 2018 2:35 pm
VictoriaF wrote:
Wed Dec 05, 2018 2:22 pm
pdavi21 wrote:
Wed Dec 05, 2018 2:15 pm
There is a third reason besides incremental value of wealth varying and ethics I'm starting to see. It's fear of the drastic financial situations you discussed. Probably promoted by the Insurance companies.
You have to admire insurance companies for concocting nonexistent scenarios such as:
- Multi-hundred-thousand dollar medical bills
- Automobile accident liabilities
- Real property destroyed in fire or flood.

Victoria
Property insurance doesn't cover floods, and automobile liability coverage is typically 20-100k depending on state.
Which is why you get flood insurance if you live in an area that could flood, and proper amounts of liability insurance. :oops:

This thread has jumped the shark. Peace out.

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Re: Why Is Insurance Worth It (Analytically)?

Post by jalbert » Wed Dec 05, 2018 3:08 pm

It seems that many people are very adamant about insurance being 100% non negotiable, you must have it in the following categories:
1. Health Insurance
2. Property Insurance
3. Supplemental Car Insurance (above legal minimum)
4. Umbrella Liability

What seems even stranger to me is that many Bogleheads are adamant about holding insurance policies as well.
What logical reason does a Boglehead have for holding an insurance policy?
Can a policy actually increase your risk-adjusted returns (Mathematically)?
The logic is based on reducing tail risk and reducing variance of future net worth, not maximizing risk-adjusted return of the cost.
Risk is not a guarantor of return.

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Re: Why Is Insurance Worth It (Analytically)?

Post by Whocares1000 » Wed Dec 05, 2018 3:12 pm

pdavi21 wrote:
Wed Dec 05, 2018 2:35 pm
VictoriaF wrote:
Wed Dec 05, 2018 2:22 pm
pdavi21 wrote:
Wed Dec 05, 2018 2:15 pm
There is a third reason besides incremental value of wealth varying and ethics I'm starting to see. It's fear of the drastic financial situations you discussed. Probably promoted by the Insurance companies.
You have to admire insurance companies for concocting nonexistent scenarios such as:
- Multi-hundred-thousand dollar medical bills
- Automobile accident liabilities
- Real property destroyed in fire or flood.

Victoria
Property insurance doesn't cover floods, and automobile liability coverage is typically 20-100k depending on state.
Auto liability minimum required by law is $20K to $100K (and in NH, you don't have to use insurance at all). You can purchase higher liability amounts however above the state minimums. In fact, between auto policies and umbrella policies, you can insure liability into the multi million dollar range.

Whocares1000
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Re: Why Is Insurance Worth It (Analytically)?

Post by Whocares1000 » Wed Dec 05, 2018 3:20 pm

pdavi21 wrote:
Wed Dec 05, 2018 2:15 pm
A lot of debtors will just write it off. I know many people who have not paid bills and never had any consequences. I know people who have not paid court judgements as well...although they have had negative consequences. I also have a family member who has declared bankruptcy and foreclosure. They are currently very wealthy (without illegally hiding assets). They made it back.

There is a third reason besides incremental value of wealth varying and ethics I'm starting to see. It's fear of the drastic financial situations you discussed. Probably promoted by the Insurance companies.
Right, I would rather someone else take the risk of a catastrophe that could wipe me out financially, mentally, and/or emotionally. Having been through the bankruptcy process once, I don't want to do it again, ever.

And yes, some creditors to not pursue bills while others do. People do make it from bankruptcy to become very wealthy (and even President of the USA). Some people do not pay on court judgements either. That does not mean that I do not want to gamble on dealing with all that when it is avoidable.

If you want to deal with those situations, that is your business. However, you asked to analyze why insurance was worth it and to me, that is why.

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Re: Why Is Insurance Worth It (Analytically)?

Post by JackoC » Wed Dec 05, 2018 3:29 pm

If the discussion focuses on ethics/morality it will get shut down before long.

I would say though that medical pricing in the US is so complicated and opaque that it's much more difficult to assess what's a fair price or fair payment than some other cases. And it's all contingent on *if* among widely ranging hypothetical illnesses and prices charged. It's related to why, steering back away from pointless moral/ethical debate, it's more difficult to assess the value of health insurance to begin with than other types. You can pay on your own...except the prices you initially get charged are likely to be a multiple of what they'd be under the provider/HI company network agreement. You might negotiate down from those list prices...but hard to say how much. You might get inferior treatment...though hard to say how much (in some cases that would be prevented by law or by the medical provider's policies independent of the law, but not in every case).

Relatively speaking it's far more straightforward to predict what it would cost you to repair or rebuild your home in case of uninsured damage or destruction. And altogether straight forward to assess the cost of replacing your car if it's destroyed or stolen uninsured. And there's a limited amount at stake in those cases also. OP has something of a point comparing medical cost to a liability judgement. That's very hard to assess also. Just because somebody won a judgement against you doesn't mean they were actually right or the amount is fair. It's just what you are obligated to pay with certain exceptions (of what assets they can claim against). It's pointless IMO to debate whether you really 'deserve' to pay that much when it's all hypothetical.

But reducing that uncertainty would tend to weigh in the direction of getting medical or liability insurance.

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Re: Why Is Insurance Worth It (Analytically)?

Post by goodenyou » Wed Dec 05, 2018 3:36 pm

Phineas J. Whoopee wrote:
Tue Dec 04, 2018 5:41 pm
Your question comes up every now and then.

Many here discuss insurance as a method of decreasing their own risks. That's true, it does.

I feel it has a second, perhaps more important aspect. If, by my actions or inactions, I injure somebody, or even just damage their property, the responsible thing, the right thing, is for me to compensate them, although money can never completely compensate for an injury or a death.

Therefore, I view insurance as a way to protect myself from adverse events, and as a way to protect my fellow human beings from me.

I realize mine is a minority view.

PJW

In some countries it's and eye for an eye. I think having insurance to compensate the injured is a better system.
Last edited by goodenyou on Wed Dec 05, 2018 3:44 pm, edited 1 time in total.
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Re: Why Is Insurance Worth It (Analytically)?

Post by pdavi21 » Wed Dec 05, 2018 3:38 pm

While I've argued a bit, I feel the original question posed has been answered. Mathematically, insurance is usually not worth it. However, one could calculate different values for incremental wealth that make insurance mathmatically worth it for them. Insurance also has the value of allowing someone to prevent acting in a way they feel is unethical. Insurance is also valuable becuase it can reduced fear, stress, and anxiety (most of the time).

While the benefits can be intangible...each benefit can be valued financially for each person, and if the benefit value exceeds the cost of the coverage, a perfectly logical investor will pay for the exact amount of insurance coverage that results in the highest value to them specifically.

Even a perfectly logical investor could disagree with another perfectly logical investor on the value of the coverage because both (in a perfectly logical way) have assigned different values to those benefits.

When you add in that none of us are perfectly logical investors (though we may strive to be). It is easy to see why insurance discussion can lead to disagreement and misunderstanding.

Thanks all, for the responses. I feel like the next time I increase or decrease insurance coverage, I will consider the decision more logically and correctly for my needs based on the discussion in this thread.

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Re: Why Is Insurance Worth It (Analytically)?

Post by LadyGeek » Wed Dec 05, 2018 4:08 pm

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