PODCAST EPISODE 249: When You Self Insure, You Are a Pool of ONE


      • 00:00 – Episode begins Paul welcomes listeners.
      • 00:40 – Self Insurance and the definition of insurance.
      • 03:00 – Self-Insurance scenario breakdown.
      • 06:30 – reassessing your insurance ideaology.
      • 11:20 – Closing thoughts
      • 12:02 – Episode ends, thank you for listening.





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Full Episode Transcription



Hello, and welcome to your business your wealth. My name is Paul Adams. I am the co founder of sound financial group and I welcome all of you the sound financial family to join me today for why self insurance is a scam. Now, normally I would be joined by quarter Shepherd, he was enjoying a nice week this week with family visiting from out of town. So you get me solo, to rant on one of the things that I think is probably one of the most or biggest misconceptions about money. And we’re gonna get to that, as we talk through why self insurance is a scam. So why do I say self insurance as a scam? Well, let’s first start by talking about what is the definition of insurance to insure something means you enter into a contract with some other entity, it could be a government agency or corporation called an insurance company. And what you’re doing is transferring the risk or some of the risk from you to somebody else. Very, very simple. The idea of self insurance came from the idea of large corporations who perhaps are paying millions upon millions of dollars every single year for something like health insurance. Now they have enough money in additional liquid capital, that over time, what they should be able to do is continue to pay all the claims, but then recapture a portion of the profit that would have otherwise been kept by the insurance company. Now they can do that because they can do what’s called owning the average, they have enough employees in a wide enough and diverse enough population of say 1000 to 15,000 employees, they have enough mitigation of risk by being able to own the average claims rate because they are insuring everybody. The difference is when we try to self insure on our own, we are a pool of one, meaning, we don’t get the opportunity to mitigate risk by spreading it over many, many, many people. That’s the benefit of insurance, we’re transacting for the average experience, which is we pay a price and then if something happens to us, they will do their best to renumeration us financially, for whatever the negative outcomes were from the event disability death lawsuit, long term care all these things. You can even do it with like your home or car, I suppose if you want to too many times people do that when they have an older car is they will say, Well, I’m gonna drop the comprehensive insurance because I don’t need that I could replace the car that my 16 year old is driving if there was a catastrophic, Gavin axe accident that destroyed the car. So now let’s talk about why self insurance, that definition is a scam. When it comes to us as individuals, again, we don’t get to participate in the average, we just get our own experience. So instead of a pooled risk, which is what self insurance is based on, we are a pool of one. And why that doesn’t work. Now, for those of you watching on YouTube, you’re gonna be able to see this, I’m going to do my best to explain this for everybody listening on audio, what we have is a scenario of two different people. One person has a million dollar home, and has a million dollar investment portfolio represented by the circle. The person on the right also has a million dollar home, also has a million dollars inside of some investment account, and has this little insurance policy up here. So let’s talk about what happens if there’s a catastrophic loss for the person that chose to quote unquote, self insure. Now, what we’re going to do in our scenario is we’re just going to imagine that what happened is there was a fire. So there’s a big ol fire, and the house goes up in flames no longer have a house. So they started with a net worth of 2 million Million Dollar Portfolio, million dollar home, the home burns down. And when the home burns down, the folks are able to use the million dollars of their funds to be able to rebuild the home. And that works pretty well. The home is rebuilt, except what has burned down, if you will, is our million dollar investment portfolio that we were using to self insure the risk. Now let’s look at the alternative. Now I know this is a simple scenario and those of you listening I’m sure this is easy to grasp. But if we had that same fire over here on the million dollar home, what we now have is an insurance policy that is going to be activated to be able to re build the home. That life insurer that homeowners insurance policy that rebuilds the home then rebuilds the home and the person who had insurance when they’re done, still has a net worth of $2 million.

