Criticism of Insurance

Insurance policies work by taking premiums from customers in exchange for baring the risk of certain costly events occurring. For example, if there is one fire in your town each month, everyone could just sit tight and hope their house doesn’t burn down next, or could pitch in and pay an insurance premium each month and this is then used to rebuild the house that burns down. Very simply this is how insurance works. It is a method of spreading a risk over a far wider area, so that it will not be as devastating as if it was concentrated solely on the person who experiences the loss.

Exclusion Clauses

There are a few problems with this however and they attract much criticism. One criticism is that by taking on the risk for people, insurance makes people take greater risks than they otherwise would. For example, if you know your home contents are insured against burglary, then you may not be as careful about locking the doors and windows every time you leave the house. Or if your bike is insured, you may not bother to lock it as much as if it wasn’t insured. In the insurance industry, this problem is known as the moral hazard.

Insurance companies protect themselves against this by inserting exclusion clauses into their contracts, which remove their obligation to pay out if the insured performs or fails to perform certain stated actions. They might for instance require that you fit smoke detectors, or use good locks on your doors, or other things that will reduce the risk of the insured against event occurring.

Too Complex

There are also certain risks that you are not allowed to insure against in most countries. This is first of all because it would be too difficult for the insurance companies to quantify, but mostly it’s because they are risks that governments want the person at risk to bare himself or herself. They generally apply to multinational companies.

There is also the criticism that insurance policies are far too complex for the vast majority of consumers to understand. It is simply unreasonable to expect the customer to understand lengthy documents that have been drafted by not one, but usually teams of specialised lawyers. This can lead to consumers being misled or buying insurance policies on unfavourable terms. To get around this, most countries regulate the content of insurance contracts to ensure that they remain fair to consumers.

Mortgage Insurance - What Is It, And How Can I Save The Most Money?

Do you know what mortgage insurance is?
Many people confuse mortgage insurance with mortgage life insurance, mortgage disability insurance, or even homeowners insurance. These are all very different types of insurance - no wonder there is such confusion! Mortgage insurance is generally required when the down payment on a home is less than 20%, and it is designed to protect the lender in the event of loan default. The lower the down payment, the higher the risk for the lender, and this can mean a higher monthly mortgage insurance premium. Depending on the specifics of your information, there are ways in which mortgage insurance can sometimes be avoided at the time of purchase, or dropped altogether at some point in the future. Many lenders now offer a single loan that doesn’t require Mortgage Insurance. These generally have a slightly higher rate.
If you have to choose, which one is best for you?

Lets look at one home purchase with three scenarios

$200,000 home

$180,000 loan (with $20,000 down)

Scenario A

One loan WITH mortgage insurance

Payments of $1,320.00 plus mortgage insurance payments of around $80.00 per month for a total of $1,400 per month

Scenario B

One loan WITHOUT mortgage insurance (8 ฝ% rate)

Payments of $1,384. $16.00 cheaper than using mortgage insurance,

Scenario C

Two loans. First mortgage up to 80% of loan value and Second mortgage of 10% of mortgage.

First mortgage of $160,000. Payments of $1,174 (8%)

Second mortgage of $20,000 Payments of $ 175 (10%)

Total payments for Scenario 3 is $1,359

In these three scenarios, Scenario C is the most cost effective.
If you really want to dig into the numbers, there is one other comparison to make:

In Scneraio A with mortgage insurance, at some point in the future, you’ll be able to remove the insurance once the loan to value is clearly under 80%. It may require a new appraisal which you’ll have to pay for, and approval of the new appraisal by the lender, which isn’t automatic.
The counterpart to that equation is that in Scenario C, you can pay down the second mortgage at a fast rate. As soon as that second is paid off, you’re left with a mortgage payment of $1,174!