Why buy insurance at all? Why not be self-insured and save the profit margin that carriers earn? After all, everybody knows that if you live to age 85 or so, the return on a life policy (represented by the death benefit) for the investment of premium is around 3%. Long-term investors can achieve much better results than that! Sure. But the “return on investment,” or death benefit, can come anytime in life, and your investments may not accumulate to total anywhere near what the death benefit would be, especially if your investments had serious losses or you had a briefer life than you assumed.
The point of insuring is this: For an individual, an uninsured loss is a financial catastrophe, especially before a large investment fund can be grown. But for the carrier, paying a large death claim on that individual after receiving just a few premiums is not a catastrophe. This is because the carrier knows that, out of large numbers of policyholders, this is rare, and it factors such losses into premium rates. The carrier will make a stable return from a large and predictable group because it knows the average mortality rates, including instances when it is likely to lose on a particular claim. So we buy insurance to hedge what is to us, individually, a catastrophe, and the carrier correctly prices premiums to consider the average results of all policyholders. It would only be wise for an individual to scoff at insurance if he or she could actually predict his or her lifespan and health over all of those years.
Disability Insurance (DI)
Let’s first consider disability coverage.
The usual reason most people ignore, or will not engage in, discussions about personally owned DI is that they incorrectly believe it is taken care of via employment.
The first problem with this misconception is that once you switch employers, the group DI cannot be continued and may not be available at another employer. One minor problem with employer plans is that the benefit, once on claim, is usually taxable. Depending upon the plan, in some policies it is difficult to qualify for the benefit. But the most surprising and serious problem, by far, is this near-secret: In every group policy ever set in force, the definition of disability changes after one to two years on claim to a definition that makes continued benefits difficult to qualify for. Sometimes benefits stop or are severely cut when the employee can perform lower-paid jobs but not his or her own higher paying profession/trade. Usually, a group policy’s benefit is reduced by the amount of Social Security disability benefit one can claim. This occurs even if Social Security denies the claim (the standards for filing a claim are effectively lower than for claim approval—yikes!).
