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Don’t Trust Insurers, Agents, and Companies That Say “What Ifs”

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What if you get into a car accident? What if your house burns down? What if you lose your job? What if you have a medical emergency?

Life is full of “what ifs” and life is full of businesses looking to capitalize on the fear of the unknown. It’s kind of sickening when you think about it, how employees of companies will try to use this fear of the unknown to get you to sign up for a policy or buy a particular product even when it doesn’t make financial sense from a probability perspective. When a company does the “what if” game with you, take a step back and do the math to see if that really does make sense.

Insurance



Insurers are the best at the “what if” game because that’s what they’re all about. Buy comprehensive coverage for your vehicle because what if someone steals your car and they find it on fire in a ditch somewhere? Well, what is the cost of the comprehensive coverage and what is the probability that someone will steal your car, set it on fire, and drive it into a ditch? I currently pay $306 every six months for liability coverage for my vehicle (protects other parties in the event I am the cause of the accident). Adding comprehensive and collision coverage to my 2003 Toyota Celica would add an additional $600 onto the bill with a $1,000 deductible, for an annual cost of $1200, to cover the “what if.” My car is worth approximately $15,000 which means I would have to expect a total loss once in the next 11.6 years (14,000 / 1,200) for it to pay off.

Two years ago I was in an accident, in which I was not at fault, that totaled my 2000 Acura Integra. The Integra, estimated value of $14,000, did not have comprehensive or collision coverage, saving me approximately $1200 a year for two years, and because of the price I paid for it, I essentially paid nothing for the car and drove it for two years. Will the decision pay off for my Celica? I won’t know for 9.6 years but it paid off for the Integra, I saved $2,400 across two years.

Real Estate Agents



Real estate agents are also great at preying on the unknown as well. “Do you really want to show your home to a bunch of strangers?” should really instead be “Do you want to be paid 3% of the commission on the sale price of the home to show your home to a bunch of strangers?” On a $300,000 home, that’s $9,000 – more than what most people make in a few months after taxes. I’d be willing to stay home on Saturdays to show the home, field phone calls, and put up signs around the neighborhood. If you’re scared about dealing with contracts and other legal matters, hire a real estate lawyer and you’ll still come out ahead. Certainly the decision is yours but you either do the work yourself or pay someone else to do it.

Companies



Companies do this all the time in any number of ways but the most popular is in buying warranties or other types of guarantees. It’s well known that extended warranties are junk because either the product can last past the warranty (otherwise they wouldn’t offer it) or you can get a better deal elsewhere (lots of credit cards double the regular warranty up to a year). I won’t go into the details on why it’s a bad deal but just do the math – what’s the probability something bad will happen and how much will it cost you? Does it make sense to buy a warranty?

Don’t let fear of the unknown be the reason why you do anything, think it through and do a little guesswork, research, and math. If the decision to get a warranty or go with an agent still makes sense, then do it. Insurance is a good thing, real estate agents are a good thing, and warranties are sometimes good as well. Don’t let the decision be based on fear and “what ifs” and let it be based on an educated decision and you’ll be better off.

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18 Responses to “Don’t Trust Insurers, Agents, and Companies That Say “What Ifs””

  1. Words like “insure,’safety,’and ‘guarantee” really mean “pay more because I do not understand risk.” Greed and fear are the most damaging emotions to our finances. Insurance companies satisfy their greedy appetites by selling products that that profit from the consumers’ irrational perception of risk.

    I strongly suggest to Blueprint readers that you understand behavioral finance. As humans, we are “wired” to make the same financial mistakes repeatedly — mostly due to our misunderstanding of risk. Insurance companies and banks have big buildings for a reason. They understand behavioral finance.

    You can start here: http://en.wikipedia.org/wiki/Behavioral_finance

    Or you can check out this excellent book: Behavioural Finance: A User’s Guide

    Your understanding of yourself, both as a human and an individual, will take you far…

  2. cooliojones says:

    They are selling fear, and they know if they can instill enough in you, you will do whatever they advise ‘just in case’ something happens, which nine times out of ten it doesn’t. Kinda like the whole terrorism threat alerts in the US.

  3. jim says:

    I don’t think the analogy to the terrorism threat alerts is a good one, I think those alerts are publicized so that the people who are responsible can cover their own asses.

  4. Michael says:

    I’ll address the real estate agent one since I just sold a condo and subsequently bought a house. And I used an agent on each one. Actually the same agent. Consider this: My place sold in six weeks in a Michigan market that normally takes about six months if you’re lucky. Would the buyer of my condo had seen it if it hadn’t been listed on the multiple listing agents web site and listed by a licensed realtor? Maybe. When things got touchy during the sale and we were delayed, he kept things calm. I know that if my agent weren’t there, I probably would have lost my cool more than once and put the deal in jeopardy. And on the buying side, my agent helped me negotiate a price, and then after the person I was buying from came in with their “final” offer, I was ready to take it. He persuaded me to make an even lower offer that they accepted that saved me an extra $5,000.

