Insurance - Which Insurance Do You Actually Need; Which Can You Do Without?

In today's episode of The Long Run Show, Michael and Austin talk about insurance.

• How people think about and approach insurance.
• which insurance life, health, auto, electronic device insuranc edo you actually need?
• Using Options to insure the investment portfolio
• The origin of insurance? How did insurance companies come about?

Hosted By:

Austin Willson

Michael O'Connor

Unedited Transcript

Hello and welcome back to another episode of the long run show. This is your co-host Austin Wilson and Michael O'Connor. And I have to say right off the bat, I don't know if anyone else has noticed, but we've got a snazzy new intro outro combo.

Big shout out to Nick Thomas. One of our lovely British writers on our TV, that the good graces to provide a little color commentary at the beginning. And I just love it. What are your thoughts, Austin? Oh, I love it too. I feel like we're at the BBC every time we every time we do the show, it's just a, it's just a grand old time.

And also shout out to our amazing producer, Asli. She did a great job putting that together and coordinating everything so that we sound good and we look good. You can't see us, but we look good anyways. Today we are going to talk about and hopefully do an interesting. And compelling job talking about one of the most boring topics ever, which is insurance.

Okay.  We thought this was actually a great fit for our podcast because this show's all about the long run. And there's nothing more long run than insurance. Insurance is all about risk mitigation. And you're talking about some, sometimes decades, long risk mitigation, some of the risks that are a hundred percent going to happen, like your death, or sometimes it's risks that may not happen like flood insurance for your house.

So we're going to cover all of that today. Maybe even get into what might be dubbed insurance for your portfolios, with the options. We went, talk about that as well. But right off the bat, Mike, do you want to say something real quick and then we'll hop into the different types of insurance and kind of lay some groundwork.

Yeah, I think this will be a fun one because this is one where you definitely have. The more optimistic view on the subject matter, which is a little flipped, I think, compared to some of our previous apps I'm a big game theory guy. And 90% of the time insurance is a bad bet for the insurer  it's if they weren't gonna make money off of it, why would they be offering it?

So it's a really unique value prop where you have to, at least in my opinion, you have to have psycho economic benefits that outweigh. The cost, which I think is a hundred percent there and life insurance, or fire insurance for your house, car insurance, stuff like that, where it would be just absolutely awful to have something happen to not have insurance.

 But I dunno stuff like electronics, insurance, appliances, stuff like that. It's really hard to make a compelling value prop in my opinion, but I am excited to dive in and yeah so I think you're, you might be right on the surface. We may have some different. Or flip-flopped I guess opinions here usually I, you can go back and listen to other episodes.

I'm usually very pessimistic when it comes to things or at least at the very least cynical or noxious.  Yeah. So this is right up my alley. Now I think it would be important to just define some of the different things. So we usually, when people think of insurance, they think of like auto insurance that's the first thing they think of something you're required to have by the government.

 It's just there it's a necessary. Yeah, I guess evil is some people might I've. I have been in a couple accidents. I will tell you it's pretty nice having having auto insurance. Even though we are required to have it to drive  in the U S at least. So that's probably the first thing people think about insurance.

 W when the topic comes up auto insurance. Okay, cool. There's a lot of other ones out there's renters or home insurance. People are very familiar with that. Then of course, you've got the life insurance side of things, which is it's whole other beast. It's its own monster in and of itself.

 You've got people saying, oh, it's an investment. Oh, it's a, it's an insurance product. Oh, it's this. So it's that I can do 10 different things at one time.  That's a wild world. And then you have the other insurances, like. Where it's insurance for like electronics. Like I've been tried platforms, try to upsell me every time I buy an electronic, whether it's through best buy or Amazon or eBay, they're always like, oh, you want to ensure this electronic device?

And I'm like, oh no, thank you. I don't really want to and Midwestern insurance selection  I think they know their customer. I'm pretty sure they they've got my IP address and have geo-fenced me in with a different. Voiceover anyways, I digress. So you've got those like device or appliance based insurances which never I never get them.

I'm not that cautious, so I've never gotten them. And of course you've got health insurance, which we, that is such a big topic in and of itself that  we can touch on it, but we're not nearly going to scratch the surface on that today. So those are the main consumer insurances.

Now there's really funky things that happen in the insurance world. So there's actually a subset of insurance companies for insurance companies, which is wild. There are insurers for the insurers. So they're insuring the risk that the insurers take on. I know that sounds very meta and ridiculous, but it is a thing because insurance companies, if they don't pay.

On a legitimate claim of some sort of, whether it's let's say a death claim for life insurance or some sort of health, insurance claim or  house insurance claim, if they don't pay out on it that really ruins their reputation. Most of insurance is about trusting the company that you're with.

 Because you're  there's a higher level of trust because it's an ongoing transaction. You're paying premiums usually monthly or yearly for the insurance on whatever it is. And that's different than. Then a one-time buy or even a subscription product where you're getting a magazine monthly or an email monthly it's very different.

It's intangible. And a lot of the value is based on trust. So there's that subset, which is other part of the insurance world. And then of course there's really interesting things like life insurance companies do really interesting things with their portfolios where they will use options to basically ensure or guarantee a return on a portion of your dollars  put into the premium dollars, put into the policy.

