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Life Insurance: Bad Bet, or Merely Sheer Stupidity?



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Life Insurance: Bad Bet, or Merely Sheer Stupidity?

Written By Jeff Nielson (Click For Original) 




If you were to tell someone that the life insurance they had purchased was “a bad bet” or (even more judgmentally) “sheer stupidity”, almost certainly that person would feel insulted. Equally, if someone were to say that to you – as is being done here – you probably would be insulted.


It’s because the person whose pride had been wounded would reply (most likely with considerable indignance) that what they did was neither a bad bet, nor sheer stupidity, because they were doing this “to protect their loved ones”. While this is a noble sentiment, it is one for which there is an obvious and automatic rebuttal. Wouldn’t you rather “protect your loved ones” with the best, possible strategy, rather than the worst, possible strategy: life insurance?

Assuming that readers are rational enough to prefer best to worst, we have the basis for this commentary. Life insurance is the worst way to protect our loved ones and after demonstrating this, in simple and unequivocal terms, readers will be reminded of superior strategies – the way in which we used to protect our loved ones, until we got “smarter”.

The best way to begin to illustrate how/why life insurance is obvious folly is through definition of terms. What is “life insurance”? Put in its simplest, most fundamental terms, it is a bet (by you) that you will die young.

For those who disbelieve this definition, pull out your own calculator, your own life insurance policy, and do the arithmetic. With every life insurance policy ever drafted, the only way to “win” is to die young. Obviously this is a question of degree, and if you die somewhat young, you will somewhat win your bet. What is unequivocal (in our current economic context) is that for anyone/everyone who lives to a proverbial “ripe old age”, life insurance is effectively the worst thing you could do with that money – other than simply lighting a match to it.

We have at least established a prima facie case that buying life insurance is sheer stupidity because it is literally betting that you will die young. But we will return to this later. The stubborn/defensive holders of life insurance will still be insisting that they are “protecting their loved ones”, thus it is time to look more closely at why this is such a very, very bad way of doing so.

As is often the case, we can illustrate some of the principles at work here by looking at extremes, by way of hypothetical example. Let’s take two “young families”: Family A and Family B. They are identical in every way: same incomes, same assets, same, proverbial “two kids”, same life insurance policies.

For simplicity, let’s even turn back the clock 40 years to when we had prosperous societies and legitimate governments. Both Family A and Family B both have a single wage-earner (gender is irrelevant), because back when we had legitimate/prosperous societies we could afford to have only one wage-earner, and one full-time parent.

If we had ever had a real “Feminist revolution” rather than merely a mass-conscription of women into the workforce, we would have had families (and societies) where the husband or the wife worked, not the husband and the wife working – just to try to maintain the same standard of living as the single-wage-earner of the previous generation. But that would be the subject matter of a separate commentary.

Both Family A and Family B have a single wage-earner. Family A is struck with tragedy. The day after they take out their life insurance policy, the wage-earner is killed. Hurray! They “won” their bet. The decision to purchase life insurance appears to be very astute. But look closer, look at the real world.

To begin with, not everyone “wins” here. The (former) wage-earner certainly does not win. That person is dead. Thus even under (for lack of a better word) optimal circumstances, life insurance is a very clear proposition of winners and losers. But before raising some of those issues, look more closely at the real world.

It is a very, very low-probability event that a young wage-earner will drop dead within the next day, or next year, or even the next decade. Even then, the most likely cause of very premature death is accident. Now here’s the point. While there is a low probability of the wage-earner dying young, if it does happen, it will very likely occur in an accident. Here there is a high probability that one-or-more other family members will be with the wage-earner, and also killed in that accident.

Thus the most likely result in the most optimal scenario (from the perspective of the life insurance) is that the wage-earner will die young, but not alone. Now, suddenly, our “optimal” life-insurance scenario is not one loser and three winners, but (very possibly) two winners, or one winner, or no winners: the entire family dies in the same accident, and their “life insurance” was worthless. The probability of the wage-earner dying young and dying alone is very, very remote. And that is the best case scenario.

Now let’s look at the worst-case scenario, Family B, where the wage-earner lives to a “ripe, old age”. Note that the worst scenario (and all “bad” scenarios from a financial perspective) are much more likely than the best/better case scenarios. Obviously this must be true, or these fat, wealthy insurance companies wouldn’t be making such large profits. If life insurance was “a good bet”, then as a matter of arithmetic/logic, life insurance must be a bad business.

Life insurance is, in fact, a good business (and a very crowded one), ergo it must be a bad bet. Why? We’ve only scratched the surface here. The fact that the odds strongly favor “the House” is only one reason why this is a poor form of gambling. Let’s now move away from the very remote best-case scenario toward the much more likely worst case scenarios.

What happens each year the wage-earner does not drop dead? He/she pays their premiums in the fully-valued dollars of today. What happens (years down the road) when the wage-earner drops dead, and the survivors collect on their precious “insurance”? They are paid in the diluted dollars of the future.

This is the real scam of life insurance: getting the Chumps to pay for their policies in full-value, today-dollars, and paying out on these bets in low-value, future dollars. Thus in any societies where “inflation” is a reality, the insurers prosper with their scam, and the insured lose, as a class. The higher the rate of inflation, the more/faster you lose and thus the possibility of breaking even on your bet diminishes more rapidly.

Let’s attach some numbers to our previous, hypothetical example. Both Family A and Family B have $1,000,000 policies. Until very recently, that would have (automatically) been considered ample insurance. However we now live in an era of not only very high inflation, but where hyperinflation is a strong possibility (if not an absolute certainty).

Of what use is it for Family A or Family B to have their “$1,000,000” life insurance policy, if on the day the survivors collect it costs $1,000,000 to buy a loaf of bread? Insure yourself for $5 million, or $10 million, and that’s still only five or ten loaves of bread. You might as well have been burning your premiums all those years – at least you could have used the heat to keep you warm.

In a hyperinflation scenario, the folly of life insurance approaches infinity. You buy a life insurance policy today. You die two days from now. But in the one day in between, hyperinflation hits, and your precious life insurance buys nothing but a few loaves of bread.

In the best of best-case scenarios, life insurance represents a dubious bet. If this were not true, there would be no life insurance companies (and thus no life insurance), as over the long term companies would not/could not survive being on the other side (the losing side) of those bets.

In our current era, we are now approaching the worst of worst-case scenarios for life insurance: imminent hyperinflation. This transforms the “bad bet” back to “sheer stupidity”.

Many readers will still not be convinced by this analysis, and (as previously noted) it remains incomplete. To fully illustrate how/why life insurance is the worst way to protect one’s loved ones it is necessary to show better and hopefully optimal ways of doing so, and this will require turning back the clock even farther, in the sequel to this commentary: Protecting Your Loved Ones – The Smart Way.



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