Insurance Isn’t For the ‘Average’

There’s so much discussion of insurance these days, with politicians on both sides engaged in battle over what’s best for the ‘average American.’ Of course, the result of this debate is gridlock. Republicans appear to be unable to pass a new healthcare bill, while Democrats hold fast on the plan that’s still in place, but showing many chinks in the armor. Most people can agree that the system we’re in has significant flaws, with no easy answers to fix them.

What’s fascinating is the debate over what insurance actually is, and what it’s intended to do. And while this brief discussion will not solve the health insurance debate, there’s one thing that we can be clear on: insurance isn’t for the ‘average.’ In other words, the purpose of insurance isn’t to protect any of us from average healthcare costs. Similarly, life insurance isn’t going to benefit many people who live to average life expectancy, and long term care (LTC) insurance isn’t a good deal for those who require an average length stay in a nursing facility. Insurance, by it’s very design, is to provide protection for those who experience non-average events.

For example, a person who has a minor claim against their homeowner’s insurance is usually encouraged to not file a claim at all. The agent suggests that the insured simply pays for the claim out of pocket rather than ask the policy to pay it. Why? By filing a minor claim, the premiums paid on the policy will often go up in the future, eventually offsetting any benefits of the claim payment.  However, when there’s a devastating fire in a home, causing tens or hundreds of thousands in damages, that’s where the insurance policy can be a financial lifesaver. See, filing a small claim is simply trading dollars; we pay premiums for years with no claims, then a small claim would cause us to simply receive those same dollars back. That’s not insurance, per se, that’s an indemnification plan. It’s just being paid back.

The same holds true for LTC insurance. If I invest tens of thousands of dollars into a policy over the course of many years, then need just a year or two of nursing care, the LTC policy is simply going to give my money back to me. It’s only when the need for care exceeds the average length of care experienced by all claimants, does the policy now benefit me financially for having it. A long-term nursing stay is the equivalent of a catastrophic house fire. Only when the event is large and costly enough, does it benefit us to have had the insurance in-place all those years.

This is where people often struggle in the healthcare debate; in the vast majority of cases, a health claim results in just being paid back our years of premium dollars. The debate then, should be focused on the catastrophic events that exercise the insurance’s true purpose. That is, the insurance covers us for events that would have otherwise bankrupted us. Of course, the healthcare system has become incredibly costly, meaning more and more benign health events now have catastrophic costs associated with them; I’m not suggesting otherwise. Unfortunately, it’s the true nature of what insurance is that becomes lost in the debate.

When planning for a financially successful retirement, insurances play a vital role in ensuring that one can remain retired long after we possess the skills and health to care for ourselves. Whether it be a catastrophic disease requiring health insurance benefits, a catastrophically long nursing need requiring LTC insurance benefits, or a catastrophically long life (financially speaking) that requires guaranteed lifetime income insurance through annuities, the role played by these purpose-built financial products often represents the glue that holds a plan together.

Ideally, we would all live vibrant, healthy lives, free of the toll of major medical and financial crises. When we don’t, the true role of insurance can provide a safety net that we’ve all collectively paid into, and some truly benefit from. This ‘social good’ is one that results in many more of us able to remain ‘average’ rather than catastrophic, as would have been the case in more primitive eras.

The insurance debates will go on and on, with no clear winners when the debate remains at the fringes. I hope we can do our best to see insurance for what it is, a very useful financial tool that will benefit some but not all.  Ideally, we’d focus on the many benefits to ‘us’ rather than turn it into ‘us versus them.’ A guy can dream, can’t he?

All the best,

Adam Cufr, RICP®