Smart Insurance Concepts
Young mountaineers quickly learn to count ounces instead of pounds, and that few luxuries belong on a multi-day trek because it is dangerous to carry unproductive weight on foot in a hostile winter environment. Similarly, excesses should be largely excluded when managing one’s financial life amidst persistent high inflation. The minimization of wasteful spending can effectively reduce debt and/or increase the productive income-producing capital investments made to offset inflation, and insurance is a budget component ripe for savings. Consider the following smart insurance concepts as you fight inflation with budget thrift:
A common philosophy among savvy insurance consumers is the idea that only catastrophic risks should be insured, underneath which stands the deduction that since an insurance policy cannot be to the ultimate financial benefit of both the issuing company and the policyholder, and since insurance companies are generally profitable businesses that investors love to own, most insurance policies are unprofitable agreements used to cover non-catastrophic risks that should be self-insured. Bear to mind self-insurance requires increased liquidity. Typical catastrophic risks include one’s health, large debts, a home, one’s life, liability while driving, and expensive late-life care.
Using an independent fiduciary agent gives policyholders access to many companies and products, forces providers to compete for the business, and provides due representation in a complex marketplace.
Never think of life insurance as a retirement funding investment, even when the cash value is invested in equity-based accounts which drive insurance benefits. Insurance policies are too expensive to be an investment, but they aren’t too expensive to be an insurance policy.
Understand the financial condition and the ‘claims reputation’ of the insurance company backing held policies, and don’t risk insolvency for premium savings. Watch annual premiums/benefits closely and be ready to replace policies with unwarranted premium increases. Pay premiums annually when charged for more frequent payments.
Always match the type of insurance policy best suited to the risk. Temporary need for life insurance should be supplied by term, not permanent life insurance; exposure to the high cost of care late in life should be met with traditional or hybrid LTC insurance best matched to family dynamics, etc.
If healthy, own a high deductible health insurance policy and maximize contributions to a Health Savings Account (HSA). Invest HSA funds productively to fund mid-late retirement, qualified health care costs.
Understand that industry-dominating, capital efficient, dividend-paying insurance company stocks are some of the most profitable businesses to own long-term, and incorporate them into your investment portfolio when they can be purchased at a reasonable price.
I never venture into the mountains without my survival blanket because I have seen it save a man’s life. While you think about these insurance strategies, don’t overlook the importance of transferring exposure to genuinely catastrophic risks to well-vetted insurers.
Think about it, Shaun.
“Be wise as serpents and innocent as doves” ~Matthew 10:16
“A shrewd person sees danger and hides himself, but the simple go on and suffer for it.” ~Proverbs 22:3
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the author.
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