Why Expensive Insurance is a Bargain

And a quick look at last night's debate

It's Wednesday, September 11th. Well, I had hoped that I was going to be able to chat with you at length today on the results and impact of last night's debate. But I'm afraid that I don't have a whole lot to say about it partly because I don't think I have anything particularly pithy or noteworthy or insightful to add compared to all the commentary that you're seeing everywhere else by everybody else. I'll just tell you what my takeaway is, which I think is largely shared by most. Kamala Harris performed far better than most people had expected her to do.

Donald Trump did not perform as well as Trump supporters had hoped. But I don't think that the results of the debate are moving the needle very much. In other words, I don't think that Trump supporters have stopped supporting Trump. I don't think Harris supporters have stopped supporting Harris. And I'm not sure that the independent or undecided voters have made a decision as to who they're going to vote for.

As a result of last night, we may have some who have reaffirmed their viewpoints, but I'm not sure anybody's minds were changed. As a result, I think that the race just got closer because Harris performed well, compared to how Trump performed last night. but that's about all that I can come up with. 

So we've got 50 plus days and counting. I hope there are going to be additional debates. I hope there will be further opportunities for the two of them to make their case to the American people and that those who are undecided have an opportunity to make their decision because it's the undecideds who are going to, at this point, determine who the next president is going to be. 

With that, let me talk to you about what I was planning to talk to you about, and that's inflation. You know, the economy is front and center on everybody's mind. It's a big topic in the presidential election, since most folks have set the economy as their number one concern in choosing between Harris and Trump. And a big part of that is inflation. We know how high inflation has been over the past several years. 

The incredibly higher cost of living we're facing and among the worst elements is the cost of home insurance. The cost is up nearly 40 percent over the past five years. And it's even worse in some places like Florida, Arizona, where prices are up over 60 percent California. Which is up for some homeowners 500 percent in just the past year. 

My goodness gracious. You know, some insurers are not just raising prices. They're quitting altogether. Allstate hasn't sold any new policies in California since 2022. State Farm did the same last year. It's also happening in Florida as well as Illinois, Indiana, and Ohio. All these states are suffering. 

From more frequent and more intense storms, wildfires and mudslides in California, to tornadoes in the Midwest, to hurricanes along the Eastern seaboard. The result is that insurance companies have been losing money for 10 years in 18 States. They've paid out more in claims than they've received in premiums. 

All told the insurance industry has lost a hundred billion dollars since 2011. Look, if you're a business executive, how long will you keep selling a product that you lose money on? And that's why insurance companies are either quitting altogether or dramatically raising the prices of their products ina desperate effort to stay in business. 

But the prices have gotten so high that some homeowners are just flat out cancelling their policies because they can't afford them. 12% of U. S. homeowners are now uninsured. If they lose their home in a natural disaster or if they suffer major damage, these folks are going to be wiped out. But you'll still owe what you owe the bank on the mortgage. 

This is all a crisis coming because we're going to have continued natural disasters due to the impact of global warming, climate change, and the situation isn't going to get any better anytime soon. In a number of states, they're not allowed to increase the cost of the coverage because it's politically unpopular or there are flat out laws against it, and so this problem is going to get worse and worse. 

How do you deal with it? Take your cue from the insurance industry. Insurance  is a really very simple business. They love to give you insurance if they don't think they're going to have to file a claim. I mean, think about this. You buy an insurance policy. Let's say it's a life insurance policy. 

When you buy a life insurance policy, you're basically making a bet. You're betting that you're going to die, and the insurance industry is betting that you're going to live. If you live, they don't have to do anything. All they do is collect the check that you send them every year. They have to do nothing, and if you cancel the policy before you die, they keep all the money that you have sent over the years. 

They love this. So they just want to figure out how much do we have to charge to persuade you to quit buying the product. And if you do end up dying, have we charged enough, to enough people, that we can pay out the benefits and still have a profit left over? It's a pretty simple business. What you need to recognize is that the cost of the policy, and this is for any policy: life insurance, health insurance, disability insurance, long term care insurance, auto insurance, homeowner's insurance, liability insurance, all insurance is priced in the same way.  

