Managing risk
Module 3 was about the risk you take on purpose, because it pays. This one is about the risk you would pay to be rid of. They are opposite decisions and people routinely get them the wrong way round: cautious with the money that should be growing, and uninsured against the thing that would actually ruin them.
Guess before you read on
Health cover for a family of four, for one year
Through an ordinary job in the United States, counting everything paid for it by everybody. Not the bit taken off a payslip: the whole price of the cover. Write down a number before you scroll.
The part of your pay you never see
—
| Employer health cover | Just you | A family |
|---|
Source: —. Note: these are averages across employers who offer cover. They say nothing about any particular job, and a job with no cover at all is not in this table.
The row that should stop you is the last one. Somebody is paying the difference between what the cover costs and what comes off the payslip, and that somebody is the employer, out of money they are spending to employ you. It is part of what you are paid. It is simply not part of what you are paid in money, so it never appears on a payslip and almost nobody counts it.
What insurance is actually buying
Insurance is a bad deal on average, and that is not a criticism of it. If the company took in less than it paid out it would not exist. Over enough people and enough years, the premiums have to exceed the claims, so the average buyer pays more than they get back.
You buy it anyway, and the reason is the central idea of this module. You are exchanging a small loss you can survive for the removal of a large one you cannot. The average is not what you are managing. The worst case is.
Which tells you exactly when insurance is worth buying and when it is not. Insure the losses that would end you: the house, the liability, the years of income you would lose if you could not work. Do not insure a phone screen. You can absorb a phone screen, and paying somebody a margin to absorb it for you is buying a bad deal for no reason.
The deductible trade, in numbers
A higher deductible means a lower premium: you are agreeing to absorb more of a claim yourself, so the company charges less to carry the rest. Whether that is a good trade depends on two things you can work out and one you cannot.
The cover you buy from yourself
An emergency fund is insurance you sell to yourself. You hold cash you could have invested, and what you get for it is that a broken car does not become a credit card balance at 22% that outlives the car.
Module 3 said cash loses to inflation every year and it was right. This is the exception, and it is the same reasoning: you are paying a known small cost, the growth you gave up, to remove a large one. The premium is real. So is what it buys.
What this module leaves out
More than any other page in this course, and it is worth being blunt about which parts.
- How to choose a policy. Networks, copays, coinsurance, exclusions, riders, and the difference between two policies with the same premium. That is most of the actual skill and none of it is here.
- What cover costs where you live. Every figure on this page is a national average. Insurance is priced locally and by person, and the number you are quoted may not resemble any of these.
- Life and disability cover. Named in the reasoning above and not priced anywhere in this course. Disability is the one most people underweight most badly, because it is likelier than dying young and the loss is similar.
- Anything about health systems outside the United States. The employer figures above are a fact about one country's arrangements, not about how cover works.
Six problems
Estimate first where a number is asked for. Anything within 25% counts, for the same reason it did in Module 1.
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1. The loss that would end you
Name one loss that would end you, and say whether you are covered for it. Not the one that would annoy you or set you back a year: the one you could not absorb. Most people can name it in a sentence and have never checked the second half.
2. Something insured that could be carried
Name one thing you or your family insures that could be absorbed instead. What would carrying it yourself cost, and what would it save? This is the same trade as the deductible above, made on a whole policy rather than on one number in it.