By: Nathaniel Nevins | January 27, 2017

Transcript


This is Nate Nevins with Nevins Financial. Today we’re going to talk about understanding insurance and what its purpose really is. I think a lot of people just don’t understand the true intent of insurance. As a result, that kind of leads into, “Well, why the heck am I paying this premium when I don’t even know what the benefit is to me?” Because insurance isn’t really an immediate benefit most of the time, and its more of a delayed benefit dealing with a claim of some sort. I mean if you think about health insurance for example, you pay this exorbitant premium for what? The whole purpose is to transfer risk. That’s the purpose of insurance is taking the risk off yourself and giving it to an insurance company so that in the event that you actually have some sort of catastrophic event, you get that covered. You don’t have to come out of pocket completely for that. For example, if you were in a car accident and you had hospital bill of a million dollars, I mean how many people can pay a hospital bill of one million dollars right then and there? That’s why they have the health insurance. They pay up to a certain portion, whatever their deductible is, and then the insurance company meets the rest of the obligation. And that’s kind of how it works. So we’re going to go ahead and look at a couple of scenarios, two different scenarios, to illustrate how insurance actually works so that we can better understand it. Okay, so we’re going to go over the two scenarios just to illustrate insurance and how it actually works so that we can understand that better. Also, just keep in mind that insurance is a transfer of risk. So we’re going to go over a scenario A and a scenario B. So in scenario A, we’ve got a man named Bob. Now Bob makes fifty thousand dollars per year. Of that fifty thousand dollars, he decides that he wants to save five percent per year, which is going to equal twenty-five hundred dollars per year that he can save. And he’s gone up to five percent because he’s decided not to purchase a life insurance policy so that he can save more money. Okay, so, let’s assume five years down the road Bob is in a plane and he just has a terrible plane accident, and the plane goes down, and he dies along with all the other passengers on board. Okay, now Bob didn’t have any life insurance, so at that five year period of time the amount of money that he’s going to have is twelve thousand five hundred dollars to leave to his family. Now that’s not including any interest. Let’s just assume he has like four thousand dollars of interest, so that’s sixteen thousand five hundred dollars. Okay, now that’s all that’s going to be left for his family for funeral expenses, for everything for living off of. Now even assuming funeral expenses being zero dollars, they don’t pay anything for funeral expenses, this family is only going to be able to live for about four months. Okay, so that’s scenario A. So he decided to assume all of the risk on his own, didn’t want any insurance premium that he was paying to protect him against that risk. Now let’s look at scenario B. We have Fred, who also makes fifty thousand per year, but instead of being able to save five percent, he can only save three percent because he did purchase a life insurance policy. Okay, so that would be fifteen hundred dollars per year. Now Fred was on that same plane as Bob and he went down and passed away from that crash as well. So what is left to his family was the death benefit of that life insurance policy. He had a five hundred thousand dollar life insurance policy and he gets whatever he had saved. Let’s just assume even that it’s in a savings account. Okay, so seventy-five hundred dollars after that five years. So how long does that allow his family to live? At least eleven years on that money. And so that’s the power of transferring that risk to the insurance company. If you don’t want to transfer any risk, then what happens is you end up paying everything out of pocket, or you have a scenario like Bob, where, you know, the family kind of gets hosed because there wasn’t proper planning in place in case that did happen. And so really insurance is meant for protection and to transfer that risk from you to the insurance company so that in that event the insurance company is the one that pays the big bucks instead of you. You just have to pay a small premium for it. If you have any questions regarding insurance, I’d be happy to answer any questions. Or if you’d like any free quotes, feel free to contact us. You can contact us at nevinsfinancial.com.