Winding down life and disability insurance

[daylatedollarshort]

Gee, it's really nice that you came along to explain insurance to us. Without you I guess we would still be in darkness.

I understand insurance pretty well and @pb4uski was an insurance company financial executive. Both of us and, apparently others here, think your "discounted lottery ticket" approach is not useful. Your explaining it over and over and over again really won't change that.

Have a nice day.

+1. I think it is pretty standard financial planning advice not to pay for insurance (or anything else) you don't need, even if the price is discounted.

If either one of us had serious illnesses at the time, I might have kept it. If one of us died and the other couldn't pay the bills without a future, second Social Security benefit, I would have kept the life insurance. If the life insurance was 25 cents a year, I would have kept it. But our life insurance premiums alone were close to $1K a year. And our probability of dying at the ages we dropped it, healthy people in their early to mid fifties, were pretty low. So for us it was not worth the cost for insurance we didn't require and had low odds of collecting on. Thy opportunity cost of the insurance was lower than the probable benefit.

 

[daylatedollarshort]

I don't "need" to ever purchase a lottery ticket, or a stock option. However, if a lottery ticket ordinarily costs $2 dollars, but I can buy it for $1, because in essence I've already pre-paid $1 which is now a sunk cost, then it is financially irrational for me not to buy the ticket at half price. If it is financially irrational to pay $2 total for the ticket by paying $1 in the past and $1 right now, then it was financially irrational for me to ever purchase it in the first place.

You are not looking at the probabilities, opportunity cost and expected benefit in either the life insurance or lottery example. You didn't take into account the odds or winning or the size of the lottery pot. What if the lottery pot was $1 and your odds of winning 1 in a million?

 

[jimbee]

You're still missing the point. In the case of the insurance policy, you have ALREADY paid in most of the total value of the premiums, including the ones that nominally are paid for towards the end of the policy, at the time you drop it.

That sounds like sunk cost fallacy. Don't fall for it.

 

[daylatedollarshort]

It's the value of the lottery ticket vs. what you have to pay for it that's important.

If the life insurance costs $50K a year for $100K of coverage, for a healthy 40 year old couple, should they keep the coverage because they had the policy a long time?

 

[OldShooter]

I think it's been a year or more since I used the "ignore" button. As of this morning IIRC there was one person on my ignore list. Now there are two.

 

[pb4uski]

That sounds like sunk cost fallacy. Don't fall for it.

Hit the nail on the head.

..... Don't "need" the insurance coverage? It's not a matter of "need." It's a matter of whether or not you can gain economic value from it.

Economic value is not why people buy life or disability insurance.

An example... DS is 33 and single. If he died unexpectedly, he has enough in savings to pay for his funeral and his credit cards last month's charges... so he has no need for life insurance.

So even if some life insurer came along and said... hey kid, we've got a deal for you... we'll sell you $100k of life insurance coverage for 20% of the normal premium... even though it is a screaming deal it would be a stupid purchase.

 

[pb4uski]

Your analogy is flawed. ...

No, you just didn't get it.

 

[daylatedollarshort]

I am now @60 so five years to go on the policy. My kids are all older and working, we have considerably more assets, and my wife and family could get by probably fine were I to drop dead with no insurance. So, no, I don't "need" it.

"Could get by probably fine" and "I'm certain we have no need because I have a detailed, comprehensive retirement plan laid out and if one of us dies the surviving spouse will have ample resources" are two very different scenarios and mindsets on insurance.

 

[pb4uski]

You just don't get it.

It's like being retired, having no need for a suit, stumbling across a sale of a $1,000 suit at 90% off and buying it.... even though you have got a great deal you've just flushed $100 down the drain.

If you want to spend your money so foolishly then by all means do so... just please don't advise others to.