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Insurance:  Private vs. Social 

presented by Stephen A. Moses, President 

Center for Long-Term Care Financing

 to The Objectivist Center's 2002 Summer Seminar 

Los Angeles, California:  July 5, 2002

(I want to acknowledge the importance to my preparation for this speech of a paper published by the organization Citizens for a Sound Economy.  The paper is titled "Making Sense of Insurance:  a Consumer Guide to Regulatory Reform."  You can find the paper at http://www.cse.org/informed/pdf_files/insure.pdf.)

I.          WHAT IS INSURANCE AND WHY DO WE NEED IT?

    Life is full of uncertainties.  Isn't it wonderful?  Could we be happy without surprises?  Without at least some unpredictability in our lives?  Without serendipity? 

    What if everything were "predictable"?  That word's synonyms answer the question:  humdrum, boring, conventional, banal.

    Nevertheless, there is a limit to the charm of uncertainty.  No one likes the surprise of an auto accident or the unpredictability of being struck by lightning.

    As human beings, we fear and despise chaos and confusion.  We appreciate order.  We celebrate reason, logic, and science because they help us bring order and manageability to our experience of reality.

   But no matter how rational and focused we are, we remain vulnerable to unexpected events that can throw our lives into turmoil.  A slippery sidewalk, an unanticipated illness, a drunken driver, a freak storm, who knows? . . . an errant meteorite.  And pow! . . . "the best laid plans of mice and men," as they say.

    We need a tool to help us mitigate the consequences of uncertainty in day-to-day life just as reason and logic help us to bring order and predictability to cognition.  Fortunately, we have such a tool:  it's called insurance.

   Now, insurance cannot repair the damage or heal the sick, but it can alleviate the economic consequences of unpredictable negative events like accidents, natural calamities and illness or death.

    So, what is insurance and how does it perform such a valuable service for us?

    "Insurance" is a financial tool with which we can replace the small risk of a catastrophic financial loss with the certainty of an affordable payment.  Insurance companies help people achieve this objective by spreading and pricing risk. 

    For example, let's say there is one chance in a million that I will be hit by a truck resulting in a $1 million loss.  That event--unlikely as it might be--would devastate me financially as an individual.  I would gladly pay $2 to make the monetary part of this risk disappear.  So would millions of other people.  Therefore, an insurance company can profitably sell such protection, called an insurance "policy," to me and to 999,999 others for a reasonable fee, called a "premium." 

    The insurer promises to "indemnify" me and all other policy holders if and when the insured event occurs by paying us a specified "claim" amount that restores us to our financial position before the loss occurred.  If the company sells one million such policies for $2 each and incurs the anticipated single "loss" of $1 million, it makes a hefty 100 percent profit and performs a valuable public service in the process.  The insureds can relax and enjoy life in the knowledge that if the worst happens, at least they are protected financially.  That is called "spreading risk." 

   But what if five of the insurance company's million beneficiaries are hit by trucks instead of just one?  Then the company would have collected only $2 million in premiums, but would owe $5 million in claims, a $3 million loss.  To know what to charge for insurance protection, companies must "assess the risk."  They must measure, record and analyze extensive, "actuarial" data on the incidence and frequency of the insurable event.  In other words, they must answer the question:  What is the probability that the insurable event will occur to individuals among the insured group and what will be the cost if it does?  That is called "pricing the risk."

    Thus, insurance is possible because mathematicians, statisticians, and actuaries can calculate the likelihood or probability that a catastrophe may occur within a given period of time.  Of course, they cannot say with certainty whether you or I may be the victims, but they can say with a high degree of confidence what level of risk we face as a group of individuals.  Thus, insurance makes it possible for us to "transfer risk" from ourselves as individuals to a third party, the insurance company, in a voluntary commercial relationship that benefits both parties.  The insureds gain peace of mind.  The insurer gains profitability. 

