February 28, 2015


This blog is switching to a video-first format with a new YouTube series called Question an Actuary (QanA). You can read the transcript (this blog post) or watch the video (embedded at the bottom). You lose nothing and get more choice.
Question: Why do I need insurance?

Answer: Because bad things happen. Even if you’re good. Even if you prepare. Insurance transfers risk.

You — yes you — always have insurance. Even if you don’t want any. How good is your protection?
As a minimum, you are your own insurance company. This is called self-insurance. You transfer the risk to yourself. You might set money aside in a bank account for the projected claims. For instance, you could build a fund to repair broken appliances or to cover expenses during a disability. Self-insurance is riskier if you live alone by choice or because a til-death-do-us-part relationship collapses.
Beyond this, you have OPM: Other People’s Money. That’s terminology from The Millionaire Next Door by Thomas Stanley. Here you transfer the risks to others, often family. Parents, grandparents, siblings. Your rich aunt or uncle. They may willing and able to help. Don’t count on them being happy, though. You may pay them back in other ways: they now have power over you … and may like reminding you and anyone else who listens about their generosity. Charity begins at home. Arguments too.

You may be able to transfer some risks to your employer. Perhaps basic medical, dental, disability and life insurance. Employers often dislike self-insurance and transfer some risk to an insurance company. Employers often pay some or all of the costs. Whoever pays decides what you get. Insurance from your employer is called group insurance.

There’s another source: an affinity group where you're not connected by work. You could qualify through an alumni association, professional association or other group. Do you think affinity groups self-insure? At work, you have no say in what you get. Same here. At work, your employer helps with the costs. With an affinity plan you pay every penny — rarely guaranteed. Part of your premium goes from the insurance company to the affinity group. Employers don’t usually add a markup since they're already profiting from you.

The next stage is personal insurance. This you buy from an insurance company. Now you’re in charge and pay the premiums, which may be guaranteed. The protection stays with you if you change jobs voluntarily or involuntarily. Here you pay the stipulated predictable premiums. In exchange, you get a  contract which states the benefits you get.

Insurance companies don't like self-insuring. They transfer risk to re-insurers who may transfer risk to retrocessionaires.

The insurer of last resort is the government. You may think they self-insure but we taxpayers pay. You may think you’re entitled to benefits because you pay taxes. Other taxpayers may not agree. Also, you don’t have control over what’s available. Rules change.

Do you need insurance?

Yes. The question is who insures you. Since we’re not good at assessing risk, we tend to be optimistic. That’s why people buy lottery tickets and get remarried.

We don’t need car insurance because we’re safe drivers. We don’t need disability insurance because we’ll remain healthy (or think we have enough coverage from work). Who needs long term care insurance? If we need money, we can borrow against the growing equity in our house (if the banks are still lending) or get help from our kids (which means a smaller inheritance for them). There’s the government too. We paid taxes for ages. They owe us!

What if you’re wrong? That’s when you’ll truly know if you need insurance. That’s also when you can’t get any. Sorry. Insurance companies also bet. To minimize their claims, they want low risks. If you’re eager to buy, they’re suspicious. Do you know something they don’t?

Even if you have insurance, you might find you don’t have enough if you have a claim. And feel you have too much if you never have a claim. Maybe something is better than nothing?

If you never have a claim, would you like your money back? This option is sometimes available for an additional cost. The refund takes place at cancellation or death. It’s as if you earned a zero percent return. You’re protected whether you have a claim or not.

You always have insurance. Have you explored your options and optimized your decision? The best time is now.

Do you need insurance? What do you think? Share your thoughts and ask your questions below. For  private personal attention in Toronto, reserve time to Learn About Life.

Reminder: These answers aren’t a substitute for personalized financial advice. The general information isn’t tailored to your unique situation.


PS Why do you need insurance?

December 21, 2014


imageThere are lots of reasons to read a book about money and there are lots of books about money. Tony Robbins has a new one, Money: Master The Game.

Unfortunately, not many people read books. Even fewer read nonfiction. Only a small sliver read books about money. Be an exception and join them.

Not Perfect

There are various criticisms of the book, such as
  • an outsider: but being outside the traditional financial community gives Tony a different perspective
  • contradicting advice: but that’s common in life. He interviews 50 money experts with varying views.
  • over-simplified: but isn’t that better than over-complicating and confusing? Complexity can be added once the A-B-Cs (or 1-2-3s) are known.
  • conflicts of interest: Tony recommends companies in which he might have financial interests (see dealing with biased financial advice). That doesn’t mean the choices are bad but they but warrant more investigation.
  • too long: yes … I got the audiobook which runs over 21 hours and sped up the playback by 30%
  • US-centric: yes but the general ideas apply everywhere
Tony responded to some criticism in this interview for The Wall Street Journal.

At the other extreme, you’ll find gushing praise.

Tony’s Advantage

Do celebrities give better financial advice? Maybe not but Tony reaches the unreachable — people who get missed by conventional financial education. Even when Tony says things you’ve heard before, you might be more likely to believe them now. For instance, I’ve covered things like
We often know the keys about money (e.g., spend less than you earn, disaster-proof your life, save for the future). That doesn’t mean we do. Tony helps people change. He might get you to change too. He has a knack for making financial education engaging. He explains his terms and uses many examples.


Instead of writing a book, Tony could have created videos and an app. That’s what I thought before getting the book. I don’t see videos, but he has a free app (if you’re willing to give your contact information).

Instead of using a conventional publisher, Tony could have self-published. He could have made the book cheaper. He could have narrated the full audiobook, rather than portions.

Overall, what he did is fine.

Free Meals

Tony is paying for 50 million free meals. Besides donating all his book royalties, he’s made an additional personal financial contribution. That’s rare. Chances are good that you’ll end up on his mailing list, though. That gives him the opportunity to sell you his other stuff with the money you’re saving.


Tony tackles tough topics such as the conflicts of interest rampant in the financial sector. He gives solutions too. Think before you leap.

The stories from successes like Richard Branson are interesting but may not provide much practical guidance (e.g., how Honest Ed turned $212 into $100 million). Look for patterns rather than a guaranteed formula to financial independence.

I wasn’t expecting much from Tony’s book but because he’s popular, I knew that I had an obligation to read it. Overall, I’m impressed and highly recommend Money: Master The Game. There’s lots of practical advice.

Money books get stale. Tony’s book is new, which means now is the best time to read it.


PS Another must-read (or re-read) is Warren Buffett’s biography, The Snowball