The greater the likelihood that you'll file a claim, the greater the cost of the policy. This is why homeowners' insurance is expensive, and in some places really expensive. This is also why some insurance is incredibly cheap. Have you ever seen those ads on TV late night infomercials where they say, we'll give you life insurance of a hundred thousand dollars. 

And it's only a dollar a year, no underwriting required and blah, blah, blah. The reason that those insurance policies are so cheap is because the insurance company knows that the only people who are going to buy those policies are people who can't get coverage anywhere else. These people are so old, so sick and such poor health that they're going to die within the next year or so. 

And the policies that this infomercial is offering to give you says we won't pay any benefits for the first two years. So, they're basically collecting your dollar or ten dollars, it's free money for them because they're not going to pay a claim. On the other hand, if you see an insurance company charging a huge amount, for example, long term care insurance routinely costs $5,000 or $6,000 or $7, 000 a year. 

Why does it cost so much?  Because the insurance company knows the odds of you filing a claim are really high. And the likelihood they'll have to pay out to you is a very strong likelihood. The more expensive the policy, the more likely you'll file a claim. In other words, the more expensive the policy, the more likely you need it. 

So, if your insurance company says that we need to charge you a massive amount of money to cover your home from a natural disaster, that's a pretty good indication you need the insurance. And if you don't want to pay for the insurance, or if you can't afford the insurance, the answer isn't to cancel the policy and go without coverage. 

The answer is, sell the house. Move to another location where the cost of insurance is much cheaper and much more readily available. The insurance industry is sending a clear message. And in fact, if you're thinking of buying a house, you should talk, not just to your real estate agent and your mortgage broker, you ought to talk to your insurance agent and say, if I were to buy this house, what would the cost of insurance be? 

Because the insurance agent is going to tell you, Oh, it's inexpensive. No big deal. That tells you the risk of having the house destroyed in a natural disaster is pretty low, or they're going to say to you, the cost of this insurance is massively expensive. Meaning your risk of having the place burned to the ground or swept away in a flood is super high. 

Or they might even tell you, you can't get the coverage at all, which means you don't own a home with no insurance. So before you buy, talk to your insurance agent about what the cost of the policy will be, and even if the policy is available in the first place. And if you already own the home, you ought to really seriously think about selling and moving to a lower risk and therefore lower cost area.  

The insurance industry is your friend. They're not your enemy. They're pricing their business because they're trying to stay in business. And the sooner you realize that,the better off you're gonna be. Long term.  

There's more to come on The Truth About Your Future. Stay with us right here. 

Hey, if you missed it, yesterday, we did a really great webinar with David Alderman, Research Analyst at Franklin Templeton on the new Bitcoin and Ethereum ETFs. 

Should you buy one or the other, or both? In what combination? How do you figure it out? What's the difference between Bitcoin and Ethereum? What are their similarities and differences? What are their different risk reward profiles? We covered all of this and a lot more. If you missed the webinar, you can watch the replay.  The link to it is free. It's in the show notes.  

We have another webinar today at 1:00pm Eastern on the bond market. Now that the interest rates are coming down, what does this mean for your cash? What does it mean for your savings and your bond portfolio? Jerome Schneider is going to be joining me. He's from PIMCO, the world's largest bond fund manager.   

The event is free. You can register right now. It's not too late to join me and Jerome today at 1:00pm Eastern. The link is in the show notes. See you there.  

 If you like what you're hearing, be sure to follow and subscribe to the show, wherever you get your podcasts, Apple, Spotify, YouTube, and remember to leave a review on Apple podcasts. I read them all. Never miss an episode of The Truth About Your Future. Follow and subscribe on your favorite podcast app.  

Ric Edelman: I'll see you tomorrow.  

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9/11 Webinar – Rates are Poised to Drop, Now What?: https://www.thetayf.com/pages/rates-poised-to-drop-now-what 

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