They'll guarantee a portion of that. So there's lots of moving parts within the insurance world, but that's the main breakdown did I miss anything there?   I always enjoy the origin story of insurance. When the the east India and Western Nia trading companies and the, all the big shipping companies were dominant any smaller player, they could maybe afford one or two big trading vessels a big sailboat sailing ship.

And if it's sunk in a storm or got looted by pirates or something, the company would just go bankrupt, you'd be completely hosed. And so the very first insurance companies were for merchant vessels and to ensure, so if you get sunk by a storm, everyone doesn't immediately lose all of their livelihoods and go bankrupt, which I think is it's so wild.

And that's where Vanguard's logo comes from  the ship with the so the, at least I believe that's originally their story behind the logo. These, I think it's a fascinating thing where you have the, this idea of a cataclysmic event. It's such insurance is such a human thing.

And I mean that in like only, it's such a unique Like all of the idiosyncrasies and funky heuristics of humanity just seem to come out and insurance, like it's such a unique and just I honestly think it's fun to talk about even how boring most people think it is. It's like the psychology and the ramifications of every layer of insurance are just so interesting to me, at least.

 Yeah. Yeah. And it's, and I've seen  I, in a past life was a financial advisor for awhile and that sometimes involved insurance and there were more there were advisors in where I worked that were, we're selling more insurance than others.  Some didn't do hardly any, or they found it out to a different advisor or something, but I've been in meetings.

Talking to clients  watching advisors present to clients and it is always the insurance conversation is all of money is emotional, but the insurance conversation is more emotional than pretty much any other part of the whole financial planning or financial advising kind of conversation.

 And so it's really interesting that you bring that up because it definitely is a human thing. Like only us humans can abstract enough to think into the future to go, oh, that might be a horrible situation. Can I get away from that somehow? Or can I like lessen that future potential blow to my, whatever.

Appliance or life at legacy  w can I lessen that we have we have a ridiculous ability to abstract and think into the future. And so it is interesting. You bring that up because  the conversations that I've seen just on a personal level and on a human level are always very emotional.

So that kinda makes sense. It's just about the most long run topic we could even talk about  in terms of human long we could talk about the heat death of the universe if we wanted to but in terms of the long run show, being about people and finances and everything, and I think it's just about the epitome of long run than we could talk about, because it requires in order to even perceive a benefit, you have to take a very long.

Look at things and imagine your future self reacting to things you can't imagine your current state engaging or losing something you have to step out of and have empathy for your future self, which is extremely interesting. Yeah, it is. It is very interesting. The different topics here are the different pieces of insurance.

I laid out what let's go through those because you have an interesting view here. You said you don't think insurance is worth it 90% of the time. So I guess first explain yourself and then second let's walk through those different pieces of insurance and see which you think might be worth it or not worth it.

 Cause it sounds like there might be different kind of arguments with each one. So go ahead and explain yourself, Mike. Yeah. That's I think the best way I can explain it is with an analogy to blackjack if you ever played blackjack, there is this almost always. I've never seen a game where they don't have it, but there's always a bar with just as insurance.

And so that's, if the dealer is showing a, an ACE or a 10 card you can buy insurance. And if they get a blackjack, you get a payout from that. So it's a way to bet on the dealer having a blackjack. So you're instantly gonna lose. So it's this kind of psychological benefit to, to it's oh shoot, he's got a blackjack.

 I gotta make some money off this or not lose all my money. And it's the probability is always, it's never in favor of taking the insurance near all. You're always significantly better off by not taking insurance. And that's a, just how insurance works and the broad scheme of things.

Because if you think about it, no, no insurance company could be in business. If it didn't work that way the B there'd be no way to, if everyone was crashing in their cars all the time, insurance companies wouldn't exist because he couldn't, or the premiums would be so incredibly high that only only a very small segment of people could afford it.

So you have to. And this isn't necessarily a bad thing. So it's, I think a qualifier to my statement of I think most, most possible uses of insurance out, there are not a net benefit for you. Like it's not necessarily, it doesn't necessarily make sense economically to engage in it.

So like a classic, like appliances phones a lot of stuff that computers, a lot of stuff, and that stuff has come out more recently that more and more companies are pushing that because at least from my perspective is because okay, you can make a lot of money charging premiums.

 When, whenever anyone buys an iPhone, just charge them three bucks a month or 10 bucks a month, whatever, it doesn't seem like much. But the probability of them breaking that over the course of the plan without it's very low comparatively. So you can make a lot of money with insurance because you're playing on that loss aversion  those kind of natural human tendencies.

And on the other side you have the really big stuff like life insurance, home insurance car insurance, where the effects  if you run into a situation that you would utilize it, the effects of not having it or are very high and the health insurance is a great example.

And that's something that very can be a very political discussion, can be all over the board in regards to how health insurance works in the United States versus other places and everything. But I think just to sum it up very briefly is it's a very interesting scenario where  it's another situation.

Where things can go very wrong. And in the, I think the psycho economic benefit, so the kind of deep understanding of value in the human brain that's outside of dollar signs or anything like that kind of understands the value in those kinds of insurances. And I think that is significant and not necessarily to be disregarded.

