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.