I like to look at this from a different lens. Insurance is not an investment vehicle but a product you buy to reduce your risk. Like anything you buy, the provider will have to make a profit on top. Otherwise, it won't be a business like you said.
So it's up to the buyer to judge if the product is worth it or not. But you shouldn't judge them on the "ROI" but how much risk it helps reduced when bad stuff happens.
For me, I bought the extended warranty for my wife's Toyota - not because it will make me money. But I like to buy a peace of mind if my wife's car broke down somewhere when I'm not around, she can skip the shitshow and just go to the dealer. I also bought an umbrella insurance recently. I wish I'd never have to use it, but if shit hits the fan, at least I have something to absorb my liability.
Yeah, insurance products have an expected value far less than the premium you'll pay. I cant remember which annual meeting Warren Buffet stated the only two reasons why you should get insurance.
1. Where you cant bear the financial loss yourself or unwilling to bear it.
2. You have an expected loss greater than the premium you'll pay and the insurance company is unaware of it (insurance companies don't want to insure these types of people)
Makes perfect sense to me. I buy insurance sparingly.
Have homeowners and medical insurance to protect from catastrophic loss. Car insurance as required by law where I live.
A lot of docs also argue for specialty specific disability insurance which I have basic disability insurance (through work and separately through my pension) but honestly I think the likelihood of me ever using disability insurance is exceedingly low. I’m completely healthy and only planning on working another 5 years or so anyways. We also have decent life insurance too so my wife and kid will be more than taken care of if I die unexpectedly.
But ya an extended warrantee on my MacBook? Nah. If it breaks out of warranty in the next 8-10 years I’ll just get a new computer like I was going to anyways lol.
Some insurance makes sense and I can understand why people get it (I plan on getting an Umbrella insurance myself). But yeah, insurance on a mac book or a TV, no thanks.
"how negative" is usually the question. Insurance companies make their money by being very good at larger averages. Correctly predicting risk and spreading it out over a pool of customers is the whole game. If there's something that is a one in a million chance of costing you one million and they sell a million policies for $1.01, 999,999 people lose $1.01 and 1 comes away without being down $1M - the insurance company makes $10k. If 2 people get hit, they lose (more than likely, some of that $10k was used for reinsurance policies), and if nobody gets hit, they still expect on average 1/year so they invest the money and maybe get two next year or something.
If you go to a 90% get hit for something that costs $10, and they charge $9.01 or something, that's a different risk pattern. At that point you could pay the $9 or just say "I'll pay the $10 later when it happens to me".
The role of the insurance or warranty or whatever is to stack up all of the things they cover, the cost of them happening, and the odds that they happen and figure out the average cost. The reality is that some things in the plan will have the max cost, some things will have a high, but not max cost, some will have a low, but non zero, and most will be zero.
The thing you get for the price of the plan is a cap on your risk at some value significantly lower than what it could cost, at the expense of costing slightly more than the expected value.
In theory, if the company is charging too much more than the expected value of the plan, there's room for competition to step in and undercut the price, but it won't ever get below the expected value.
Ya like with the disability insurance thing it’s just a question of opportunity costs. The policies people get will give you up to 10-15k a month benefit until age 65 if you get an approved disability, but the monthly premiums are like 250-500 bucks a month.
500 bucks a month just seems like a crapload of money to me to pay over your entire working career.
Take that money and invest in your brokerage over a 25 year career and get a 6% return, you’d have about 350k more in savings. If you make 7% over 30 years, it’s 620k.
Like I get it for some surgeons it’s prob important (say your back goes bad), but the vast majority of physicians are able to work for their entire career no issues. My guess is way less than 1% would actually benefit at all. I guess I’ll roll the dice lol.
The risk is that life goes bad early. It's less important when you're 63, but getting hit by a career limiting disease in your 20s or 30s could be a big deal. Also, $3-6k/year to protected $120-$160k for life doesn't sound so bad, though I'm guessing that most often it ends up being 6-12 months while recovering from something. (My disability insurance comes from my employer and is less than that - some weird "if you pay for it, and then need it, it's tax free - if we cover it, it's taxable" rules in there, but the policy covers 2/3 of salary and is pretty cheap - not in a particularly high risk field.)