So I, I definitely, I've definitely met people who say never do any kind of insurance because of just the probabilities, like never, ever do anything insurance, like you just, if you're gonna do life insurance, just save the premium instead and then give it to your kids or something like that.

So there is some very, there's some very interesting takes out there that are like, oh, never do any insurance, which if you're purely looking at the statistics, like sure, like purely looking at it or probabilistic way, but at the same time, it's I think that there's real value in that that the psychological side.

  Okay. I'm just confused by the guy who said don't ever buy insurance ever. And because I'm like if anyways, the probability of that person who's told you that dying is a hundred percent. So he's looking at this, that's beside the point. We don't need to argue with an imaginary person. Who's not part of this podcast okay.

So it seems like what you're saying is insurance, for things that can be pretty easily replaced and, or things where you you're not going to get rid of car insurance. You're required to have it by most states laws. In at least in the U S here. So you're saying like, okay, barring anything that you're required to have or anything that would be.

 Easy to replace, then you can look at getting insurance and then it's really just a cost benefit from a  emotional perspective.  Is that what you're saying? Pretty much is a good way to sum it up. I would say so, because the same thing with I just recently I traveled pretty routinely.

I never, ever booked travel insurance. I never had before, but then I just recently did purchase travel insurance for a big trip coming up just because I was like the cost benefit of. Okay. If this gets canceled and you gotta you can take risk into account. There's always the risk of COVID lockdowns or flights being canceled, et cetera.

So it depends on  the full scenario of risk as well. So that was the first time I've ever bought travel insurance and never buy like a U haul insurance when moving or renting any objects or anything like that. And so I think what you said is pretty spot on because it's the you have to have kind of an internal conversation and say, do I actually consider this worth the extra?

And I think one of the, one of the really important ways that insurance can masquerade itself as this, just like a no brainer kind of thing, even on small products like that is because if you're looking at a phone, like if you're getting a new eight, $900 iPhone and they say, look, you can just add on insurance on this full coverage for 10, 15 bucks a month.

Something like that. It sounds, oh my gosh, like $15 a month compared to $900. That's so little money. I don't care about that much money compared to the 900. So it's okay that's a great deal. Who knows? I might break it. I don't wanna have to repay the $900.

And then the next day you could be buying a meal for $15. And so  it's, there's a lot of anchoring that goes on as well. That makes insurance seem cheap when you know, the product itself is expensive. And I think that's a very common, psychological phenomenon as well. It's like that's an easy way to create a subscription plans towards just the psychological benefit of not worrying about whether it's going to break or not, which is, I think it's a really fascinating for now.

Interesting. Okay. Yeah. That's fair. So I would probably agree with you on like phones and appliances. And I think it, like you said, depends on the whole situation, but like for a long haul move using U hall, I might just buy the insurance cause I'm like I've had an accident before, so maybe I'm going to have one again.

Maybe I'm just that bad of a driver. I'm like don't tell my insurance company, but the thing is okay, maybe I would do that, but that's considering my scenario. And so it's not necessarily true for everybody. I did want to go back though, to something you said in your explainer of, oh if if there was.

  If the insurance was actually worth it, insurance companies, wouldn't be making a buck. And you said something about premiums would have to be super high  for there to actually be any, if everyone was crashing their cars and using the insurance premiums that have to be super high because everybody would be using it.

And so since not, everyone's using it, therefore no one should get it. And that was that was kinda what I heard. So please correct me if I'm wrong. But the, that thought process for at least some insurances, so I'm thinking  let's just compare apples to apples. So let's go term and term life insurance, which term life insurance you pay usually a monthly or a yearly premium for.

15 years of coverage or 30 years of coverage or 20 years of coverage during that term, if you die, you get paid out the amount that you're insured for. So term life insurance, car insurance, renter's insurance, home insurance. Let's compare those because they're all the same. You're paying for a term you're paying usually some sort of monthly or annual premium price for that.

 The reason, so to push back on what you said it's, it doesn't work because it's not worth it because they're taking advantage of you that the in life, the insurance is taking advantage of you because there's just more are there, people are not using it enough, therefore you shouldn't get it.

Hopefully I'm not strong. Meaning you've stepped in if I am, but pick a little bit, but I'm interested to hear what you're about to say. The idea behind it is that. Actually what you brought up at the beginning where the ships were insuring each other on a long voyage because they if one of them, or many of them lost the ships that were in their fleet, they didn't want to have to basically bear the brunt of that all themselves.

They wanted to spread that burden out across multiple people. Th the same idea holds true that the, what you were saying about yeah. If everybody was crashing their car and using the insurance claims then you know, the insurance company wouldn't be making a buck, you might be really getting the best out of your insurance.

You might be getting a new car for a couple of hundred bucks in premium. But there would obviously be opportunity costs there anyways. You might be getting a new car, but then the premiums would all just have to go up. The idea with having a large pools of people insuring one another is that you spread around the risk and the burden.

 And I guess what I'm saying is that the idea that, oh the it's just  the insurance company making a book on a low probability event that is somewhat true cause they do have to make a buck, but also the main the main mechanism for that to happen is not that the event is low probability or the risk is low probability, but it's, there's enough people to spread the risk around so it can reduce the burden for any individual risk.

