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.

Free Life Insurance Quote - Important Points To Consider

Taking care of your loved ones with a life insurance policy is a wise decision. Once you have made the decision to purchase a life insurance policy there are other important decisions which must be made as well. Life insurance is not money to be dispensed at the time of your death only. It is also protection for your assets and for the future of your loved ones.

What purpose does life insurance serve?

Obviously life insurance should bridge the gap between the time of grief immediately following your passing and the return to normalcy. Life insurance planning should provide for this short term need. Life insurance must all safeguard the assets you have acquired during your life and pass on as many of those assets as possible to your estate. Make a list of the assets you have and the needs your family will have after your death.

How to accomplish your objectives

Once you have ascertained what it is you want your life insurance to do you must consider how these targets will be achieved. Most of the time making sure that the needs of your loved ones will be met requires more than just a large infusion of cash. A plan should be in place for the proper allocation of the cash received from life insurance policies. There are also tax ramifications which should be analyzed.

Consult a professional

First and foremost the best advice is to get as many quotes as possible and compare. It is free and you will learn more about life insurance faster. There are many laws, particularly laws concerning taxation, which may eat away at the value of your life insurance. Ways to protect your life insurance are available. Using a trust instrument to receive insurance proceeds is just one valuable tool available for protecting your life insurance from taxes. An insurance professional or an attorney can help you with planning your estate to avoid most if not all taxes on your life insurance policies.

A CPA Talks About Buying Life Insurance

Not everyone needs life insurance. The first thing to do is make sure you need it.
Life insurance is really meant for your family members or other dependents who rely
on your earnings.

Why You Buy Life Insurance

You buy life insurance so that, if you die, your dependents can live the same kind of
life they live now. Strictly speaking, then, life insurance is only a means of replacing
your earnings in your absence. If you don’t have dependents (say, because you’re
single) or you don’t have earnings (say, because you’re retired), you don’t need life
insurance. Note that children rarely need life insurance because they almost never
have dependents and other people don’t rely on their earnings.

Life Insurance Comes in Two Flavors

If you do need life insurance, you should know that it comes in two basic flavors:
term insurance and cash-value insurance (also called “whole life” insurance).
Ninety-nine times out of 100, what you want is term insurance.

Term Life is Simple to Buy and Understand

Term life insurance is simple, straightforward life insurance. You pay an annual
premium, and if you die, a lump sum is paid to your beneficiaries. Term life
insurance gets its name because you buy the insurance for a specific term, such as
5, 10, or 15 years (and sometimes longer). At the end of the term, you can renew
your policy or get a different one. The big benefits of term insurance are that it’s
cheap and it’s simple.

Cash Value is Trickier

The other flavor of life insurance is cash-value insurance. Many people are attracted
to cash-value insurance because it supposedly lets them keep some of the
premiums they pay over the years. After all, the reasoning goes, you pay for life
insurance for 20, 30, or 40 years, so you might as well get some of the money back.

With cash-value insurance, some of the premium money is kept in an account that
is yours to keep or borrow against. This sounds great. The only problem is that
cash-value insurance usually isn’t a very good investment, even if you hold the
policy for years and years. And it’s a terrible investment if you keep the policy for
only a year or two. What’s more, to really analyze a cash-value insurance policy, you
need to perform a very sophisticated financial analysis. And this is, in fact, the
major problem with cash-value life insurance.

While perhaps a handful of good cash-value insurance policies are available, many—
perhaps most—are terrible investments. And to tell the good from the bad, you
need a computer and the financial skills to perform something called discounted
cash-flow analysis. If you do think you need cash-value insurance, it probably
makes sense to have a financial planner perform this analysis for you. Obviously,
this financial planner should be a different person from the insurance agent selling
you the policy.

What’s the bottom line? Cash-value insurance is much too complex a financial
product for most people to deal with. Note, too, that any investment option that’s
tax-deductible—such as a 401(k), a 401(b), a deductible IRA, a SEP/IRA, or a Keogh
plan—is always a better investment than the investment portion of a cash-value
policy. For these two reasons, I strongly encourage you to simplify your financial
affairs and increase your net worth by sticking with tax-deductible investments.

If you do decide to follow my advice and choose a term life insurance policy, be sure
that your policy is non-cancelable and renewable. You want a policy that cannot be
canceled under any circumstances, including poor health. (You have no way of
knowing what your health will be like ten years from now.) And you want to be able
to renew the policy even if your health deteriorates. (You don’t want to go through a
medical review each time a term is up and you need to renew.)