    So, in my eyes, my agent helped me get my place sold quicker, helped the deal stay together through tough waters, and helped me save money on the other end. Could I have saved money trying to do it all myself? Yes. Am I glad I chose to spend the money on the agent? You bet I am.

  5. Lord says:

    The real danger is all the ifs they place in their policies. It is very easy to think you are covered when you are not. Proliferating coverages are the result. There are no blanket coverages anymore. (Comprehensive is usually not that expensive, perhaps you should check around. It is one insurance I usually buy because it covers me, not the other guy, and eliminates the unpredictability of events which is what one buys insurance for in the first place.)

  6. Foobarista says:

    I’m a big fan of lots of liability and little else, assuming you have enough emergency cash to replace the asset. This is why I regard emergency money, however invested, as a sort of “cash-flow insurance”.

    Also, your math about the “win” from having to use insurance is even worse than you’re showing, since the car will be depreciating over the years you’re paying insurance, since most insurance payouts will only cover the depreciated cost of the car, not the cost of replacing it with a new car.

  7. I don’t know about other industry, but I will comment on the agent part. I am a real estate stager and I have contact with sellers fairly directly on a regular basis. Most of the time sellers think their homes are worth much more than what the market is willing to pay for. They know now market is scary and it’s a buyer’s market, but they still think they should get the amount of money that they want to make on it. A lot of reasons why I see FSBOs don’t sell is largely due to incorrect pricing. They tend to overprice the home where there is not enough demand for it. They also tend to get upset when buyers commented on the home or the pricing. The sellers take it personally. They forgot that now they are selling a HOUSE, a product for the mass. It’s no longer their personal home. It is something they will profit from the sale.

    I think if you want to save the commission, I would still recommend hire an agent to put your listing on MLS for increased exposure and also get consultation on where you should price your home at. Then do all the marketing legwork yourself, such as marketing, flyering, advertising, doing your own open houses, etc. This way you don’t pay as much on the commission. But overall there are a lot of factors that can make the deal falls through and a good agent will help you to hold all that together. And sometimes, frankly, it just is worth it not to deal with annoying or strange people. haha

    Cheers,

    Cindy

  8. jim says:

    Foobarista: Excellent point, so the win is actually better for the consumer and worse for the insurer, right?

  9. Marilyn says:

    Okay. You decide to sell the house yourself and save the commission. What else is new?
    So you don’t need to be there on Sundays and Holidays? You don’t accomodate customers when they are in the buying mode, when they are raring to go? Are you confident you will have the ability to attract the full spectrum of legitimate customers, including transferees?

    The term “strange” can be defined in two ways. Do you know what the “strange” i.e. unfamiliar buyer is interested in, or what their motivation to buy is? Are you sure you are emphasizing the features that are important to that particular buyer, or are you wasting their time with items that have no interest to them whatsoever? Do you know at what part of the buying process they are in, or if they have the means to afford the property? Do you know how to elicit honest feedback when you don’t have a clue about them? Can you tell if they are real, or truthful? Do you understand that if they don’t take a personal liking to you it could mean the loss of a healthy sale?

    The second “strange” i.e. odd, crazy buyer can come directly to you with no
    buffer in between. Hmmm ….agents often get word of these people through multiple colleagues and contacts, and are able to thwart problems before they surface.

    Would you know what volume of showing activity your competing homes are experiencing? Would you know if they are getting offers and interest?

    Were you aware of the fact that many homebuyers are not thrilled to deal directly with a homeowner. It makes them very uncomfortable. If an agent is there, it can bring a level of comfort to the client. Many legitimate buyers won’t go near a For Sale By Owner, or will throw lowball offers to their heart’s content.

    Do you think your real estate lawyer will answer all your questions and spend extra time assisting with mundane forms and inspection laws without being generously compensated?

    Do you have strong confidence in your negotiating skills? Especially when dealing in excess of multi-hundreds of thousands? Or are you so worried about the commission that you land up sacrificing out of your inexperience.

    And what do you do if no one comes to look? Have you taken professional photos? Do you have it on TV? Have you maximized its salability? Have you fine-tuned everything?

    Please be aware, speaking of “strange”, that the most affable, attractive people can change like werewolves when involved in the buy/sell process.
    There are infinite opportunities for disagreement in which an agent can smooth the way forward to a positive result.

    So………………
    I guess I am PREYING on everyone’s fears of the unknown, so that
    when you sell it yourself you don’t land up PRAYING that you didn’t screw up the largest transaction of your life.

  10. I think Marilyn, Cindy and Michael brought up some great points. I think there is a point where all of us (especially us pf bloggers) go overboard about DIY, cutting out the middleman and not paying “fees”.

    But as a couple of you pointed out here : what value do you put on an agent who sells you house in a much quicker time than average.

    For those who want to invest on their own and use “low cost etf and indexed”, what is the opportunity cost for not doing proper allocation, for not knowing your risk profile and right allocation, for not rebalancing your portfolio. My guess is that most DIY investors after a ten year period will underperform even a portfolio of funds laden with “fees” because of the mistakes they made DIY.