It can reduce the burden where as if they didn't have the risk spread around or the burden financial burden in this case spread around, it would be a full a hundred percent. Whereas it can maybe be 10% of that burden. Does that make sense? No, definitely. I, and I totally agree with that.

It's something. It's similar to a credit union where you have a conglomerate of individual players that creates a situation where the risk is significantly lower for everyone. So it's I definitely agree. It's I guess maybe I threw my perspective out a little too harsh in the beginning of, I think my perspective is more just if you simply take like the individual's perspective from each like each individual player in that whole games perspective sometimes it can be a hard sell  to be willing to take on the risk of the group as a whole.

  But it's a very good point. It's I don't. I think that insurance companies are fraudulent or just taking people's money or anything like that. It's not, I definitely agree that  insurance is a necessity in this day and age and it's it's a good thing. It's not at all a bad thing.

 And I, maybe I came off like that a little too pessimistic, like short term insurance companies. Definitely. Don't, that's a bad as the good thing, you're not anti insurance, otherwise you might, I don't know. Maybe you disappear insurance coming true. It's like messing with the fed big pharma and insurance companies.

It's just let them be there doing their thing. Anyways. That's a whole, maybe a better qualifier to my original statement of 90% of insurance. I think I meant more like 90% of the offers for insurance that you'll come across over the course of your life are not worth it. So the kind of, a lot of the.

More like substandard like regular events, like getting a new phone, getting new appliances, getting new products moving, traveling, the kind of insurance is that ironically almost a weird negative correlation between the amount of times that you would use the insurance in your lifetime compared comparatively.

It seems like the amount of times, if you're only used at once, like life insurance or hopefully your house only burns down once it burns it down at all.  Like insurance is that you would worst case scenario only use one, maybe two times I think have the most intrinsic value and are probably the best, like the best value, both simple economically and psychoactively as well.

Whereas the insurance that you could end up using many times you could break your phone many times  the possible risk to the insurance company of someone who is is maybe just drops their phone a lot. And they have to average that out. So they probably have people who dropped their phone a ton of times are the outliers on one end.

And the vast majority of people don't, but they end up having to pay extra for that. And that's a whole funky situ situation. So I would amend my statement and say more like the number over the course of a lifetime, most of the insurance, most of the possible insurance things that you'll be offered are not worth it, but does that.

 That I could see where you're coming from on that, because I guess I would probably agree mostly with what you said, or I would greet most with what you said.  There's almost a weird negative correlation where if you're going to use the insurance a lot, it's probably not worth it.

Whereas if you don't use it a lot but I guess actually, let me go back let me say this. I think it's actually, if the burden of the risk of that thing happening, it's not necessarily that thing is likely to happen, but that if it did happen, it could be catastrophic. I think that's when insurance makes sense, rather than if there's a high probability or low probability.

 Because there may be a higher probability that. I'm going to get in a car accident rather than my house is going to burn down, but both are still really bad. And they would both be very damaging and burdening if they happen. So I want to ensure both of those risks. Yeah. So it's almost like a burden, like what's the burden of the risk, not what's the probability of, Ooh, that's an interesting definition.

I like that. How does this, because we know there's a lot of ways to have quasi insurance on your investment portfolio, whether you're using hedging tools, whether you're using a funky options plays whether you're buying interest rate swaps or treasury swaps, or there's a lot of different ways to have quasi insurance in a portfolio or over the course of a lifetime w we still didn't get to, I want to dig more into your you're comparing, contrasting each of the, more common long run insurance.

 Things, but what you just said, it almost makes me think that it's maybe not a great play to, to be regularly insuring your portfolio, ensuring quote unquote using hedging tools that perhaps may be reducing your upside. So it's an interesting if there is that kind of actual correlation between the amount of use, like the amount of times, if you're hedging, and this is just financial tools and instruments in general, there are so many hedging tools out there.

 You gotta think about the premium involved and that's say it again, but it's like this if these tools are being used extremely regularly   maybe they're a funky value prop going on there. So that's just a thought just to put meat on those bones, I think you're probably right.

 Because I just read through a. An ETF. I was doing some research on this ETF company and they basically offer some ETFs that will try to basically ensure whatever you put in the ETF for 12 months. So they want to ensure or reduce the downside. They don't use insure because they can't, it's an ETF company, but they want to reduce the downside to basically shave off the first 10 to 12%, excuse me, downside for that year.

So the idea is they're all pegged. They basically use option strategies on the S and P 500. And they're pegged from, let's say February one, two of 20, 22 to February 1st, 2023, same thing. They have 12 of them for each month of the year. And so you can buy this, buy into the strategy, essentially through an ETF where you can insure against the.

10 to 12% of the market dip. However, the rest of that, let's say the market drops 30% of the year. You're only going to save the first 20 or the first 10%. They are not going to be able to save you from the huge drops. So their idea is we can, and again, this is, it's an ETF, so it's very hard.

They use a lot of qualifying statements, but essentially their idea is we want to help you with the little  smooth out the bumps in your portfolio. And we want to help you with the little downswings while maintaining upside rather than totally protecting you against the largest bear market that we might have in that 12 month period.

