Having worked for an insurance company in the past, I may be more critical of the industry than most. Don’t get me wrong. It’s very important to have different types of insurance. When I was in a minor car accident — nobody was hurt — I was certainly happy I had insurance. The same was true a few years ago when a thief broke into my car and grabbed my radio and some other items. Insurance is both a service and a product, and by paying the premiums, customers are guaranteed some form of protection.
I can’t get away from the fact, however, that insurance companies make more money when they don’t pay out claims — when they don’t perform the service they’re supposed to perform for their customers. I wrote about this recently when comparing mutual insurance companies and public insurance companies. Shareholders’ needs for profit don’t always play nicely in the short term with the customers’ needs for service.
As if on cue, the media offered two interesting examples of insurance companies aren’t always concerned about helping policyholders. The first was fun.
Among my friends, it’s no surprise I’m a fan of the television show Leverage. The premise of the program is that five former con-men (and con-women) joined forces to protect and avenge the powerless individual against corporations, governments, and other powerful entities that have wronged individuals or the public. An insurance company was a key piece of the most recent episode; the company collected premiums and hoarded the cash, never paying claims. In reality, of course, a company would be required to pay a certain amount of claims or return the premiums, or else face a fine, but in the world of Leverage, that’s a minor detail that can be painted out of the story. Clever writers, when asked, can easily get around such seemingly troublesome plot holes.
The other example is not so fun. Progressive Insurance held the policy for a driver who recently died in a car accident. The other driver, who may have been at fault for running a red light, was underinsured. The insurance company representing the driver at fault figured it was a clear case, and paid benefits, but since the other party was underinsured, the payments did not amount to much. The driver who died carried coverage for underinsured drivers, so her own insurance policy from Progressive should have covered the gap between the benefits provided and what the driver’s estate should have received.
Progressive refused to pay, and in court, a lawyer from Progressive defended the driver who was at fault, then denied that they defended the driver, then sent social media spam to anyone who questioned Progressive’s actions. As far as I know, the company has neither apologized for their behavior or marketing lies, nor have they paid the underinsurance claim to the estate of the deceased driver.
Update: You can read more details about the Progressive Insurance case from an article by Ron Lieber in the New York Times.
But I didn’t come here today to complain about insurance companies. (It’s just so hard not to, though, so please forgive me.) Today’s is a day to celebrate life insurance, so I’m going to share my thoughts about that instead.
Financial planners say life insurance is an essential part of growing an protecting a family’s wealth. But I don’t carry any life insurance. The purpose of life insurance is to pay benefits to those who count on your income-earning ability or human capital in order to live — or in order to live the type of life to which they are accustomed. If a wife and three children were depending on my earning a six-figure salary each year, it would be a shock for them if I were to suddenly pass away.
I don’t have a family counting on my generation of income. I don’t even have a salary — though I am earning income as a freelancer and consultant. Not only that, but I have enough assets — at the moment, anyway — to cover the cost of the expenses relating to my own hypothetical death, so that’s not something that needs to be covered in the form of insurance. Life insurance will also be used to cover debts, and at this time I have none other than credit card debt I pay off every month.
Put succinctly, I don’t have life insurance right now because I don’t need it. It’s only a secondary benefit that I get to continue avoiding working with yet another insurance company.
I may be in the minority. Most Consumerism Commentary readers have dependents. The me of the future might also have a family who at least partially depends on my income. Those who do have concerns other than their own prosperity need to consider an option for ensuring a level of continuity following an unfortunate event like death. If you’ve managed to build a significant amount of wealth, you can effectively self-insure. With ten million dollars in the bank, it might be possible for your survivors to live their lives without much change from a financial perspective. With no million dollars, however, like most households, buying life insurance is a wise choice.
How much life insurance do you need and how much does it cost?
There are a large number of calculators online designed to tell you how much insurance coverage you need. The total amount of coverage depends on how much income your survivors would need, how long your survivors would need that coverage to continue, some specific large expenses that would need to be covered like college education for your children or charitable donations you’d like to leave, and how much of your own assets you’d be willing to commit to these same purposes.
Some of the calculators are linked directly to insurance agents. Good luck getting information on the cost of insurance without leaving your name and contact information. In order to receive quotes pertaining to the cost of premiums, for the most part you’re going to need to open yourself up to calls or emails from salespeople. In general, the younger you are, the less you’ll pay as a premium for the same coverage. It’s not ageism, it’s based on probability tables. Insurance companies project life expectancy based on age, and use that information to calculate the chance of one policyholder being able to cover the expense of his or her own coverage.
In some cases, the company will underestimate your life expectancy, and in other cases, the company will overestimate. The amount of money spent on premiums in total should be able to cover everyone while providing profit to the insurance company. There’s not a big chance of these calculations going horribly wrong. It’s not like property and casualty insurance, where an uncharacteristic storm could send an insurance company into bankruptcy due to its inability to pay its claims. (But that’s why re-insurance exists, and that’s a whole other topic.)
Anything that could potentially effect you’re life expectancy will adjust the cost of your life insurance premiums. If you engage in unhealthy activities, if you like extreme sports involving risking your life, or if you have a chronic illness, you’ll find it difficult to negotiate a bargain for yourself, if you can qualify for coverage at all.
The type of insurance also effects the cost. Different types of insurance do different things. Most experts — those who aren’t trying to sell insurance, anyway — tend to agree that the best type of insurance is the type that keeps it simple: term life insurance. Once you start looking to universal life insurance or cash value life insurance, where part of the insurance policy is an investment or savings vehicle, the costs generally don’t balance the type of service you’ll receive. You’re better off keeping your investments separate from your insurance, giving you a better chance of controlling fees and expenses. Why? Because reducing your investment fees and expenses is one of the best ways to improve the performance of your investments over time.
And don’t forget to shop around.
Do you have life insurance? Why or why not? If you do have life insurance, what type do you have? What have been your experiences shopping for life insurance?
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Photo: Phil Comeau
Updated August 24, 2012 and originally published August 22, 2012.