    So far so good, but now insurance starts to become a little complicated.  What if I want to buy insurance because I know I am very likely to need it?  This is called "adverse selection" and insurance companies must discourage it.  Or, what would happen if I bring more risk into the risk pool than you do?  Would it be fair to charge me the same premium as you have to pay?  In fact, would you even purchase an insurance product that guaranteed to give a higher return on average to other, higher-risk insureds than to yourself?  Probably not. 

    For example, say that I am a heavy smoker and I am therefore more vulnerable than a non-smoker to emphysema and lung cancer.  If I'm already sick, selling me health insurance would be like providing fire insurance to someone whose house is already in flames, blatant adverse selection.  But even if I'm not yet ill, if I were to pay the same premium for health insurance as a non-smoker, I would be getting more protection for my money, dollar for dollar, than the non-smoker.  That's true, because, as a smoker, I would be much more likely than the non-smoker to file an insurance claim for medical treatments related to my unhealthful behavior.  Put another way, the non-smoker would be subsidizing my health insurance premium by paying a higher premium himself than the level of risk he brings to the risk pool warrants. 

    Thus, insurance companies must not only assess, but also "classify" risks.  They do this through "underwriting."  That is, they ask questions, examine evidence, or do tests to determine the level of risk that each individual or class of individuals brings into the "risk pool," so they will know how much premium to charge each insured or group of insureds.  Thus, your insurance company may examine your driving history or review your medical records before underwriting you for auto or life insurance, for example.  If insurance companies failed to classify risks in this way, the whole system would fall apart very quickly. 

    In the example of the smoker and the non-smoker, the non-smoker--unless he's an inveterate altruist--would get smart sooner or later, drop any health insurance which punished him financially but rewarded smokers, and look for a policy that treats everyone fairly.  This would have a devastating effect on the "reserve fund" that insurers must maintain and invest.  Insurers need reserves to pay "claims" when they occur, to cover administrative costs and, of course, to return an acceptable profit to their investors or shareholders.  When non-smokers, i.e. "good risks" drop their policies and stop paying premiums while smokers, i.e. "bad risks," keep their underpriced policies, something has to give.  Either the insurer must raise premiums for the remaining smokers covered by the policy to ensure sufficient reserves to pay their higher anticipated claims or the reserve fund will become "insolvent," i.e., insufficiently capitalized to pay expected claims.  Either way, nobody wins.

    Another beneficial effect when insurers classify and price risk accurately is to encourage positive behaviors and discourage negative behaviors.  The price of insurance should alert us to the long-term cost of our decisions and behavior.  When insurance is very expensive, it sends the message that our conduct or condition may be excessively risky.  For example, people who have poor driving records usually pay higher auto insurance premiums, at least sooner or later.  Their careless or drunken driving may have little or no cost for a long time.  Once a traffic ticket is issued, however, it becomes part of the public record.  An auto insurance company can review the public record and raise the violator's insurance rates to reflect the added risk he brings to the risk pool.  On the margin, this added cost associated with carelessness or illegality tends to discourage irresponsible behavior and reward responsible behavior.  Conversely, over time, if one's driving record improves, one's insurance premiums will decline once again to reflect better performance, thus rewarding improved behavior.  Insurance achieves this positive social effect justly and without coercion by objectively pricing the risky behavior of individuals.

    Even when our behavior is not dangerous to others or otherwise irresponsible, however, accurately priced insurance premiums still give us valuable personal information and promote fairness and equity.  For example, why should a sedate philosophy professor pay the same life insurance premium as a skydiver or motorcycle dare-devil?  There is nothing wrong with the adventurous life, but insurance helps make sure that those who choose it take their fair share of the fiscal, as well as the physical, risk.  Properly conceived, therefore, private insurance is in many ways a marvelous early warning system for us both as individuals and as a society. 

II.        WHY AND HOW IS INSURANCE CORRUPTED

        Well, if insurance is that wonderful, why do so many people have such a bad opinion of it?  What's the "rap" against private insurance?  Maybe the following comments will sound familiar:

    Private insurance is heartless.  It blames the victim.  It punishes people for conditions that are no fault of their own.  For example:

    Health insurance callously excludes anyone with a serious pre-existing medical condition. 

