Who is Better at Insurance: You or the Insurance Company?
Some people believe that insurance companies are evil empires designed to remove you from your money, but did you know that they won’t insure a single thing for more than it is worth? If you have a home that is worth $250,000, you cannot insure it for $1,000,000. The insurance companies know that they would be giving people a financial incentive to have their house catch fire, and they won’t do this. Category to category, it’s the same: companies will not “over-insure” you. The one exception we’ve found to this is that some insurance companies will insure you for more than your Human Life Value (HLV). I believe the reason for this is that when you are sued – you are typically sued for someone else’s HLV, not your own. So if you kill someone in a car accident, the family will be awarded the lost person’s HLV for their loss, not yours.
Insurance companies are generally very good at what they do. They specialize in being as efficient as possible with the money they steward to protect the much larger pool of assets that they insure. The example below will show that you cannot be nearly as efficient in your own life – with your own assets – as these companies. After centuries of experience, this is what they’ve excelled at doing. If you have some wisdom to do better, you should go into this business to compete with them.
Some people believe that if they cut corners on their insurance or savings plans that they will have more to invest and thus get rich quicker. But this line of thinking goes against the very nature of God. He blesses diligence and patience:
“He who works his land will have abundant food, but the one who chases fantasies will have his fill of poverty. A faithful man will be richly blessed, but one eager to get rich will not go unpunished.” (Proverbs 28:19-20)
Some people believe, and we’ve even seen it taught, that once you have enough assets to protect against a loss, you should drop that coverage. But again, if we look at this logic closely, it’s foolish. If your home is worth $250,000 and you have amassed $250,000 of assets over and above your regular savings, should you drop your coverage? If you did this, you would put yourself into a state of fear. What if your house burns down? To settle this fear, you would need to keep your $250,000 of assets safe and liquid, probably leaving it in your savings account. You would have to because if you invested this money, you might either lose some of the value, or at least lose liquidity – thus placing you in an impossible situation if your house did burn down. Therefore, you would be stuck earning the very small rate available in your savings account.
Let’s say your $250,000 is earning 2% interest. This $5,000 would be your profit after the first year of this scheme.
If on the other hand, you paid $1,500 for homeowner’s insurance, you would be free to invest your $250,000. If you achieved an 8% rate of return (ROR) on this money, you would have $20,000 of earnings in this year. Of course, you would have to subtract out the $1,500 you paid for the insurance, but you are still $13,500 ahead of the no insurance plan.
Ex.1 (No Insurance & Cash) Ex.2 (Insure & Invest)
$250,000@ 2% = $5,000 $250,000@ 8%= $20,000 Minus Ins. Prem. $1,500
Total Income = $5,000 Total Income = $18,500
This is basic economics. The accounting minded person looks at the direct cost. The economist looks at all the costs and benefits that ripple out from any given decision. Although the decision to maintain insurance has a cost to you, it frees you to be more productive in other areas of your life because your mind is never hindered by thoughts of what could happen if things go wrong. You have protected against such things in every way possible and thus you are free to be bold in your other actions.
As you layer each financial decision upon another in such a way, you will truly have the ability to follow the Lord in any way that He leads without being disturbed over your own welfare. The Lord always will take care of you, but one way to embolden your faith to follow Him financially even when it seems He is asking much of you, is to grow your Fruitful Tree with deep roots first in this manner we are describing, and then upon a strong trunk, so that your new fruit is secured year after year.
Make sense? What do you think?
Photo credit: jaxin