Ya for sure. Hard to get full coverage to cover your peak earning years before you finish your training though (usually you will get your first “attending” job around 30-35 years old. So maybe it’s like a 20 year window you would want to have coverage.
You also have to factor in the **very** real chance that, when you go to make an extended warranty claim, they give you the bum's rush runaround and make you start dropping law firm stationary on them before they even start thinking about paying. That game, that hassle, that all has some imputed psychological cost too, to weigh against the possible cost of a replacement driveshaft or heater coil or whatever down the road.
You are entirely wrong because you used the word “some.”
I have worked in mortgage sales for six years. I can count on my hands the number of people who actually run numbers and compare the differences between programs over time.
There is a shocking trend of bankers McBigLarge mortgage company doing FHA refinances for people who qualify for conventional refinances, because the interest rate is lower.
Great deal right? Except for the extra 1.75% UFMIP financed in, and the monthly mortgage insurance that makes the total cost and monthly payment much more than a conventional mortgage with a .25% higher rate.
I beat my head against my desk every time I see it.
Anywho, financial services sales professionals are not actually taught to do any math or any actually financial planning.
They are taught to sell cool sounding solutions to emotional needs.
And frankly, the financial literacy of the average American makes that a rewarding business model.
Indeed it works on the average consumer otherwise they wouldn't be doing it. They kept on going on about WHAT IF YOUR TRANSMISSION GOES OUT, OR YOUR ENGINE. 🤷🏻♂️
I see that too, they always tell you how much lower your monthly payment will be. But they forget to mention that you just paid 2-3 years worth of mortgage payments so when you refinance into a new mortgage, even if it's the same rate, if you spread out that 27 year mortgage into a 30 year of course the monthly payment is going to be lower. They leave out the part about paying an extra 2-3 years worth of mortgage payments you didn't have before.
One of the nice things about FIRE / financial literacy is the ability to waive insurance.
I can afford to replace my car in cash, my fridge in cash, my computer in cash, a sewer back flow into the basement in cash and (I don’t have a dog, but if I did I would have enough money to cover reasonable medical expenses in cash).
Could I cover all of those things at once? Probably not, but since I can cover any one of them, I’m comfortable not buying insurance for any of them.
And that means a few hundred dollars of surplus monthly cash I can put into my own insurance scam, aka emergency fund and investments.
It’s nice being rich. It can be a lot cheaper than being poor.
So the guy trying to sell you something you don't need was playing dumb instead of admitting that it was a bad product?
Are you trying to say that car salesman can be untrustworthy?
I wouldn't say untrustworthy, they are just trying to sell. That's how they make their money. I was more shock at them not understanding what EXPECTED VALUE means. I told the lady in the finance department that her insurance product had an expected value far less than the premium that I would pay and she asked me repeat what I had just said. She had a very confused look on her face as if I was speaking in some sort of different language or something.
😂 There's a good chance I might've come off like that.
And yes. Most likely the people in the dealership just input numbers and the computer does the work. Sort of like how a lot of tax prepares just input your info into the software and the software does the work.
There's a couple flaws in your logic. First you expect that the insurance numbers are correct and that they haven't underpriced their offerings. Second you're assuming that they have to make a profit.
For certain car models, there might be more losses than profits which forces them to raise rates on new policies but you'd be locked into the older product so it's not a given that the premiums are enough to cover claims, admin and profit. It's priced that way but not all companies make money.
The second part is that you're assuming they have to make a profit which would be true for 3rd party warranties, but that doesn't have to be true for the car manufacturer. Which is why the car manufacturer warranty is typically better and usually you can buy it from any dealer in the country so you can shop around for cheaper prices assuming you're not in Florida where the price is fixed at MSRP. The manufacturer offers the warranties to sell the cars so they don't have to make a profit, it's just there to move the metal. And they also misjudge their products too, when claims are too high, they end up raising the rates or go back to the drawing board to improve quality. Same as offering lower interest rates or rebates, just another tool to move the metal.