 So an interesting. Thing, because I don't think they were close to 1% for the expense ratio. And I was like, yeah, I don't think that would really be worth it if they're not going to fully protect the downside. If they're only going to protect the first 10%, I don't think it's really worth me paying them 1% of all the funds invested for that insurance, because it's not the biggest risk.

The biggest risk is a 30% downturn like a 2008 or something. And so I would want to protect against that risk, which there are other products out there, usually an insurance where you can do that. You can basically have zero downside with a cap on the upside, which is really interesting. The only reason they do that is because they think they have a lot of money, so they can ensure that that, that.

Kind of floor and ceiling approach, but they also use options. But they're very effective at it because they have a lot of money. So the options and the fact that they have a lot of capital behind it, make them able to offer those sorts of products, but a very interesting kind of scenario there where it's yeah, this isn't really worth me insuring quote, unquote, that the first 10% of my losses I don't think that would really make sense.

That's a really, yeah. That's a really interesting situation. A very interesting ETF. Cause it's like on the one hand it's so interesting. Cause it's I wonder who first thought of that. That's a very unique product to where  that is very unique and  maybe worth it if you're very convinced that this is not going to be much downward volatility in the market.

  If you think the market might go down 5%, but since was such an awful. An odd way to think about it. Cause I think the majority of retail and a good portion of institutional, like you said, watch for the 20 to 30%, you just want to not be in the market when that happens, is one of the easiest ways to consistently make big returns.

So that's a very interesting, and maybe it's a thought process of if you see it getting towards that 10% bound and you pull out, you say, oh, perfect, okay. This is right at I'm about to not be insured anymore. This is what I sell or I don't know exactly how it works. Yeah. I didn't dig in hard enough, but I don't think that would be the case because it seemed like it was a reset.

It was a 12 month window that reset exactly 12 months later. So they couldn't guarantee the insurance in between that period because of the option strategy they were using. Eh, I, again, didn't see the value in it, but that just is putting some meat on those bones of it's probably worth looking more at the burden and less at the probability that should probably be your first impression or your first factor that you consider is what's the burden of the risk here.

Not what's the probability that this risk is going to happen. I think that's probably maybe third, the probability factor maybe third, second, or third in the list. But the burden has to be the first part for sure. In determining if it's worth it or not. That makes since to me. And I think that cause otherwise you go go down the weeds of Monte Carlo options, pricing, and all sorts of fun, fun equations and stuff that  a lot of the times it works.

  For the average. So the average investor if you want to have relatively safe blue chips with covered calls is pretty classic. Get a little extra premium on the side from the pharmacy. Want to be going a little crazy, but   yeah. That's definitely a good positive, but that's not really, that's almost a risk in and of itself like you may if you're doing a short-term, if you're writing a short-term call, I guess it's not gonna be that much risk if it's far out of the money, but cause we've got a lot of Robin, Hooders sorry for anyone who use Robin hood.

 But got a lot of Robin hood is just buying way out of the money options companies. That's what it should be. We got a lot of hoodies because there were a hood I'm just kidding. We're insulting our audience. No no, it, that in and of itself could be. As well, because you could have to sell based on how the option plays out, could up sell if you're writing the call.

So you're losing out on some upside possibility. Possibly, but if it's far out always, there's always chances of everything in the long run that is the best quote ever. There are always chances of everything in the long run. My, my long run, my, my long run forecast for you, Mike is that there is a as a high chance of everything and not financial advice, but general advice.

I would say none of this is financial advice, but that's life in general advice, all the high probability of anything at any time in the long, pretty much that's that's just life advice there who knew you were going to get, be getting a grandfather wisdom from Mike and Austin here on the line.

Exactly.  I want to jump back. We talked a good bit about the stock stuff, but I want to jump back to your example of the contrasting kind of the more standard insurances that everyone is probably going to be looking at whether or not. Hoodie or you're active in the market. Maybe here, your problem might be looking at life insurance or already have it and optimizing it.

And that's a lot of stuff that I'm not as well versed as you are. So I want to hear what you were talking about and get a little compare and contrast for our listeners before we have to wrap up relatively soon. Yeah. So the  the nice thing is we don't have a hard commercial break Mike, so we can just, and go and folks you're a long, we can make this, the longest episode that the long, long running, it would probably be appropriate with insurance.

 No.  Just to sum it up. So let's go through them relatively briefly. And then you can ask questions where you think would be helpful. So life insurance kind of its own behemoth, but essentially two different types. You got the term which we just discussed. You pay a premium for a period of coverage where you'll be paid out the better.

Of dying. You'll get paid on a death benefit if you die during that term period during the coverage period. So you're just paying for you're basically just paying for coverage during a set amount of time 20 years. Let's say, if you outlive the term and you're not covered anymore, then there is permanent insurance, which always pays out.

 Th there's actually never been a life insurance policy. That's not ever paid out. Every insurance policy always pays out as long as there's a legitimate death claim filed. It always pays out. Now, some people don't file a death claim. Totally separate. Maybe insurance companies make it hard to file death claims on purpose.

I don't know, but I like living. So I'm not going to go tread, tread too far into those weather. No, but so you've got the permanent insurance, which always pays out when you die. You're paying into the policy the whole time. There's a lot of different calculations that go into that. If you're buying a policy, when you are, let's say 75 or 80 versus buying that same policy, when you're 35, you're going to be paying a different premium because the risk that they insure you for is adjusted over the life of the policy.