And you say well Paul What you basically just showed me is that self insurance works. But let’s go back to our original premise, the idea of self insurance came out of corporate America and their ability to basically cut a health insurance company or even perhaps a property insurance company. Let’s say somebody has a fleet of trucks, and they say, and we’re just going to self insure the loss of those trucks, because that 5000 trucks and they can do that. And their hope is they will capture the profit that otherwise would have been maintained by the insurance company. In our case, as an individual, we can only profit on the profit that the insurance company was going to make, if there is no claim whatsoever. If there is a claim, we encounter the loss, meaning there was no insurance. See, the point of my story is not that people can’t choose to not own insurance, you can absolutely choose to not own the insurance, whether that’s car insurance, homeowners insurance, if you have your house paid off, you don’t need to hold any homeowners insurance, it could be disability insurance, life insurance, long term care, insurance, the list goes on. All of these insurances are mitigating risk by laying the risk off financially least on somebody else, in this case, the insurance company, when we retain the risk, that’s all we’re doing is taking the risk, you’re not doing any kind of self insurance, you’re actually just choosing to take the risk. And this is why I bring this up in today’s episode is my concern is that people aren’t being straight with themselves about the risk they’re taking. They feel as though Well, I don’t need to pay $500 a month for my disability insurance or whatever their disability insurance is $200 a month, etc, I stopped paying that. And therefore, I’m self insuring. So even if they put that money in a bank account, it doesn’t work. Because if that disability insurance policy would have paid your family $10,000 a month, but in two years, you get disabled, all you have is $4,800 in an investment account, plus a little bit of growth, to mitigate what was a significant loss of income, and you need $10,000 A month to replace that income. So you just took the risk. So if there’s anywhere you and your spouse had been thinking about that your quote unquote, self insuring, I’d like you to just take some time and reassess that. Take a look at really what is the risk that you’re taking. And here’s just a quick fine point on risk, when you’re taking risk, is it risk, that gives you a big enough benefit that it’ll solve all your financial problems. And if the risk manifests, is that enough to completely dismantle your entire financial picture. And here’s what we find. Most of the time, when we do the math, I’ll save you guys the math today is that if you take a look at the amount of money you would save by not owning whatever the insurance is that you’re quote, unquote, going to self insure, as we say, take the risk on, you’ll find that it doesn’t end up being enough money for you to actually make any difference in retirement, that of what you needed was $8 million. And even with all the cost of premiums and all the lost opportunity cost, let’s say it made a $50,000 difference by the time you’re age 65. Well, is the difference between 8 million and 7,950,000 of capital at work and be what prevents you from retiring or not? Heck no. So even if it worked really well to set aside all of the money from what we would have paid an insurance premiums. And if that money performed really well, and inflation wasn’t too bad, and, and we get to retirement, we never spent the money for something else. And we consistently set the money aside, you kind of get I’m giving you a very perfect scenario of human behavior in this idea of self insurance. And yet that self insurance only made a $50,000 difference in our old age, which equates to almost zero difference in our retirement income and therefore does not prevent us from retiring. But what could prevent us from retiring? Whatever that risk was, that we were protecting against? I’m gonna say it again, whatever the risk is that we are protecting against, that could definitely dismantle your ability to build financial independence. To go back to the question about disability insurance, if you’re listening the podcast or if you’re watching on YouTube, on the disability insurance subject, I would encourage you guys to go check out and we’ll put it in the show notes. The worst case scenario, where I interviewed a client of ours, who actually was kidnapped as a part of his job. It wasn’t his job to get kidnapped. He was kidnapped because of the job he had running jewelry stores. He killed both of his captors and ended up permanently disabled as a result.

Now that could have dismantled all of his future financial aims, but instead He had dedicated a little bit of money to disability insurance for the prior five years. And when he did, that was the one thing that stood up and made sure he didn’t lose everything. So just be clear with your spouse, with anyone you’re doing planning with or with your insurance person, or with your financial advisor, if you don’t have one reach out to us, we’d be happy to chat with you. But the key is, if you haven’t really gotten clear at what the impact would be to you and your family, if that risk manifests, then you didn’t even do the math yet to know how big the risk is for this self insurance. And that makes the point I made at the very beginning. The problem with this term self insurance and why it’s such a scam is because it puts us in the position of not really taking the risks that we’re taking as seriously as the risk that we’re taking. That was a terrible sentence. And so I apologize to any of my past grammar teachers. But the idea being is we’re not appreciating the gravity of the risk we’re taking, when we simply say we’re self insuring. And incidentally, nearly everyone I see who’s self insuring is actually just kind of living the same life they’ve lived it’s not like they take the hundreds of dollars a month that we’re gonna go to the quote unquote insurance and set it aside. So with that, I hope that this was a contribution you we love you guys in the sound financial family. And I love it when we get to see comments when you guys talk to any of us at Cory Paul, Jeff, any of us at sound financial group we love when we get the feedback that you enjoyed the episodes, please make sure to put in a comment. Don’t forget to subscribe. And if you give us a review on iTunes, take a screenshot of it. Send that to us at info at SFG wa.com. And we will send you a copy of our most recent book with that we hope that this contribution has. With that we hope this episode has been a contribution to you being able to design and build a good life and we will see you here next week.




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