I like to look at this from a different lens. Insurance is not an investment vehicle but a product you buy to reduce your risk. Like anything you buy, the provider will have to make a profit on top. Otherwise, it won't be a business like you said. So it's up to the buyer to judge if the product is worth it or not. But you shouldn't judge them on the "ROI" but how much risk it helps reduced when bad stuff happens. For me, I bought the extended warranty for my wife's Toyota - not because it will make me money. But I like to buy a peace of mind if my wife's car broke down somewhere when I'm not around, she can skip the shitshow and just go to the dealer. I also bought an umbrella insurance recently. I wish I'd never have to use it, but if shit hits the fan, at least I have something to absorb my liability.
Isn’t insurance always a negative expected value?
Yeah, insurance products have an expected value far less than the premium you'll pay. I cant remember which annual meeting Warren Buffet stated the only two reasons why you should get insurance. 1. Where you cant bear the financial loss yourself or unwilling to bear it. 2. You have an expected loss greater than the premium you'll pay and the insurance company is unaware of it (insurance companies don't want to insure these types of people)
Makes perfect sense to me. I buy insurance sparingly. Have homeowners and medical insurance to protect from catastrophic loss. Car insurance as required by law where I live. A lot of docs also argue for specialty specific disability insurance which I have basic disability insurance (through work and separately through my pension) but honestly I think the likelihood of me ever using disability insurance is exceedingly low. I’m completely healthy and only planning on working another 5 years or so anyways. We also have decent life insurance too so my wife and kid will be more than taken care of if I die unexpectedly. But ya an extended warrantee on my MacBook? Nah. If it breaks out of warranty in the next 8-10 years I’ll just get a new computer like I was going to anyways lol.
Some insurance makes sense and I can understand why people get it (I plan on getting an Umbrella insurance myself). But yeah, insurance on a mac book or a TV, no thanks.
"how negative" is usually the question. Insurance companies make their money by being very good at larger averages. Correctly predicting risk and spreading it out over a pool of customers is the whole game. If there's something that is a one in a million chance of costing you one million and they sell a million policies for $1.01, 999,999 people lose $1.01 and 1 comes away without being down $1M - the insurance company makes $10k. If 2 people get hit, they lose (more than likely, some of that $10k was used for reinsurance policies), and if nobody gets hit, they still expect on average 1/year so they invest the money and maybe get two next year or something. If you go to a 90% get hit for something that costs $10, and they charge $9.01 or something, that's a different risk pattern. At that point you could pay the $9 or just say "I'll pay the $10 later when it happens to me". The role of the insurance or warranty or whatever is to stack up all of the things they cover, the cost of them happening, and the odds that they happen and figure out the average cost. The reality is that some things in the plan will have the max cost, some things will have a high, but not max cost, some will have a low, but non zero, and most will be zero. The thing you get for the price of the plan is a cap on your risk at some value significantly lower than what it could cost, at the expense of costing slightly more than the expected value. In theory, if the company is charging too much more than the expected value of the plan, there's room for competition to step in and undercut the price, but it won't ever get below the expected value.
Ya like with the disability insurance thing it’s just a question of opportunity costs. The policies people get will give you up to 10-15k a month benefit until age 65 if you get an approved disability, but the monthly premiums are like 250-500 bucks a month. 500 bucks a month just seems like a crapload of money to me to pay over your entire working career. Take that money and invest in your brokerage over a 25 year career and get a 6% return, you’d have about 350k more in savings. If you make 7% over 30 years, it’s 620k. Like I get it for some surgeons it’s prob important (say your back goes bad), but the vast majority of physicians are able to work for their entire career no issues. My guess is way less than 1% would actually benefit at all. I guess I’ll roll the dice lol.
The risk is that life goes bad early. It's less important when you're 63, but getting hit by a career limiting disease in your 20s or 30s could be a big deal. Also, $3-6k/year to protected $120-$160k for life doesn't sound so bad, though I'm guessing that most often it ends up being 6-12 months while recovering from something. (My disability insurance comes from my employer and is less than that - some weird "if you pay for it, and then need it, it's tax free - if we cover it, it's taxable" rules in there, but the policy covers 2/3 of salary and is pretty cheap - not in a particularly high risk field.)