But the initial, like your personal risk is determined when you start the policy. So at 75, you're going to be way less healthy than you are at 35. That means you're going to pay a larger premium at that point. Sometimes it doesn't make sense to buy insurance because they know that they're going to have to pay that insurance out very quickly.

And like you said, at the beginning, they're not going to make a buck on it. So if you're paying premiums in for 40 years, from 35 to 75, then they're going to be able to make a buck on it because they're going to take some of that money and invest it. And then also have some of that earmark to be able to pay your insurance your insurance claim, your death claim when you pass away.

Now, if you set it up  the amount you pay in from 35 to 85, let's say, or 95 over that 50 to 60 year period should be less far less than what you get in return. And the reason that works is because they could take that money and invest a large portion of. There's also going to be people that live far longer and actually get less.

There's gonna be people that live live a shorter life and actually get more compared to what they paid in. It all tends to even out, but you should be able to make more on the death claim than you paid in premiums. If you didn't, no one would buy insurance. Now, some people will still buy insurance because there's really good scam artists out there in the insurance world.

It's very unregulated compared to financial advising very unregulated. So you can read some wild stuff. And it gets very annoying because they also can just call themselves financial advisor because that's not a. Like a regulated term. So a person can be a quote, unquote, financial advisor, but they only sell insurance.

And  if all you have is a hammer, everything's a nail. So everything gets solved by insurance for those guys. And that's not necessarily appropriate. So that's life insurance, there's permanent and term permanent. You're going to get paid out at some point term. You may or may not get paid out depending on when you die.

Then you've got the home or excuse me, I should back up. So on in my estimation, usually it makes sense to do some sort of life insurance usually, but you want to optimize it. You pay in far less premium than you get paid out. And you want to be aware of how the whole game is played in that world.

Usually it helps to have someone walk you through it. Who's independent and can look at a lot of different options for you. And so that in my estimation usually makes sense whether it is some sort of term product with the option to become a permanent product later, or it's some sort of permanent product.

 Again, like we've said in a couple of other instances in this podcast, it depends on the whole scenario at that point, determining if it's a good fit or not. But usually there's usually, there's a reason for life insurance. Now, the only reason there wouldn't be. Is if you had no risk. So if an example of that, which might sound weird because everyone has a hundred percent probability of dying, but there may be no burden attached to you dying other than I'm sure an emotional burden for some people, right?

I would hope you have friends and family, and it's emotionally difficult when you pass away because you were loved. But there may not be a financial burden attached to you passing away because maybe you are you don't have a. Necessarily kids. You never married. You just were riding that single wave all the way into your nineties and you pass away a happy, jolly single guy.

Okay, fine. Then you don't really have anything to insure because there's no burden there. You're not leaving behind a spouse who needs some more money to be able to live the rest of their life. Not leaving behind kids who need to be taken care of or kids that are adults, but you want to pass on some sort of legacy to them.

 At that point, if somebody is single, sometimes people will write an insurance policy on themselves and use it to pay for an endowment for a college to, to fund some sort of charity. You can do a lot of things with insurance, but there may not be a super good reason if there's no burden, which is why I think burden is the number one factor in determining the usability or the value of insurance.

And then probability, there is no burden. You don't even have to talk about the probability. Yeah, I would say for most people, life insurance will make some sort of sense  in their life home insurance. First, let me stop there and you can ask questions. Did that make sense? No, that makes sense. And  I liked that definition of looking at the burden right upfront  which brings in an interesting one because it's that's a tough call.

If you're very young and single or then you might not imagine you, you're not, you don't have burden in the moment, but like you said, if that's the easiest, the cheapest way to get good insurance when you're young and healthy. So it's a, it's an interesting conundrum. Yeah. It's. It's almost go ahead and you insurances, like when you really need it, you can't get it.

And when you don't need it, you can get it really cheap. That's pretty much all insurance, except for phone insurance. Sometimes you can just buy that and then be like, oh, sorry, I dropped my phone anyway. So I would say that there's probably, for most people, there's probably a situation where life insurance makes sense, home insurance.

 We don't really probability may be very low, but the burden of you being in the street and homeless might be pretty high. Now, if you have multiple properties, maybe you've reduced the amount of coverage depending on the property and the utility it has for you as the owner. Maybe I put less on my vacation now, cause I don't really care.

Or maybe I put more on my vacation house because it's worth more. And I actually really care about it. It's a family heirloom passed down five generations and I really want to make sure that it doesn't. Dye, and then I die. I'm still there. It doesn't get destroyed and I can't pay to repair it. Somehow death of houses is always a sad thing to see.

It is always a sad thing to see. So that home insurance, I think the burden is pretty steady there really interesting one. And it's almost a subset of this renter's insurance is interesting. Sometimes it's required by your landlord sometimes not. And I don't know. I think it's a personal thing.

I, I think it also depends on the scenario. If you're living in a situation with other roommates or your, in a huge apartment complex, may definitely be worth it to have some renters insurance, because then there's more risks involved. There's more potential risks involved because you have more humans and humans are inherently risky.

