Lake Atitlan, Guatemala

Insurance is for losers

The idea of insurance may seem good at first glance: you pay a small sum of money monthly, to get a guarantee that you will receive a larger amount of money to cover for an unexpected cost in the future.

Life takes random turns and you never know what will happen next. Maybe you crash your car on the way to work. Maybe someone burns down your home. Maybe you lose your job.

In its simplest form, it could be 100 friends agreeing to pay $100 per month to a common pool of money. Each year $120,000 is collected, which is then paid out to the members who are struck by misfortune that year, for example $80,000 to Carl who suffered a house break-in, $30,000 to Amy to cover a stolen car, and $10,000 to Steven to pay his hospital bill when he broke his leg. Seems fair, doesn't it? Not really, because some people are more careful and diligent than others.

Insurance as an idea inherently favors reckless people. In effect, they get a license to act careless, since some other person's money is going to cover their so-called misfortune. Not everyone wants to act carefully, and shouldn't have to. If you value a life on the edge, then go for it. This is all fine by me, as long as you take responsibility for your actions and pay for the damage inflicted on others. Insurance will let you get away with that for free, because someone else will pay it for you.

Who will judge if a person is careful or not; who will set the level of carefulness and award the claims accordingly? It is extremely difficult, and a matter of moral judgment. What seemed like a good and simple idea at first, is far from easy and fair in real life.

In this fictional example, we have also assumed that no third party profits from this system. So to make this already bad idea worse, let's assume that someone sees an opportunity to make a profit from common people's fear of the unexpected, and wants to exploit this on a grand scale. Then he starts an insurance company.

Don't get me wrong, insurance companies and banks, who I believe are the top leeches in the world, have the full right to exist. The problem isn't that they exist; the problem is that so many people are stupid enough to use their services. If people willingly want to give away their money for a false sense of comfort, let them do it.

Instead of handing out all the collected money of the yearly insurance pool, the insurance company has a goal of handing out as little of it as possible, because it is a company like any other that wants to make a profit. It also has staff whose salaries should be paid, and it spends money on selling you its services, i.e. advertisements. Instead of pooling your money with 100 people that you might personally know, you are now joined by millions of strangers, whose character you have no clue about. Are they careful? Do they file frivolous claims? Are they abusing the system?

Insurance companies are a form of voluntary socialism. Everyone who joins the system thinks it benefits him, that he somehow is getting more out of it than he contributes, but in the end it is the system itself (the insurance company or the state) that benefits. Both the insurance company and the socialist state collect money from one group of people and distribute it to another group of people. The only difference is that one system is mandatory and the other is not. The money you pay for your policy is not saved away as your money; it is immediately paid out to other claimants. There is no way for you to get your money back in case you never file a claim.

Insurance companies do not create money out of thin air. Whatever they receive each year, is what they pay out each year in claims, minus their operating costs. If you are a careful person, how could you ever benefit from being part of that? You are clearly going to contribute more than you will receive.

A look at a typical health insurance company reveals that out of all money that was collected in 2008 from insurance policies ($61.60 billion), 78% ($48.21 billion) was paid back through insurance claims, 3% ($1.78 billion) was spent on advertisement and selling, and 12% ($7.24 billion) was administrative costs (staff, rent, etc). Left from this is $4.37 billion, or 7% in net profit. These numbers seem normal to me, nothing to get upset about. However, ask yourself why you want to be contributing to the $13 billion dollars (22%) which never will see any claimant's pocket? This money is used up to finance the machinery of the enterprise.

Having insurance gives a false sense of security. If a robbery at gunpoint in your home isn't stressful enough, now someone unrelated to you will scrutinize you for your insurance claims, by judging your character. Were you careful enough? What actions did you take? Are you a good person? Are you entitled? This in itself is degrading, almost identical to being sued in court when you are innocent.

So how do you live a life without insurance? Although different kinds of insurance have existed for thousands of years, the modern forms for property, vehicle and health insurance have only been popular for less than a hundred years. Clearly we can do well without them.

The alternative is simple. Instead of paying that monthly premium to the insurance company, you save the same amount for yourself. Each month your saved pile of money grows thicker. See it as at emergency money for exceptional circumstances. Early on while the savings are thin, be very careful and don't take risks in your life. This is what it means to take responsibility for your actions. When you can't afford to cover the cost of damage to yourself or someone else, don't take the risk. In a way, insurance is a way to cheat the system and get away from that natural responsibility.

Over the course of your lifetime, you will have saved more money this way than you would have received in insurance claims, several fold. And you need no one's permission to use the money.

Of course, this only works if you have good character, and if you are less prone to accidents than the average person is. But what does "accident prone" really mean? Truely random accidents are extremely rare. Most situations in life will be largely affected by your prior actions, although it may not seem that way. For example, the risk of being in a car accident is almost entirely dependent on your driving skills. You might think it has everything to do with the other careless drivers on the road. But being on the lookout for them and being prepared for their reckless maneuvers, is one of the skills of being a good driver. A person that is said to be prone to accidents, is typically a person with poor skills.

Insurance is for losers, who either don't understand the math involved, or are reckless enough to actually benefit from it. For everyone else, it is fantasy of protection that comes at a net loss. Insurance together with bank credits is what stupid people use to live above their means to create an illusion of wealth. It contributes to a society where everyone feels entitled to things, but no one wants to take responsibility for their actions.

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