    Home owners insurance may be prohibitively expensive for otherwise fine citizens who just happen to live in crime-infested neighborhoods.

    AIDS patients can't get life insurance and Alzheimer's patients can't get long-term care insurance, even though these are the people who need the protection most.

    Are these legitimate criticisms?  No, of course not, private insurance is a business, not a charity or a welfare program.  To achieve the private and social benefits I described earlier, insurance must remain a business enterprise, motivated by self-interest, regulated by competition, and priced by objective evaluation of risks and returns.

    On the other hand, nothing about private insurance precludes the existence of private charity or government welfare programs intended to help the uninsurable.  Either can co-exist with private insurance.  I should observe, however, that welfare programs that have easy or elastic means tests can and do "crowd out" private insurance coverage if the welfare benefits are readily available to the uninsured after an insurable event occurs.  For example, why buy flood insurance if the government indemnifies you with grants and loans every time the Mississippi escapes its banks?  My main point, however, is that private insurance and charity or welfare should remain different subjects altogether.  Charity or welfare should deal with an entirely separate clientele according to strict and objective eligibility criteria.  They should help those who cannot help themselves by means of private insurance.

    Serious problems begin to arise when politicians, bureaucrats or "advocates" of one kind or another try to achieve welfare goals through private insurance.  When they try to "improve" on private insurance with mandates, controls, or regulations, all sorts of unforeseen and unintended consequences follow. 

    Here is how it starts.  In the interest of protecting consumers, someone insists that insurance should be required to cover a benefit that was previously not covered or only covered as an optional benefit for an added premium.

    Or, in the interest of assisting the uninsurable, someone demands that everyone should be able to buy insurance and that premiums should not exceed "reasonable" levels.

    Or, in the interest of helping people with proclivities toward illness, someone wants to prohibit the collection and review of medical or genetic information by insurance companies.

    Demands for politically induced insurance "reforms" like these start small and quietly.  They build over time with growing support from the often small minority of individuals who stand to benefit most from the changes.  Gradually, interest groups mobilize to represent the benefit seekers and to promote their claims.  A relatively small number of people and organizations have a relatively intense interest in promoting laws that benefit them.

    Opposition remains quiescent for two main reasons.  "There but for the grace of God go I," think some.  "Maybe this new law will actually help ME someday."  Or, others think, "I should not begrudge the less fortunate their getting something from private insurance companies.  After all, those companies have deep pockets and, even if they pass the cost on to me, how much more will helping the needy cost me anyway?"  Most people do not understand the trade-offs between a free or a controlled insurance market.  Others don't care.  Thus, whether motivated by self-interest or self-sacrifice, ignorance or apathy, most people go along to get along when it comes to supporting or opposing government intervention in the insurance industry.

    In a moment, we will consider the practical consequences of political tinkering with the insurance marketplace.  First, however, consider what all efforts to humanize or soften private insurance have in common.  They attempt to reduce the cost of insurance protection for high-risk individuals by increasing the cost to low-risk individuals.  Therefore, their purpose and effect is to spread wealth, not risk, very much in accordance with the Marxist maxim "From each according to his ability to each according to his need."  Unfortunately, ability is a scarce commodity in society and should be encouraged, whereas need will always expand indefinitely to consume the product of ability unless it is appropriately constrained.  There is an old saying that "you get more of what you subsidize and less of what you tax."  By subsidizing high-risk behaviors and conditions while taxing low-risk behaviors and conditions, socially motivated interventions to improve insurance have exactly the opposite effect of the benign results we attributed earlier to private insurance.  They reward irresponsible behavior and punish responsible behavior, thus creating a downward spiral of perverse incentives. 

    Now, how does that happen in practice and why?

III.       REGULATION, WELFARIZATION AND SOCIAL INSURANCE

      Government efforts to improve private insurance fall into two major categories:  prior approval and restrictions on risk classification.