 So then it maybe makes sense, but if you're living in a house by yourself and you're just renting the house, maybe it doesn't make sense at that point. Like you don't own the thing. Yeah. You have a lot of stuff in it, but you're the only variable or you and your wife or husband are the only variable or what have you then probably doesn't necessarily make sense because  the at that point, yeah, the risk is high, but the probability is far reduced.

  And maybe even the burden isn't that high either.

So that, that can be  Kind of a sticky wicket that's, again, case by case scenario for that one. You, have you have anything to add there, Mike, as far as like home or renters or what would you do for renters? Yeah, that's an interesting cause I do, I actually have renter's insurance, but I w I'm actually planning on canceling it.

So that's an actually really timely, a timely thing because it's it's interesting, like you said, it's all about the variables and the risk factors involved and  And it sounds like we at least from my perspective, I've definitely taken a very pessimistic view. It sounds like I'm taking a very pessimistic view over this episode of insurance, but I think it, it really is in some ways similar to investing in that it takes a lot of self knowledge of your risk profile.

And if you don't have house insurance, will you be constantly worrying about how did I leave the, that I leave the stove on? Is the gap there going to be a fire? If you don't have life insurance, you got constantly be worrying about it. So it's something where I think  like we talked about, I think in the previous episode of knowing yourself and understanding your risk profile, understanding the things that you value, the things that.

Going to worry about or not worry about is really important. I think for, I think the majority of people, like you said, it's a lot of those long-term insurances, home insurance, life insurance. It really makes sense because it's it's things that people will likely have to deal with at some point.

And are you going to be worried about it and constantly thinking. Yeah. It's almost yeah, like you brought up at the beginning, there is some psychoactive value to it as well. It even if you decide that yeah, the burden is catastrophic and I need to ensure this risk.

Yes. It may happen. The probability is enough that I shouldn't share it. Okay. Also, there's just like the mental strain associated with it. That could be very valuable to, to mitigate. Or it could be a relational thing  oh my goodness. If I die is my, are my wife and kids going be taken care of?

 That's like a common one for young families.  That's a very common worry, especially if  you're the primary breadwinner. Or even if you have two two spouses working, you still got to take care of the kids. Somehow they got to go to daycare. There's an expense there.

 So it definitely. Mental strain as well to think of as far as the other types of insurance auto insurance and the next one that comes to mind that I think probably everyone's going to run into that. You have to have it. I've I tend to be more cautious. I'm interested to hear what you think about auto insurance.

I tend to be more cautious just because I, this is a mental, this is a perfect segue because this is a mental thing for me. I've been in a couple accidents before. And so I know that, okay, having insurance to be able to pay for this vehicle and or damages outside the vehicle, if it's property or hopefully not.

But if it's people, if someone goes to the hospital and I'm at fault, if I need to if I could get sued for that, then that makes sense for me  to reduce the mental strain and concern to have a larger amount of liability coverage on. Policy, but that's me, I'm more cautious.

And again that's my scenario. And I value that insurance probably differently than other people would because I just have a different history, a different experience with driving. So that's weather, whether good or bad, that's just how it is. And so I probably value having a little bit more coverage.

I don't know  what's your perspective on that? Yeah, I think I'm actually in a similar boat to you on this one of a for car insurance. I think I had a similar experience where not driving and been in an accident and been driving and been in an accident and never in a, an a fault situation.

I haven't run any red lights. Like it's never I've never been the cause of an accident, but it's interesting to see what if you didn't have car insurance and you didn't cause an accident  and then some states are no fault. And it doesn't matter if you caused it or not.

If you're not getting the payout from the other person where some states are where you'd get covered, but that's scary, especially if you're traveling across state lines regularly if you're moving around at least for me I'm in a similar situation where  I'm willing to pay the extra money to have a better coverage.

 And I think car insurance is oddly in a similar situation as health insurance, because health insurance has. So both car and health insurance, there's so many different options, at least the variable. Exactly. At least in my head home and life insurance are similar in that there's one kind of thing that can happen.

  You die or your home is destroyed and maybe there's different levels of. Moderate damage to a house. I don't, I thought you were going to say different levels only, mostly dead only what's the princess bride girl only, nearly he's only nearly dead, something like that. Only nearly dead.

Yeah. But but I think that car and health are in this interesting category where there is a lot of different costs, possible, a lot of different variables possible. And for me, I'm actually, I would say I'm probably more on the cautious side, similar to what you're saying on both where  I would rather spend a little more on, on both car auto and health insurance and have that added protection.

Yeah. Just for the edification of our audience. I'd looked up that quote it's mostly dead is slightly above. Nice for those who are trying to string the quote together. There you are. Yeah. I see what you're I see what you mean, thinking of them similarly   they do seem to have some kind of cross over there and health insurance.

Everybody's going to probably bump into that at some point. I've surprisingly had different experiences than I thought I would have with health insurance. Not and this is just me, probably just being a young guy and not having used it a lot yet, but I haven't yet seen the value of it, even though I totally understand it.

 And definitely pay a premium for it. I pay a premium for good health insurance, but. I haven't really seen the value yet just cause I haven't used it. But I've seen it in other in others or family members or friends that, that sort of scenario seems again, most of this stuff it's  yeah, health and health insurance is its own behemoth, but it seems yeah, it's probably makes sense.

