Self-Insurance? What?
Posted by John Draper | Filed under Insurance
Director Nathalie has a first job; she’s a classical harpist. And boy is she good. So one day I arrive to set and Nats wants to talk about what she should do with her insurance on her harp. It’s costing her almost $500 a year, and after listening to me prattle on about cutting costs, she things this may be a cost she’ll cut. Whoa there Momma.
First I ask what it would cost to replace her harp. About $16,000 she say. Okay, say I, so do you have $16,000 in the bank to buy a new harp right now? No, she shakes her head, a little stunned at the question. Then you definitely SHOULD NOT cancel your insurance.
I explain to her that when she buys insurance on her harp, she shifting the risk for taking care of a disaster from herself to the insurance company, and the $42 premium she’s paying is the cost of the insurance company accepting that risk. Huh?
Well, let’s say you decided to self-insure, which was what she was proposing. If the harp broke in 2 years, she would have $42 x 12 x 2 – $1008 saved in her self-insurance pool. How would she come up with the other $15K?
Most people would just put it on credit. Credit has made insurance seem like a useless product because people have, to a large extent, had an endless supply of money available to solve any problems. But credit shouldn’t be used as insurance since the cost in interest if far higher that the insurance premium.
So how long would it take Nats to come up with the full $16K if she were banking her $42 a month premiums? 381 months, or almost 32 years! So for 32 years, she’d be at risk, having to cover the cost of the new harp to some degree, when for $42 a month she wouldn’t have to think about it.
Every time she loaded that sucker into the car – which she does fairly often to get her gigs – she would be worried sick about what she was going to do to come up with the money to replace it if the worst happened. Ditto every time she arrived home and had to unload it.
That’s a lot of worrying. And that’s exactly what insurance is designed to do: eliminate the worry.
Insurance has a bad rap. If you make a claim, they raise your premiums. They put you through the ringer because they don’t want to make a payout. There are even stories about life insurance companies not paying out when the body insured actually drops dead. Com’on, do I have to drop the body of at head office to get the money?
Companies sometimes forget that the purpose of their existence is to produce what they’re producing. Car companies make cars. Shoe companies make shoes. Insurance companies create peace of mind by offsetting risk. What we’ve seen since the early 1980, is a shift in companies’ focus from doing their jobs to “meeting shareholders’ expectations” Hey, people who invest shouldn’t have any “expectations,” and shareholder expectations should NEVER stand in the way of dealing with every single customer as valued and respected. So whenever people are badly treated by any company, be it a little thing, or a big thing, they should bray it all over, tell everyone, and stand in the store and shout it at the tops of their voices to warn the other would-be customers.
But you also can’t paint an entire industry by the bad behaviour of a few players. There are reputable insurance companies who take their jobs seriously and make sure their clients receive the services they’ve paid for.
And we should do the math before we decide that insurance is just money down the drain. If Nathalie never has the need to buy another harp because she dropped hers, she should say, “thank you” for not having to deal with that stress. In the mean time her $42 a month has bought her years of piece of mind and a sense of safety. Money well spent.
November 18, 2008 at 9:12 am
Great post, Gail. When you put it the way you do, it makes so much sense. I cringe when I hear of fires, and people don’t have house insurance, or for that matter, apartment insurance. When I first moved out of my parents place, I had apartment insurance on every place I had, and now, house insurance. I would never want to be without that whenever the unexpected happens. Think of all the homes in California with the wildfires – I wonder how many of them are insured. Like you said, a small payment for piece of mind.
November 18, 2008 at 10:42 am
Hello. Besides my usual job as a software developer, I have also spent about 10 years of my life being a bellydancer. (ya, I know). I never made it my main income (because it’s impossible – very few people have) but I’ve watched many of my friends try. And then if they’re lucky and very popular they get to dance 6 times a weekend with bare feet on cement. And that’s when they make money. And then first their backs give in, and they can’t dance or teach for months. And then they feel the financial crunch and go back into dancing. And then their shins give in. Etc. Without insurance, they’re often royally screwed… Even with insurance, they’re still royally screwed.
as a side note, just in case anyone thinks that 200$ is too much to pay for a bellydancer for 20 minutes – you’re wrong.
November 18, 2008 at 11:51 am
It’s another excellent post. I never really thought about this before. However, one thought that I have is the importance of deciding what you truly need to insure. If the harp is necessary to your livlihood (or even just your biggest passion in life) and you would absolutely need to replace it, then it makes sense to insure it. But I read in “Your Money or Your Life” about someone who had insured a peice of jewellry that had been passed down by his grandmother. Upon reflection, he realized the jewellery was really priceless. It wasn’t it’s monetary value that was so vast, it was its sentimentality. Insuring it ended up being a waste of money because if lost, he would never (and could never) replace it.