    Prior approval was the first tactic used by state regulators.  It involves the regulatory clearance of insurance rates, policy forms or both.  Historically, insurance regulation has been a state-level function with relatively little federal involvement.  Insurance companies that wish to market a policy nationally must file for approval in all 50 states.  Each state has different requirements.  Some are stricter than others.  The most rigid states require the use of state-mandated rates or forms. 

    Auto insurance in New Jersey is an interesting case study in what happens when a state imposes artificial limits on insurance premiums and refuses to approve policies that do not comply.  Legislators in New Jersey imposed a system of "rate caps" several years ago.  They required insurers to charge no more than 135 percent of the statewide average for auto insurance premiums in any given sector of the state.  This had the effect of forcing insurers to undercharge motorists in high-risk urban areas for their coverage.  Conversely, it also forced motorists in low-risk areas of the state to pay disproportionately high premiums to make up the difference.

    New Jersey drivers are required by law to carry automobile insurance.  They cannot drop their coverage so they have no choice but to pay the inflated government-mandated premiums.  People in the cities, such as Newark and Atlantic City, like this system.  Their premiums would sky-rocket 51 percent if the controls were lifted.  People outside the cities deplore the system.  Nine out of ten New Jersey drivers would experience an average seven-percent reduction in their premiums in the absence of these rate caps.  In effect, the mandatory restrictions on auto insurance premiums constitute a hidden tax on low-risk drivers for the purpose of making coverage more affordable for high-risk drivers. 

    The obvious solution to bring the market back into equilibrium is to eliminate these rate caps.  That is hard to do, however, because advocates for the "disadvantaged" who live in high-risk urban areas insist that the caps favor consumers and that dropping the caps would only benefit the insurance industry by allowing it to charge higher premiums.  All too often, the media accept and promulgate this argument.  Thus, for reasons discussed above--self-interest for some, altruism for others, and ignorance or apathy for most--such insurance "reforms" tend to remain in place and other similar measures constantly gain support and adoption.  I call this process the "welfarization" of insurance, that is, the transformation of private insurance by government intervention from a market-based product into a tool to improve the condition of some people in relation to and at the expense of others.

    In addition to prior approval requirements and rate caps, regulators sometimes also impose restrictions on risk classification.  As explained earlier, insurers must classify kinds and levels of risk carefully to avoid "adverse selection" and to price policies accurately in accordance with the levels of risk that various policyholders bring into the risk pool.  In the absence of risk classification, smokers and non-smokers, good and bad drivers, dare-devils and college professors would pay identical premiums. 

    An example of insurance "reform" that eliminates or severely restricts risk classification is "community rating."  This well-intentioned, but perversely counter-productive intervention requires that insurance premiums reflect the average risk in a geographic region.  Under community rating, the level of insurance premium for everyone is determined by adding up the cost of paying benefits for everyone--rich and poor, sick and well, responsible and irresponsible--and dividing by the total number of individuals in the covered population.  What could be more fair than that?  It sounds at first like an equitable solution to, or at least a significant amelioration of, the endemic problems of unaffordability and the uninsured. 

    If we look beyond the good intentions and follow the logical consequences of community rating, however, we'll quickly see hopeful expectations disappear and tragic consequences develop.  Low-risk insureds hastily realize they have to pay more for insurance than was the case before community rating.  Their inclination is to drop such over-priced coverage.  High-risk insureds, on the other hand, have every reason to keep their under-priced coverage.  In fact, high-risk people currently uninsured are more likely than otherwise to purchase this highly attractive new insurance.  Gradually, the risk pool becomes heavily weighted with people who are highly likely to file claims.  In other words, the insurance company begins to lose money.  At this point, the insurer must either raise premiums to remain solvent or stop offering the coverage altogether.  If the insurer raises premiums, the coverage becomes less attractive to low-risk insureds, further exacerbating the problem.  Sooner or later, the only viable option for the insurance carrier is drop the policy and leave the state.  The money they can collect from premiums will not cover the anticipated expenditures for claims, much less return administrative costs and an acceptable profit.