 As far as the other pieces of insurance I don't think appliances are, we've been over this appliances devices. It doesn't really make sense to me. It sounds like it doesn't make sense to you either. That was when he said insurance, I was thinking like life and auto and then you S you brought up the devices and appliances.

And I was like, where I forgot there was insurance on those. Cause I think it's so dumb. I never used it and best buy insurance or apple insurance or any of those companies feel free to send us. Stats on LinkedIn or started arguing with us or that could prove us wrong. I'm more than happy to change my mind on something, but for me, it's like that kind of insurance, which is so common.

 You're going to be buying so much of that stuff, especially as phones have become more and more disposable, you will just get in your phone so often or planned obsolescence. Exactly the thing to exactly. Be careful with those updates folks. So I think travel insurance, a case-by-case scenario, I'd never used it.

I don't see the point, especially now post pandemic. A lot of airlines are just essentially offering you insurance via vouchers are really flexible, change rules all of that. So it doesn't seem to be super valuable. Lastly, before we let these fine folks go, the portfolio side of things, the investment side of things, it seems like maybe we should.

I think that is super valuable. I guess I'm speaking for both of us here. My opinion would probably be that everything I've seen thus far seems like  the premium would probably outweigh the benefits of ensuring any sort of like downside risk because you're going to have to reduce some of the upside.

 There's no, holy grail that's like zero volatility and a hundred percent of the upside. That's just not the thing. So that's just where I stand on that. But maybe there's scenarios where. I wouldn't really call it insurance for your portfolio, but maybe adjusting the riskiness of your portfolio based on other factors like timeline, as far as when you're going to use the capital.

 That probably makes more sense to me that I don't think there's that the re the reward is far smaller than the premium you'd pay for it. In my, especially if we're talking in the long run, it seems like if we're talking about short-term, if you think of the next three months, something crazy is going to happen.

Maybe you put some shorts on something, put some shorts on

come on and then go for a dip, go jump in the lake. But it seems like insurance in terms of a portfolio perspective is usually for short term actions. If you're talking in the long run. If you think in the long run, the market is going to keep going down. Why are you in the market? Either you need to, your strategy should either be you're shorting the market over the long run, which would be your strategy.

And so if you want to insure against that, then you just buy some of it. So you buy it is, I think the long run methodology, I think almost insurance for portfolio is maybe all investments, maybe it's real estate, maybe it's wine or it's  those kinds of cool alternatives seem like a better form of quasi insurance where diversification is kind of insurance in one way.

 It's not necessarily tendered by a company that is offering you a payout. If something happens, it's more of you creating your own insurance by diversifying and changing your risk portfolio to. Different things. So I think in terms of a portfolio, it seems like the best insurance from my perspective is diversification.

According to how you perceive your own, a bit of ability to handle risk in different scenarios. Yeah. And I think also it might be helpful to zoom out from. Thinking about your portfolio in terms of your one log into your investing account, your portfolio should include, if you're taking a, taking everything into account should include the cash you have in the bank, and your emergency fund and all of that. So maybe the insurance in air quotes that you would be using for your portfolio is, could be dubbed like a war chest of cash sitting on the sidelines, ready to go by when everything else dips. And yes, your portfolio is going to dip along with that, but you've got cash to go in and buy it at fire sale prices.

So that would be the only thing I can think that's close to some sort of insurance other than of course, diversification and spreading out among different risk profiles and asset classes. But that's the only thing I can think of that would be quasi insurance for your portfolio. That would actually be.

 Yeah. Again, not financial advice, but would love to hear opposing perspectives or agreements or anything. So feel free to drop us a line and let us know what you think about the world of insurance though. The wild, wonderful world of insurance, the wild, wonderful world of insurance. That is quite the alliteration and we're going to have to put a pin in it there.

This has been another episode of the long run show. Hopefully you will join us next time.  One of the future episodes we'll be talking about, actually what we just talked about in the last five minutes. Some of the more personal side of investing and thinking through what it looks like what your whole situ situation looks as a investor now, You're one login to your one investing account.

 So that's that look for that in an upcoming episode. But until then drop us a five-star review. Like I said, last time, if you want to drop a one-star, don't go to LinkedIn and argue with us there. Hopefully publicly, if you're rude, I just won't answer you, but I'll answer, I'll be the dedicated answering Mike.

Michael definitely answered but no, feel free to drop us a review that definitely helps out and share the podcast. If you know somebody who's has questions, we have some we have a decent library building up here. So if people have questions like crypto, they have questions on inflation questions on NFTs all that sort of thing.

What is value? We did a show on that. Definitely share, share some episodes insurance. Obviously you're here. If you liked this episode, share it. Getting the word out definitely helps us out. So if you found this valuable, please feel free to. And what will be a little exciting aside as well. We'll be having some guests on, in some of our future episodes as well.

It should be a lot of fun  branching out and bringing in perspectives and looking forward to not just the two of us rambling on, but having some fresh perspectives and fun discussions. Exactly. Maybe we'll find a another cynical bloke and another, a optimistic bloke to join the wild show that this is awesome.

 As always, thanks so much for listening. We'll catch you next time. .

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