    Re : Insurance using fear tactics. In their defense, they have probably seen situations where if only someone had insurance, they would not have been in such a mess. I know someone with no disability insurance between jobs come down with a stroke! Would you have blamed an insurance agent if he was sitting down with my friend and be “pushy” and used “fear tactics”?

    There are many products and services in the world sold by salespeople and the media. All their marketing techniques are slick. But not all products are suitable. We have to take it upon ourselves to make an informed decision. But in defence of this post, most salespeople sell products rather than finding out one’s problem and recommending the right “solution”.

  11. James says:

    Hi Blueprint,

    In talking about insurance, I think a lot of people tend to buy more of a

    Hi Blueprint,

    While we’re on the topic of insurance. I think its important that people often purchase too much insurance. What I mean is that people often purchase a policy with a low deductible. They end up paying for for higher premiums, when in fact they’d be better off covering the smaller expenses out of pocket.

    Thanks,

    James

    ++++++++

  12. Lord says:

    The best comment for FSBOs is to try it. Something like half of all people that do give up and use an agent anyway. They sell themselves on it.

  13. broknowrchlatr says:

    Here is a different angle

    Product Sales.

    How many people do you know that buy something from a certain store at a higher price, jsut because they can take it back? Many people avoid Ebay because of the uncertainty of it all. But, most avid Ebayers knwo that over the long haul you might get screwed once in a while, but you save a lot of money. Many people buy from where it is comfortable and give too much emphasis on small risks.

    I had a discussion with my boss on referbished items. His wife won’t ever buy refurbished. I always do. Why? you save 33% or so. Sometimes there are querks, but over the long haul you save money. I’m typing on a laptop that was about 40% off. There are a couple imperfections. The reality is that for every 3 purchases like that, you can afford for 1 to be totally worthless and still come out ahead.

  14. dong says:

    I’m actually a big fan of insurance. I think it’s important to cover those what ifs, if they’re big. I get the minimum for the car (other than liability), but when it comes to health, disability, and life that I can’t self insure for, it’s worth it. Even though the probability is small, it’s worth getting insurance for things that you can’t cover and need to cover.

  15. Foobarista says:

    No, actually the deal gets worse for the consumer as time passes; the price the insurance company will pay for a totaled car will decrease fairly rapidly. After about six years or so, the insurance company will likely regard anything beyond a door ding as “totaled”. If your car’s KBB value is $5K, and your non-liability insurance is $1200, you’d need a 1 in 4 chance of “totaling” to “win”, which is pretty high. (And if it’s your fault, they’ll jack up your rates hugely for several years…)

    For us, we did carry comprehensive&collision for the first couple of years of owning a new car, but once its replacement value got under the amount of money in our long-term e-fund, we cancelled it.

  16. jim says:

    Foobarista: Hahaha, we’re saying the same thing, I meant self-insuring is better as time goes on… I just realized how ambiguous and probably straight up misleading my response was.

  17. Scott says:

    Cost is only a concern in the absense of value. Wether it is property insurance you do not understand, real estate agents, life insurance or any other risk management tool, their must be a value seen or felt to justify the price paid.

    If you think you can be an expert in something, then dont use a professional, do it yourself. I am confident we all have all the time we need or want and can therfore be an expert at everything( insurance expert, real estate expert, retirment income expert, tax expert, medical expert).

    A show of hands to all you who took out their own appendix last year? Have the reconstruction price of their home in cash in a cd in case of fire? 20 years of your income, adjusted for inflation, in cash you die and your family needs the money?

    Didnt think so, and for the wise butts, if you do have all that cash then no, you can self insure, all .013% of the population who is cash flush. The rest of us? find the value, get some help.

  18. Art Dinkin says:

    Bravo Scott! Well said.

    For the record, I am neither for nor against insurance, real estate agents, or anything else on a broad scale. I think the only absolute is there are no absolutes.

    In regards to auto insurance, as with all insurance, you need to identify what it is you can afford to loose and self insure it. If you can not afford to loose it or can not self insure it then insure the hell out of it. Although some insurance you buy not because it is the best value, but because you sleep better at night.

    My vehicle is also worth about $15K, maybe a bit more. I was in an accident last week which did about $5K – $6K dammage to my vehicle. Unfortunately, this will end up being my liability but the important thing is no one was injured. I do not know how much I pay for comprehensive and collision. What I do know is within 90 minutes after the accident I had the police report filed, insurance claim filed, my vehicle towed to the dealer, had a rental car, and was in my office seeing clients. Could I self insure my vehicle? Sure, but the lack of headache last week was worth the premium (and my agent).

    I’m curious Jim. What do you do for a living? Should your employer find someone with less skills, less experience, or with lower income needs and let you go because the math works? Is your income guaranteed? Why don’y you go into business for yourself?

    There is nothing wrong with studying a field and then choosing to do-it-yourself instead of hiring a professional. But if you are not sure and have questions, then paying a professional is not inappropriate.


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