Wednesday, September 30, 2009

Insurance, Part 2

At our last juncture, we discussed term insurance, which is the cheapest form of temporary insurance. It is designed to provide for the family in the event of an untimely death before assets can be accumulated. The idea with term insurance is to have a target amount of money that you will have accumulated to provide for the family. Once that target is reached, you would not need the insurance. That target date might be one year, five years, ten or twenty years ahead. The further you have to plan, the more expensive the term insurance becomes (Remember the $27,925 premium at age 70?). Our 23 year old hero from last time could purchase a one million dollar term policy for about $1,510 a year. Based on the tables, he could continue that premium with little increase for about 15 years.

For any business to remain viable, the amount of income must at least equal the amount of expenses. If income is greater than expense, we have profit. If income is less than expense, we have loss. Continue the loss and eventually the company (or household) goes bankrupt. Once the company is bankrupt (as we said before), nobody wins because the claims cannot be paid. Ignoring a whole lot of complicating factors, we can examine what a NO LOSS premium would be for various types of life insurance. [Cash in] = [policyholders] * [premiums]. [Cash out] = [deaths] * [face amount]. Again, if we make all the policies for the same face amount, we can calculate the required premium by setting cash in equal to cash out.

(1) [policyholders]*[premiums]=[deaths]*[faceAmount]

For large numbers of policyholders, the actuarial tables can predict the average number of deaths expected by multiplying the probability of death times the number of policy holders. So equation (1) becomes

(2) [policyholders]*[premiums]=[probability]*policyholders]*[faceAmount]

Dividing the policy holders from both sides we get:

(3) [premiums]=[probability]*[faceAmount]

That is where I got the numbers for the one year term discussion.

The math gets a little more complicated when we look beyond one year, but the concepts are fairly simple. Since only the living can be counted on to pay the premiums, equation (1) becomes

(4) [survivors]*[premiums]*[years]=[deaths]*[faceAmount], which reduces to

(5) [premiums] = ([deaths]*[faceAmount])/([survivors]*[years])

The actuarial tables provide a column of survivors from an original 100,000 population. Looking at the male age 23 column, we see that there are 98,057 survivors. Ten years later, there are 96,663 survivors. In that time, 1394 people died and the company would have paid out $1,000,000 to each death. The 96,663 survivors would have paid the required premiums for ten years. The required premium, then is

[premiums] = (1,394*!,000,000) / (96,663*10) = $1,394,000,000 / 966,630 = $1,442.12

Notice that this premium is actually lower than the initial one-year term premium because of the reduced mortality expectations from age 23 to age 32. It is not until the male reaches 33 that the probability of death exceeds that at 23. You can do the math for ten year level term for a 40 year old and see a big difference. 91,985 survivors would pay premiums for ten years to cover 3,465 deaths.

[premiums] = (3,465 * $1,000,000) / (91,985,*,10) = $3,766.92

Here the premium is larger than the one-year term at 40 ($2,436) but less than the one-year term at 50 ($5,730) because of the increasing mortality. Stay tuned.

Monday, September 28, 2009

Die Anyway, Part 2

I have held a number of jobs in my years: Pin setter in a bowling alley, busboy, caddy, producer and director of a successful after high school play, Air Force officer, college professor, Certified Life Underwriter (CLU) and insurance agent (property, casualty, life, annuities, and mutual funds). I would like to take a few moments of your time to share with you what I know about the insurance industry. This does not properly come under the heading of apologetics, but it is about my life.

First of all, who needs insurance? If you have unlimited assets, you do not need property or liability insurance. Say you live in a modest house of $50,000. If you have financed the home, the lender will require you to carry property insurance. If you paid cash and have at least that much in additional resources, you would not need property insurance as you could absorb a total loss and purchase another one. Similarly with auto insurance. If you have financed the purchase of a new car, the lender will require that you carry insurance. If you paid cash for the car and had enough to purchase another one, you could omit the collision and comprehensive insurance. If you cause a wreck which damages another person's life or property, you would be liable for their expenses. Again, with enough assets of your own, you would not need liability insurance.

Should you have to enter a nursing home, you would pay upwards of $50,000 a year for the privilege. The average stay in a nursing home that exceeds 90 days is three years. So, if you had $200,000 lying around, you could absorb the expense even with inflation. Medical bills can be extremely high, but with a few million dollars (let's say five) in your account, you could probably absorb them. With that much money, you could easily generate an annual passive income of $200,000. You would not need disability income insurance, which is designed to replace earned income. And, when you die, there would be ample funds for your survivors to handle final expenses and their own living expenses. So, the person who needs insurance is one without unlimited resources. They must find a way to mitigate or share the risks.