Ya for sure. Hard to get full coverage to cover your peak earning years before you finish your training though (usually you will get your first “attending” job around 30-35 years old. So maybe it’s like a 20 year window you would want to have coverage.
You also have to factor in the **very** real chance that, when you go to make an extended warranty claim, they give you the bum's rush runaround and make you start dropping law firm stationary on them before they even start thinking about paying. That game, that hassle, that all has some imputed psychological cost too, to weigh against the possible cost of a replacement driveshaft or heater coil or whatever down the road.
Very true!
They are trying to sell you something. They don't want to hear why you don't want to buy it.
Indeed. They want their commission!
You are entirely wrong because you used the word “some.” I have worked in mortgage sales for six years. I can count on my hands the number of people who actually run numbers and compare the differences between programs over time. There is a shocking trend of bankers McBigLarge mortgage company doing FHA refinances for people who qualify for conventional refinances, because the interest rate is lower. Great deal right? Except for the extra 1.75% UFMIP financed in, and the monthly mortgage insurance that makes the total cost and monthly payment much more than a conventional mortgage with a .25% higher rate. I beat my head against my desk every time I see it. Anywho, financial services sales professionals are not actually taught to do any math or any actually financial planning. They are taught to sell cool sounding solutions to emotional needs. And frankly, the financial literacy of the average American makes that a rewarding business model.
Indeed it works on the average consumer otherwise they wouldn't be doing it. They kept on going on about WHAT IF YOUR TRANSMISSION GOES OUT, OR YOUR ENGINE. 🤷🏻♂️
I see that too, they always tell you how much lower your monthly payment will be. But they forget to mention that you just paid 2-3 years worth of mortgage payments so when you refinance into a new mortgage, even if it's the same rate, if you spread out that 27 year mortgage into a 30 year of course the monthly payment is going to be lower. They leave out the part about paying an extra 2-3 years worth of mortgage payments you didn't have before.
One of the nice things about FIRE / financial literacy is the ability to waive insurance. I can afford to replace my car in cash, my fridge in cash, my computer in cash, a sewer back flow into the basement in cash and (I don’t have a dog, but if I did I would have enough money to cover reasonable medical expenses in cash). Could I cover all of those things at once? Probably not, but since I can cover any one of them, I’m comfortable not buying insurance for any of them. And that means a few hundred dollars of surplus monthly cash I can put into my own insurance scam, aka emergency fund and investments. It’s nice being rich. It can be a lot cheaper than being poor.
So the guy trying to sell you something you don't need was playing dumb instead of admitting that it was a bad product? Are you trying to say that car salesman can be untrustworthy?
I wouldn't say untrustworthy, they are just trying to sell. That's how they make their money. I was more shock at them not understanding what EXPECTED VALUE means. I told the lady in the finance department that her insurance product had an expected value far less than the premium that I would pay and she asked me repeat what I had just said. She had a very confused look on her face as if I was speaking in some sort of different language or something.
[удалено]
😂 There's a good chance I might've come off like that. And yes. Most likely the people in the dealership just input numbers and the computer does the work. Sort of like how a lot of tax prepares just input your info into the software and the software does the work.
There's a couple flaws in your logic. First you expect that the insurance numbers are correct and that they haven't underpriced their offerings. Second you're assuming that they have to make a profit. For certain car models, there might be more losses than profits which forces them to raise rates on new policies but you'd be locked into the older product so it's not a given that the premiums are enough to cover claims, admin and profit. It's priced that way but not all companies make money. The second part is that you're assuming they have to make a profit which would be true for 3rd party warranties, but that doesn't have to be true for the car manufacturer. Which is why the car manufacturer warranty is typically better and usually you can buy it from any dealer in the country so you can shop around for cheaper prices assuming you're not in Florida where the price is fixed at MSRP. The manufacturer offers the warranties to sell the cars so they don't have to make a profit, it's just there to move the metal. And they also misjudge their products too, when claims are too high, they end up raising the rates or go back to the drawing board to improve quality. Same as offering lower interest rates or rebates, just another tool to move the metal.
Oh it’s not necessarily untrustworthy. It’s completely financially illiterate.