Is Insurance a sucker’s bet? Navigating Risk in Personal Finance.

This picture is what we all wish our financial journey to resemble; a journey in calm waters with the destination dictated by our actions.

However, more often than not, life throws us a wave or two and despite our best efforts. We end up “off-course” by no fault of our own.

So what can we do about it?

Universally we can either take on the risk ourselves via Self-Insurance or transfer the risk to a third party via Insurance if we’re unwilling or unable to take on the risk.

There is a strong case to be made for Self-Insurance as Insurance is always priced by actuaries, it ensures the risk taken by the insurance company is commensurate with the reward.

In short, as everything is priced in, there is no “edge” to be had for the consumer for taking the other side of the bet.

However, I believe there are factors that make Insurance an attractive proposition regardless.

Risk Asymmetry and Uncertainty of Costs.

What do I mean?

There is an aspect of Risk Asymmetry that drives the need for Insurance. In the case of our imaginary sole breadwinner Eric, he is faced with a conundrum.

Should he pay $340.90 a year over the course of 35 years, or a total of $11,931.50 for $1,000,000 in death benefit and total disability benefit or Self-Insure for the difference?

If Eric reaches the age of 65 safely he has an additional 12 thousand dollars to his name. However, if he is one of the improbable cases, his family is exposed to a humungous downside. The lives of his dependants will be thrown “off-course”.

This is the Risk Asymmetry where consumers are exposed to a large risk that is not commensurate with the savings.

What about the Uncertainty of Costs?

Uncertainty of Costs comes into the picture when we are talking about individuals with the ability to Self-Insure, the question is, should they?

Assuming Eric is 30 and plans to retire at 65 here are the comparisons.

  1. Insurance – $50,000 compounding at 6.5%. With a $1,200 annual premium, he will have $294,596 at 65.
  2. Self-Insured – $50,000 compounding at 6.5%. To have an amount between $293,000 and $294,000 at retirement he cannot spend more than, $17,500 by 30, $33,000 by 40, $62,000 by 50, and $116,000 by 60.

Should Eric have a need for funds due to unfortunate events he would definitely prefer to have it happen between his 50s and 60s. After he has built a suitable reserve to combat uncertainty without risking his nest egg.

With the help of Insurance, we are able to smooth out the cost side of the equation and focus solely on the returns side of the equation.

If you are interested in hedging out risks in your financial journey, compareFIRST is a great way to get an idea of the cost involved in getting coverage for Life Insurance.

For individuals that prefer a guided and personalized approach to avoid over or under-insuring themselves with the various types of insurance, I welcome your engagement.

Important: The information and opinions in this article are for general information purposes only. They should not be relied on as professional financial advice. Readers should seek independent financial advice that is customised to their specific financial objectives, situations & needs. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.

Published By:

Thomas Pang Chi Teck

I grew up loving finance and economics as a keyhole into understanding how the world works, being a Financial Services Consultant provides me with a platform to apply my knowledge by designing a plan that fits and enables my clients to accelerate through life knowing their financial well-being is taken care of. 

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