How insurance works: Build wealth and reduce your need for insurance
The best way to avoid getting screwed by insurance is to learn about the financial side of things.
While insurance harms general public the most, the harm is not that significant for the wealthy.
If you want to avoid getting screwed by the insurance industry, you need to avoid over-insurance. And firstly, you need to understand how it works. In general insurance is a form of 1) Risk transfer, 2) Risk distribution, and 3) Risk assumption.
1) Risk Transfer:
When you buy fire insurance, your goal is not to burn your house down and collect the money from the insurance policy. You want them to pay for your house and take away the burden of paying for it from you. You want a third-party take care of this risk (risk transfer).
But insurance companies are designed to screw you – to pay attention to the fine print.
So, what they actually do is offer a “discount” which is really just an upfront payment scheme with an interest attached to it (this scheme has nothing to do with the concept of “interest” which exists separately from insurance policies).
You are thus paying for the “risk transfer”.
2) Risk Distribution:
The insurance industry is not interested in spreading the risk to all its customers but rather in shifting the risk to individual customers based upon their risk profile.
Thus, you see that they have different classes of policies which they try their best to sell to people with different risk profiles.
Which brings us to the third part of this scheme: Risk assumption.
3) Risk Assumption:
The general public seldom knows about this scheme – it is only the insurance companies that make money from this. But the general public doesn’t have any reason to disbelieve them because the insurance companies are making their best effort to be truthful in their advertisement campaigns.
You see, most people would probably say “that’s how insurance works” or “I guess that’s how it goes” when they hear these statements. And that’s exactly what the insurance companies want you to say because those are the people who will buy their policies.
The general public can never get screwed by the insurance companies, but only by themselves. People who don’t know anything about financials (and thus risk) will always be screwed when it comes to insurance, and nothing can fix that except for educating yourself on financials. Once you’re financially educated, you will learn to minimize or eliminate your need for insurance.
There are very few cases where it is worth buying insurance.
Why Insurance is bad for poor and not that bad for the rich?
It’s not that insurance companies are evil; they’re just doing their job. The concept of insurance mostly affects the poor group of the population because that’s their bread and butter.
The rich population – that in 2022, there are 2,755 Billionaires, 56 million Millionaires – has other ways of reducing risk, like putting their money into investments or into more businesses that are less risky than just a home. This also explains why the insurance companies will try really hard to sell you a policy if you’re ‘just another person’ (A total of 860 million people will be living below the $1.90 a day line by the end of 2022).
Basically, a person with a net worth of 1,000,000$ paying 10,000$ each year for insurance coverage is not that big of a deal, still. But if a person with a net worth of 60,000$ pays 500$ per year, it would be more expensive. Ask how! Ask yourself, I won’t tell you.
Insurance stops you from getting rich
Insurance makes your current life the default setting, the default reality, the default asset. It will just not let you build wealth. Not only that, but insurance lures also you into spending for other thing to stay safe with your current assets, rather than taking reasonable risk to accumulate your wealth.
So, if you’re rich, no problem, you can live a comfortable life, and insure that life. If you’re poor, some of your income will go for insurance and thus money that could have been distributed to people who need it less. Yes, it is sarcastic.
Insurance companies love poor people because they know that by offering insurance, they can make money off of them (so do the banks). Insurance companies need poor people, so from their point of view: “You better stay poor!”
How should you be handling risk?
A young person should not have any insurance related to the home, period. If you’ve been paying for the house for a couple of years, then you’re spending more on your insurance than what it’s really worth. You need to keep that money and start investing it into something else (like growing your income). Investing into something else might include taking risks like buying a new business or investing in another business.
This doesn’t mean that you should be riskier either. For example, if you live in an area where the crime rate is high, then you might start panicking and get insured against crime, not invest into an alarm system and maybe think about moving (not necessarily now) when things change.
And neither should you gamble with your money. Insurance is still far, far better than gambling or taking unnecessary or unworthy risks in the name of investments.
Always keep the law of large numbers with you. By now, all know that insurance companies win due to the law of large numbers. You can rather start investing in the financial markets with odds on your side, and you will win in the long term. Or simply open your own insurance agency/company.