November 18, 2008 at 12:40 pm
Good advice. Remember though that there is usually a deductible and sometimes it can be quite large. So my question is what is the $42 per month providing? If the deductible is $500, she may not get anything from her insurer for a small ding. And sometimes the deductible is much higher. Just a thought.
November 18, 2008 at 1:11 pm
This is a good kick in my butt to get apartment insurance. I keep putting it off – not because of the cost, but because of laziness. If anything DID happen, I’d kick myself.
November 18, 2008 at 3:23 pm
John — good point about the deductible. I was thinking the insurance is more applicable if it were lost or stolen, rather than damaged. My basic view is to insure anything that would cause financial hardship to replace — including your own or a spouses income if lost due to death. (For this reason I don’t buy life insurance for my son since he doesn’t generate income, quite the contrary)
Saver Queen – good point there too. If the sentimental value is higher than the real value, it may make more sense to get a safe deposit box at a bank and keep it there (and be cheaper). Anyone remember the simpsons episode where someone pawns a violin, and the pawn shop owner examines it with a jewelers loupe and says “Well it’s not worth much money, but it’s sentimental value is through the roof!”
November 18, 2008 at 3:43 pm
The timing on this post couldn’t be better for me. My fiance is signing ‘new job papers’ today: health benefits forms, beneficiaries forms, and life insurance forms. Apparently this job will provide him (well, actually me, I guess) with a lump sum payment of one year’s salary if he dies. He had the option to pay a certain premium to get additional benefits (3x his salary)
Since the premiums aren’t cheap, my inclination was to say it’s not really necessary until we’re looking at having kids. But this post stopped me and got me thinking. If he died suddenly, I wouldn’t be able to keep the current roof over my head (he earns considerably more than I do) Put that way, the premiums are a small price to pay. Peace of mind is worth a lot.
November 18, 2008 at 4:59 pm
I have a question regarding the various types of ‘life’ insurance. From what I’ve seen, there is life insurance, disability insurance, and critical illness insurance. With a baby on the way now we’re planning on increasing our life insurance but just realized that these other types are probably just as important. Should we get more disability coverage than life insurance coverage? Is critical illness insurance really necessary?
November 18, 2008 at 8:21 pm
while i don’t have my daughter insured at this point, from family and several friends who have lost their children, it was near financially devastating. modest funerals with standard arrangements won’t be cheap ($15,000 plus), not to mention time off work. consider if you have disability through work, will they cover etc. the standard 2 weeks or whatever it is isn’t enough. everyone is different but the loss of income is likely to be huge for a few months. this is definitely when you don’t want to worry about money, when you’ve suffered such a horrible loss.
November 18, 2008 at 9:30 pm
Kate:
When starting a new job, read the insurance benefits carefully. Note that some of the additional insurance can be obtained without medical exam if included early. I do not know what happens with pre-existing conditions.
In short, for some insurance, you don’t want to wait more than 30-days (or the like) after you begin the new job! Read the fine print.
November 19, 2008 at 10:49 am
That 30 day clause was actually what got me to agree to us getting it now rather than later. No medical form and cheaper premiums. And a lot of peace of mind.
November 19, 2008 at 8:03 pm
I HATE paying insurance, but I do… I know in my heart of hearts that it is safer than not having it.
oh… but I do H-A-T-E it!
November 19, 2008 at 11:47 pm
I work in the insurance industry. Both claims and in the past I sold both property and automobile insurance. It’s the one thing we purchase that we hope we never have to use! You cannot test the product you’ve purchased until you have the misfortune of either a fire, theft or car accident. It has broken my heart to have to tell people, sorry, you did not purchase that coverage, we cannot pay. Take a good hard look at what you think you can afford if anything happens. The lower the premium, the higher the deductible. Think of your deductible as the self insured portion. Can you afford to pay $1500 if you are in a car accident to get your vehicle out of the shop? Do you have coverage for a rental vehicle? Was it really worth the $20 saving in premium between the $1500 deductible and the $500 deductible? Make sure you trust your agent. Any good agent will ask lots of questions and LISTEN to you. Make sure your agent knows who you are, your lifestyle etc, so that they can make recommendations, etc.
And lastly, one good tip when it comes to house insurance….make sure you record the contents of your home, all your closests, the drawers, every nook and cranny with a digital recorder. Make a hard copy and keep it off your property for safe keeping, ie a safety deposit box. If you lost everything in a fire, guaranted you’ll not remember all that STUFF you had in those four walls.
Great post Gail. I just had to add my two cents. Absolutely love you and all that wonderful advice your provide us with.