    Viewed logically and analytically, this outcome seems obvious.  But that has not stopped real-world regulators from imposing community rating and unleashing the inevitable consequences.  New York legislators mandated community rating for health insurance in 1993.  Premiums doubled or tripled for young people and decreased for the old.  Many of the young dropped their policies and more old people bought them.  When claims increased and reserves declined, nine insurance companies dropped out of the market.  In the end, fewer people in New York had health insurance than before the imposition of community rating.  The same tactic in Kentucky led to 45 of 47 insurance companies withdrawing from the state's individual health insurance market.  According to the Citizens for a Sound Economy's paper on insurance regulation, this outcome led Kentucky's Insurance Commissioner to conclude that the "health insurance market is unstable and cannot sustain itself over the long term."  In other words, market failure caused by government intervention in the insurance marketplace became one more reason in the politician's mind to impose even more government intervention.  That is a chain reaction which leads deeper and deeper into political manipulation and further dysfunction.

    Clearly, efforts to manipulate private insurance to achieve welfare objectives have failed miserably.  Unfortunately, efforts to use welfare principles to achieve insurance objectives are just as unsatisfactory.  "Social insurance" is the idea that we should all pay in the same premium, usually in the form of a payroll deduction, and that we should all be entitled to the same benefits regardless of the level of risk we bring to the global risk pool.  America's Social Security and Medicare programs are social insurance systems.  Both of these programs are enormously popular.  Many people consider them to be unqualifiedly successful.  Similar and more extensive social insurance programs in Europe have even greater popular support despite the enormous tax burden they impose on wage-earning participants.

   Of course, doubts and criticism also abound.  Social insurance, critics say, is a Ponzi scheme.  It seemed to work early on when a large number of people were paying into the system while only a small number of people were drawing benefits out.  But in the future, as Europe, the United States, and the rest of the world confront a new demographics of aging, analysts say a small "echo" generation of workers will be unable to support full social insurance benefits for a retiring baby-boom generation of gigantic size and with unreasonably large expectations.  That is a legitimate criticism, but it is not the one I want to focus on today.

    I have argued in this talk that both spreading risk and pricing risk are critical economic functions.  If we do not price risk fairly and objectively, we end up with a system that rewards high-risk, including irresponsible, behaviors and which punishes low-risk, including responsible, behaviors.  One of the main differences between social insurance and private insurance is that, although both spread risk, only private insurance prices risk in a meaningful way.  Private insurers have a legal and fiduciary responsibility to their insureds.  They must price insurance coverage at a level sufficient to accumulate reserves that will be adequate to pay carefully anticipated claims rates.  Private policyholders possess legal contracts, enforceable in a court of law, that assure them recourse in case of dispute, malfeasance or insolvency by the insurance company. 

    Social insurance, on the other hand, offers none of these protections.  Social Security and Medicare, for example, are notorious for growing exponentially beyond their original cost projections.  Socially insured people have no legal recourse or protection against increases in premiums (payroll taxes), decreases in benefits (program cutbacks), or the imposition of means tests (welfarization).  Indeed, a majority of Americans now believe that these bulwarks of traditional social insurance will not be there in full when they need them in the future. 

    In America’s mixed economy, social insurance is usually considered a safety net and not a first line of financial defense.  When savings, investment, pensions and private insurance prove inadequate, we look to social insurance to pick up the slack.  Unfortunately, however, the very existence of compulsory social insurance debilitates the effectiveness of private financing vehicles such as investment and insurance.  People save or purchase insurance if they perceive they are vulnerable to a large financial loss.  What matters is their perception, not the magnitude or reality of the risk.  Real risk, if unperceived, will not impel people to insure.  Real or not, perceived risk, will influence people to insure. 

