On Insurance, Part I – Risk Transfer Only

ChimeraInsurance has one purpose, and one purpose only. 

Remembering that purpose will keep you from expensive insurance ‘solutions.’ 

The purpose of insurance is risk transfer.

For the rest of your life, insurance salespeople will try to sell you the idea that you can both increase your wealth and protect against risk at the same time.

Not True.

Buying insurance transfers your personal risk to an insurance company – and should be used only that way.

Insurance does not increase your wealth and attempts to convince you otherwise end in expensive financial monstrosities.

Not a dragon, a chimera

Investment products have giant wings and sharp beaks, while insurance products have protective scales and armored fins.  The combination is not the cool dragon your insurance salesman wants you to envision, but a mythical chimera that will never fly – nor save your wealth.

Examples of monstrous chimeras include variable annuities, as well as life insurance billed as a savings vehicle with ‘accumulated policy value’ in it, which your agent will assure you that you can borrow against. 

A straight annuity, an investment product designed by the insurance industry, is also a losing proposition for everyone, except the insurance company, of course.

But my insurance salesman tells me this is a great investment?

Yes, for him.  He gets fat commissions.

It’s not a great investment for you.

So, in sum: Insurance is great for transferring risk away from you and onto a big company, but not great for anything resembling an investment.

See post on Insurance Part II – The Good, the Optional, and the Bad

 and Insurance Part III – Calculations of Life Insurance as investment

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2 Replies to “On Insurance, Part I – Risk Transfer Only”

  1. There’s one caveat that I believe is worth noting. It only applies to a more sophisticated investor. Later in life, if properly calculated, a very wealthy individual can use an insurance product to transfer his assets to beneficiaries without being taxed, IF AND ONLY IF the policy is written correctly. This will likely amount to several thousand dollars in legal fees but on an estate of many tens of millions of dollars, that would be a drop in the bucket when compared to the potential tax liability.

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I founded Bankers Anonymous because, as a recovering banker, I believe that the gap between the financial world as I know it and the public discourse about finance is more than just a problem for a family trying to balance their checkbook, or politicians trying to score points over next year’s budget – it is a weakness of our civil society. For reals. It’s also really fun for me.

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