Since not everyone goes to the hospital or the nursing home or becomes disabled, some of those risks could be retained even without unlimited resources. Everybody, however, dies. A person who is earning an income of $50,000 a year and wishes to provide for his or her family would need to carry about $750,000 in total death benefit to cover final expenses and provide an income for his or family for 15 years. A person who does not care about his family obviously would not carry any life insurance. Let's assume you care and do not have unlimited resources. You would look for a way to share the risk. That is why people buy insurance of any kind – to transfer the risk to an entity that does have vast resources. And they must have the resources to pay the claim when it comes due. You would be quite upset as would your survivors, if at the time of your death the insurance company would not or could not pay. You WANT your insurance company to be rich – to have large reserves of money so that they can fulfill the terms of the contract. There are rating companies that evaluate the ability of companies to pay. The two best known are A.M. Best and Standard and Poor's. A. M. Best ratings range from A++ to B+ for secure companies and from B to F for vulnerable companies (with S for suspended rating in some cases). Standard and Poor's highest rating is AAA. Whereas an A+ from A.M. Best is the second highest rating, the same rating from Standard and Poor is the fifth level.

Insurance companies hire mathematicians called actuaries to calculate the correct premium to charge for the policy. They consult mortality tables to determine the percentage of a given population that are likely to die in any given year. For a generic male of age 23, one would expect about 151 deaths in 100,000 people. On the other hand, a population of generic males age 70 would expect about 2729.5 deaths that same year. An insurance company covering the young population (let's assume all have a $1,000,000 policy for simplicity) would have to have $151,000,000 in reserves to pay the expected claims. A company insuring the older population would need $2,729,500,000 to pay the claims. Ignoring for the moment the other expenses of the company, the first group of 100,000 people would need to pay an annual premium of at least $1510 for the company to break even. The older group would have to pay a minimum premium of $27,295 per year. What I have just described is the principle of term insurance. The premiums would be adjusted upward for a non-generic male (smoker, heart disease, diabetes, etc.). A term insurance policy that has expired has no value to anyone. If the policy expires before you do, there is no death benefit for the survivors. Guaranteed renewable term policies can be continued in force (usually to age 70) by the insured making the age-adjusted payments of the original classification. That is, even if they do develop heart disease or some other ailment that would increase the likelihood of mortality, they continue to pay the generic rate. A non-renewable term policy expires at the end of the contract period and the insured must qualify for the new rate with his or her current risk factors.

Saturday, September 26, 2009

Eat Right. Be Fit. Die Anyway.

This title was a T-shirt inscription that I saw when taking my mother-in-love to have a carotid ultrasound. It reminds us that life is fatal. As one wag put it "You'll never get out alive." Or as the Bible says "it is appointed to man once to die…"

If any of you followed the link above, you know I left out part of that quotation (of course, the ellipsis tells you something was omitted, but the link tells you what was left out). In my not always humble opinion, the omission is the whole point. My first wife died several years ago from ovarian cancer – that is what the death certificate says. Each of us dies from something even though G*d installed a healing program in our bodies called the immune system. The body is fully capable of repairing minor damage (broken bone, laceration, infection) on its own as long as the immune system is intact. At some point, through lack of "the will to live" or perhaps through a direct attack on the system or from the cumulative effects of life ("old age") or fear, the immune system stops doing its job and something will be listed as the "cause of death." When the spirit departs the body, the body dies.

I don't mean for this to be a downer. I thought of using Dave and Blarney (Dave and Blarney Discuss Life and Death Part 1), and I still might follow the Health Care series with that as kind of a natural segue. But first I wanted to explain how I got there. When my first wife died, we were attending a "Charismatic" church that believes in the today healing power of God. Most Christian churches believe that it is G*d's will for people to be well (why do Baptists build hospitals and churches offer prayers for the sick?). We prayed for healing, we searched the scriptures for healing, we listened to tapes of healing, and she died anyway. I'm sure there was more we could have done. I'm sure there was more I could have done. She lived two years longer than the oncologist thought she would, but she wearied of the fight. She told me while we were in the hospital for what turned out to be the last time "I want to go home." Thinking that she meant our earthly home, I was calling to make arrangements for hospice care when she slipped out. Even though the doctors made an effort to revive her, she was gone. Earlier she had seen a vision of people dancing a "funny dance" as she called it. They were in the corner of the room, but of course not visible to me. And then she was gone. I was devastated. Why had she died despite our and the physician's best efforts? At the funeral the pastor was honest enough to say "I don't know."