    Social insurance creates a perception of low risk thereby reducing the demand for private insurance protection.  For example, when President Lyndon Johnson signed the Act that created Medicare in 1965, he stated confidently that “No longer will older Americans be denied the healing miracle of modern medicine.  No longer will illness crush and destroy the savings they have so carefully put away over a lifetime so that they might enjoy dignity in their later years.  No longer will young families see their own incomes, and their own hopes, eaten away simply because they are carrying out their deep moral obligations.”  By building up false hopes like these, Medicare effectively scuttled any hope for a private health insurance market to cover seniors.  Today, the elderly spend a larger proportion of their income for health care than they did before Medicare began; Medicare has little hope of continuing to provide full benefits without major premium increases as the baby boom generation retires; and a private insurance system to take Medicare's place has no realistic chance to develop.

    Clearly, the real or perceived availability of social insurance and welfare benefits mask the urgency of risk and inhibit the demand for private insurance.  For the same reason, some lines of private insurance sell better than others.  For example, most people buy private health, car, fire, and life insurance.  If they did not have these kinds of coverage and the insurable event occurred, they would usually experience a major loss with little direct assistance from the government.  On the other hand, very few people purchase hurricane, flood, or earthquake insurance.  When a major natural disaster occurs, local and national politicians jump to the opportunity of promising financial assistance of all kinds to the victims.  Nothing lets a politician appear compassionate and generous without fear of criticism like a major disaster.  As I explained in a previous Summer Seminar lecture, the marketability of private long-term care insurance is also undercut by the easy availability of nursing home care financed by Medicaid.  Bottom line, people only buy insurance against perceived risk.  If the risk doesn't exist or if they don't perceive it, they forgo insurance protection.  One can only wonder at the possible effect on private life insurance sales of the government's liberal indemnification of families victimized by the World Trade Center attacks. 

    Thus, government impedes the effectiveness of private insurance in two main ways:  first, as we explained earlier, by trying to improve on private insurance with arbitrary controls and second, by mitigating the risks against which private insurance should protect us, through the imposition of mandatory social insurance, public welfare, and emergency grants and loans. 

IV.       PRIVATE INSURANCE:  THE PRACTICAL TOOL

    It falls to us who work in insurance-related fields to explain the benefits of a free insurance market and to advocate against adverse government interference in the business.  We welcome the support of interested laymen in this effort.  So I encourage you to watch out for and oppose bad policy proposals.  Welcome opportunities to repeal damaging laws and regulations that are already in place. 

    I want to close today, however, by talking about the practical relationship between private insurance and social insurance.  I will explain why private insurance is such a good practical tool for people to prepare for life's surprises.  Conversely, I'll comment on how social insurance fails in that respect.  I will end by making a few suggestions about how individuals  like yourselves can maximize the benefits you stand to receive from private insurance while minimizing the potential damage from social insurance.  Finally, you've probably all got complaints or criticism with regard to private insurance.  My guess is that most of those problems will have been caused directly or indirectly by government interference in the insurance marketplace, but we can explore your experiences with and opinions of insurance in the question and answer period if you like. 

    Properly conceived, private insurance is a powerful practical tool.  Here again, I am talking about private insurance unencumbered by outside, government-imposed controls and regulations.

    *  Insurance is individualistic.  Individuals buy insurance to protect their own self-interest. 

    *  Insurance is objective.  Premiums and benefits are based on risks and probabilities as determined by hard actuarial data. 

    *  Insurance is voluntary.  You can buy it or not as suits your purposes.  Even when government requires insurance, as for automobile owners, you at least have the option not to drive. 

    *  Insurance is rational.  It helps us prepare for the unexpected based on facts and analysis, so we don't have to depend on wishful thinking or blind hope. 

    *  Insurance is equitable.  You know you get what you pay for because your premium is based on underwriting which measures and prices the level of risk you bring to the risk pool.

    *  Insurance depends on the trader principle.  You won't buy it and the insurance carrier will not sell it unless you each perceive that the transaction will leave you both better off than you were before.

    *  Insurance is capitalistic.  Nobody forces you to buy insurance but if you don't have it, you are responsible for the punishing financial consequences if and when the insurable event occurs.

