Question: I pay a lot of insurance premiums and sometimes I just feel insurance poor. Is that unusual?
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Answer:?Sometimes stupid things spoken by clever people can sound very wise.
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I suspect you?ve heard someone grouse about ?all those premiums I pay are making me insurance poor,? implying that the payment of the premiums is somehow causing poverty.
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Actually, it?s the other way around. The payment of your insurance premiums should keep you out of poverty.
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Think about it.
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The $1000 a year someone pays to the insurance company to protect their $250,000 house is not going to cause poverty. Yes, I would prefer to have the grand back in my pocket, but it won?t break me.
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But what WILL break me is having the grand back in my pocket because I refused to carry insurance on my house, and my house burns down. Now I have the $1000, but I?m $250,000 poorer. That?s going to come much closer to causing poverty than my payment of the premium.
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But you also need to know the difference between ?if? insurance and ?when? insurance.
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?If? insurance is the most common kind. It is designed to protect you against the negative financial consequences of an unlikely catastrophic event. While the possibility may be remote, your house might burn down, you might have a car wreck, you might need brain surgery, you might become disabled, you might get sued. Any of these events could cause severe enough financial consequences to bankrupt you. So you incur a guaranteed small loss (the premium) to avoid a potential catastrophic loss.
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?When? insurance is different. It offers a different kind of risk management. ?When? insurance deals with events in your life that WILL occur ? but no one knows exactly when.
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Take retirement for example. A pension plan knows its covered retirees will retire, but they do not know how long each one will live. So when calculating reserves required to fund a retirement pool, retirement plan actuaries are able to average together a large number of people. This ?law of large numbers? is very accurate. They can?t tell the actuary which of their retirees will only collect a few retirement checks (because they die early), but they can predict with great accuracy how many will do so out of a large number.
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It?s OK to think of ?if? insurance as an expense. It is a sure, small loss incurred to avoid a potentially disastrous large loss, therefore helping you avoid poverty.
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But you should think of ?when? insurance as funding ? a larger cash flow that pre-funds a larger amount of money that will come back to you in the future (either through retirement payments, cash values or death benefits). Its predictability and guaranteed continuity also help you avoid poverty.
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The purchase of any kind of insurance should always be made with help from an expert, licensed professional.
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Insurance premiums do not cause poverty. But they may prevent it.
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Byron R. Moore, CFP? is managing director / planning group of Argent Advisors, Inc. Email him at bmoore@argentmoney.com. Write to him at 500 East Reynolds Drive, Ruston, LA 71270 or call him at (318) 251-5858. The views expressed in the preceding commentary do not necessarily reflect the views of Argent Advisors, Inc.?No forecasts can be guaranteed.?Argent Advisors, Inc. does not offer tax, insurance or legal advice.?The information contained in this column should not be construed as a substitute for personalized investment, tax, insurance or legal advice.Source: http://www.argentmoney.com/blog/?p=209
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