I can tell you now that I was angry at G*d, angry at myself, angry at the "faith" people, just angry. Fortunately for me, my son was living with us. He had been a great help through the battle, assisting with moving Sharon from the upstairs bedroom to the family room and back again. He had prepared a bed for Sharon to sleep in when we went home from the hospital. But that wasn't the home to which Sharon had referred. If not for him and my granddaughter, Brianna, I might not have survived the next several months. We would weep together as we watched home videos. She would come and sit on my lap and we would hug. I needed that. The two inside dogs were a great comfort to me also. We had prayed and Sharon had died anyway. Some reporter had once told Oral Roberts "I happen to know that you prayed for so and so and she died." His reply was "Son, everybody I ever prayed for dies at one time or another." Oral Roberts never claimed to heal anyone – G*d healed through him. People criticized him for building a hospital, but he understood that all healing comes from G*d. And I understand that, too. G*d is the source, first of the immune system, then of the knowledge of the body granted to doctors, and of the gifts of healing. For the sensitivities of my Jewish readers, I omit the vowel just as the early writers presented the YHWH without vowels.

And here is the beginning point: either G*d exists or He doesn't. I can respect the agnostic who is not sure. The atheist is a conceited
fool. For most people there is ample evidence of G*d's existence in nature. The atheist, in effect, says "I have seen all there is to see and know all there is to know and G*d is nowhere to be found." In his arrogance, the atheist claims the attributes of G*d for himself (omniscience, omnipresence, etc.). He is his own god. So let me state that I know I am not smart enough to be YHWH, but that I believe He exists. I have seen His hand on my life and the lives of others. I also believe the Bible is His word and that it means what it says. I have learned, too, that a walk with YHWH is an intensely personal journey. From sin to faith, each person is on his or her own (I think it no coincidence that the center of "sin", "faith" and "believe" is "I"). No one sins for someone else, and no one has faith for someone else. And no one knows the condition of another's heart. What I say may help you (I hope it does), but the thoughts come from me.

Well, no they don't. I probably have never had an original thought in my life. What I mean to say is these are the thoughts that help me. They come from YHWH or other people (through books or messages), and I have internalized them. After this life, there is another and left to my own devices I would not have a pleasant one. Thank YHWH for Jesus. I wish I could hold myself up as a paragon of virtue. I really want to be one, but I am not. I know me and I know my faults and my failures – as a father, a husband, and a person. Paul thought he was the chief of sinners, but I think I have him beat. I need a Savior and thank YHWH, I have one. I was a sinner, I got saved by grace and I am a child of the living G*d. I still fail, but I can go on and (in the words of the Army) be all I can be in Christ, the Messiah. And when I die (which I surely shall someday in spite of diet, exercise, and prayer) I have the expectation of a great afterlife. I hope you do, too.

Tuesday, September 01, 2009

Dave and Blarney Discuss Health Care - Part 1

Blarney:  Yes we can!  Hope we can believe in!  Change that matters!  Organize for America!

Dave:  What has you so worked up, Blarney?

Blarney:  I am just so pumped!  I just left a “Town Hall” meeting with the  President.  It was great!

Dave:  What was it about?

Blarney:  It was about health care reform.  Wow!  It was stupendous!

Dave:  Really?  What is the plan?

Blarney:  I’m not really clear on that, but it will be great!

Dave:  How do you know, if you don’t know what the plan is?

Blarney:  No child will be without health care!  Everyone in America will be covered!  The current system is broken and he will fix it!

Dave:  How?

Blarney:  Are you one of those right wing nuts that is opposed to health care reform?  Why are you asking these obnoxious questions?

Dave:  I just want to know what kind of change we are expecting.

Blarney:  If you are happy with your current program, you can keep it!  There will be no rationing!  This will save Social Security and Medicare!

Dave:  If everybody keeps their current plan, what will change?

Blarney:  Well…  Uh… People without current insurance will have lifetime coverage!

Dave:  And who pays for that?  Where is the money coming from?

Blarney:  There you go, asking irrelevant questions.  The GOVERNMENT will pay for it all.

Dave:  And where will the government get its money?

Blarney:  We’ll tax the rich, of course.  We need to spread the wealth around!

Dave:  Ok, let’s let that one go.  Will this plan provide more medical personnel?

Blarney:  What?  Well… Uh… Why is that important?

Dave:  Because if more people will have medical care than now, unless there are more doctors, somebody will have less.

Blarney:  This plan will keep the greedy doctors from overcharging, so the money will go further.

Dave:  That’s not the point.  If currently each doctor is seeing as many patients as they can, who will take the new patients?  Someone will have to lose their current care or we need more doctors.  What is the incentive for someone to be a doctor if the government will cap their wages?

Blarney:  We don’t need to worry about that.  With more abortions and mandatory end of life counseling, there will be less children and less seniors to drain the system.  If we can convince everyone to kill themselves after 65, Social Security will no longer be bankrupt.  Medicare will be solvent.  It is the perfect solution.

Dave:  Unless, of course, you are 65.  Why should 65 be the magic number, what about 60?

Blarney:  Sure, even better.

Dave:  How about 55?

Blarney:  Now you are getting it!

Dave:  Did you ever see Logan’s Run?

Blarney:  No, why?

Dave:  Never mind.