    *  Insurance serves life.  It helps us to manage uncertainty and therefore preserves, sustains, and promotes life.

    Now consider the principles that underlie social insurance.  By the way, it should be clear by now that "social insurance" is an oxymoron and an anti-concept.  Insurance is a financial tool with which individuals can mitigate risk.  Therefore, "social insurance" is a contradiction in terms.  It does not subsume compatible concretes, so it is not a legitimate concept.  Consider the following.

    *  Social insurance is collectivistic.  It taxes everyone and tries to serve all members of the group.

    * Social insurance is subjective.  "Premiums" and benefits are based on political considerations and are established by the authorities.

    *  Social insurance is compulsory.  You have no real choice whether or not to participate in Social Security, for example.

    *  Social insurance is non-rational.  You pay what it charges and get what it gives you without regard to any reasoned calculation of what you want, what you need or what you can afford.

    *  Social insurance is inequitable.  By treating everyone the same, it punishes some people (the most responsible and least risky) to reward others (the least responsible and most risky). 

    *  Social insurance violates the trader principle.  If warnings from the General Accounting Office, the Congressional Budget Office, and dozens of independent experts are accurate, Social Security and Medicare will leave both their participants and the government worse off in the long run.

    *  Social insurance is socialistic.  It actualizes the Marxist credo I mentioned earlier by taxing ability to subsidize need.

    *  Finally, social insurance undermines life.  It creates a false sense of security that anesthetizes people to risks which they must recognize and confront to live safely.

    Now, how can you make the best possible use of private insurance to enhance your life and how can you avoid or mitigate the potential damage you might suffer as a compulsory participant in social insurance?

    First, make an inventory of the risks you face and evaluate, critically and objectively, the insurance protection--both private and social--that you already have.  If there are gaps in your protection, act to fill them promptly and deliberately.

    For example:  do you have enough life insurance so that if you died, your beneficiaries would receive a benefit amount sufficiently large so that, conservatively invested, it would replace your income or whatever portion of your income on which your family depends?

    Second, remember that the purpose of insurance is to replace the small risk of a catastrophic loss with the certainty of an affordable premium.  You should self-insure for small risks that would not devastate you financially.  Prepare for these small risks by saving and investing wisely.

    For example:  You might not want to pay extra premiums to get dental insurance or any other kind of insurance that pays incidental expenses.  Such insurance is tantamount to dollar cost averaging, as when you agree to pay the same amount every month for electricity so your bill doesn't skyrocket in the Winter and plummet in the Summer.  You are much better off to set a little money aside each month so that you can pay for that root canal or  crown when it's needed instead of hiring an insurance company to do the saving for you. 

    Third, carefully consider before you buy insurance that pays a benefit even if the insurable event never occurs.  When you buy such a policy, you are not buying pure insurance.  Rather, you are investing your money with an insurance company.  You may be able to invest your money independently more profitably than you can rent it to an insurance company that will take out administrative costs, profits, and pay you a relatively low return.  In other words, instead of buying whole life insurance, you might instead purchase term life insurance and invest the premium savings elsewhere.

Two exceptions to this rule:  One, there is a case to be made for buying insurance that builds equity if your purpose is tax avoidance.  It may still be a poor investment, but if it reduces your taxes, you may come out ahead.  Two, if you find accumulating savings to be difficult, you may need the discipline of getting a premium bill from an insurance company to increase your investment savings. 

    Fourth, conduct your estate planning with the assumption that government-based social insurance and welfare programs, including Social Security, Medicare and Medicaid, will not be there for you at all or that they will pay you benefits considerably below what they pay beneficiaries today.

    For example, make sure you have adequate disability or income-replacement insurance, a strong investment plan that maximizes tax-favored savings plans like Individual Retirement Accounts and 401-Ks, and, by age 50, a private long-term care insurance policy.  Build a wall of private protection between yourself and life's uncertainty that depends as little as possible on government promises and programs.

    Thank you for your attention.  I'll be glad to entertain questions now.


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