On insurance, unnecessary insurance, and saving money on insurance

(This article includes updates from July 22)

Lately, I've participated in many discussions in various settings about insurance. Not just insurance directly related to mortgages but insurance in general.

Actually, my long-time readers know that every fixed family expense is directly linked to the mortgage. The amount of the monthly payment significantly affects the total payments to the bank. In my lecture, I demonstrate the total cost at the level of Hundreds of thousands of shekels As a result of a thousand shekel reduction in the monthly payment:

This means that every shekel added to our fixed monthly cost for mortgage repayment will ultimately be very expensive and greatly affect the family's well-being.

Why don't we like dealing with insurance?

This article aims to address one of the family expenses we usually avoid dealing with – The insurances. I was thinking about why we don't like dealing with insurance:

1. Insurance is related, on the one hand, to promises of large sums in the event of an insured event, and on the other hand, to a relatively small monthly expense.

2. Insurance is related to our greatest fears: a child getting injured, a child getting sick, disability, death, illness. We cannot prevent these events but we are accustomed to "doing something" against dangers. This "something" is perceived by us (with the encouragement of insurance agents, of course) as taking out insurance.

3. Similar to mortgages, we don't understand much about insurance, but we trust "professionals" (banks, insurance companies, insurance agents) to be the responsible adults and recommend what we should do. Of course, these recommendations have vested interests. Mortgage advisors, as well as insurance agents, should be viewed not as advisors but as salespeople. This one-word change, which I've proposed many times on this site, helps to better understand everyone's place in the equation and leads to a better understanding of the "advice.".

Well, what do I have against insurance? Actually, nothing. I think some insurance is essential. I'm not against insurance, I'm against over-insurance. For example People think that the more money they have, the more insurance they should get. In reality, it's the complete opposite: The richer you are, the less insurance you should have. 

How do insurance companies work?

The insurance company operates using a simple method: it calculates the risk of a particular event, called an insured event, occurring. After calculating the risk of the event occurring, it estimates the average cost it will have to pay as compensation if such an event occurs.

Let's take personal accident insurance for children as an example. Under the insurance, there is a reimbursement of 5,000 NIS for a broken arm. The insurance company calculated that the risk of a child breaking their arm due to a personal accident is one in ten thousand. That is, every month, for every ten thousand insured children, one will break their arm. The cost of the insurance for the insurance company is therefore:

 1/10,000 * 5,000 = 0.5 Israeli Shekels. Personal accident insurance includes various insurance components (burn, fracture, death, etc.). For each of these insurance components, the insurance company performs a similar calculation and finally arrives, for example, at an average cost of 20 shekels.

Like any commercial company, an insurance company does not exist for charity but to achieve the maximum possible profits. Therefore, to the cost of damage calculated earlier (20 shekels), the insurance company adds an additional amount intended to cover all its costs (broker's commission, employee salaries, office maintenance costs) andprofit To its shareholders.

Examples of salary costs paid in insurance companies can be seen here:

Sample insurance company executive salaries:

• CEO of Migdal Insurance Company – In eight years of work, he received 44 million NIS. Upon his departure, he received approximately 8.5 million NIS for "non-competition.".
• Harel will pay an annual salary of NIS 10 million to its two CEOs.
• Additional information

It is important to remember that in every insurance company, in addition to the CEO, there is also a chairman, a vice-chairman, deputy CEOs, and finally, thousands of employees, all of whom are funded by insurance payments.

Insurance companies operate in a competitive market, setting insurance payouts and premiums based on market competition. The companies utilize various behavioral experts to sell their wares and to skillfully tap into our fears.

For example, Harel Wedding Insurance He rode on the couple's fear of losing the large sums of money they had invested in organizing their wedding. From observing the payment and compensation table of this insurance, one can see something fascinating:

Cancellation of a wedding due to a traffic jam, illness of a spouse, or reserve duty due to war will entitle the couple to NIS 100,000. In contrast, cancellation of a wedding due to Death One of the spouses will win the remaining spouse 25,000 ILS.

After reading the first part of the article, we should not be surprised From the absurdity where a traffic jam results in four times higher compensation than a death. Simply put: The insurance company likely calculated that death is more common than cancellation for any of the other reasons, and to meet a customer-acceptable insurance cost, it reduced compensation where the frequency is greater.

What else is worth insuring?

In my opinion, insurance should be taken out against something that would be impossible for the family to cope with. For example, maintaining a family member in a nursing home costs about 10,000 shekels a month. Most families would not be able to cope with this cost, so there is logic in long-term care insurance. For a family for whom this cost is manageable, insurance is unnecessary. Remember the rule: The more resilient you are, the less insurance you need. 

More examples:

Comprehensive car insurance

I drive a car that costs around 50,000 NIS. I know that if the car is stolen or destroyed, I can finance the purchase of a new car with monthly payments that I can afford. I do not have comprehensive car insurance. On the other hand, I do have third-party liability insurance – because if I hit a Mercedes worth 200,000 NIS, it would be difficult for me to finance the compensation.

Apartment contents insurance

The same principle as before. I know that if the contents of my apartment are damaged, I can afford to replace them. However, I would have difficulty affording to rebuild the apartment itself. Therefore, I am getting apartment insurance, but not insurance for the apartment's contents.

Health insurance

I do not provide health insurance. As a real estate investor I have several apartments. I am keeping one of them without a mortgage, and it serves as a substitute for health insurance. If, God forbid, one of my family members needs expensive treatment abroad, I will sell this apartment and fund the treatment.

Health insurance, similar to long-term care insurance described above, is individual and not family-based. There is a very slight risk that two family members will need it simultaneously, but since we don't know in advance who will need the insurance funds, we are forced to insure everyone.

In the same way, we purchase long-term care insurance concurrently with health insurance, even though if we become disabled, we will most likely not need surgeries abroad or expensive medications. Since we do not know which of the conditions (illness with medications outside the basket) or a disabled state will occur, we are forced to insure against both.

Personal accident insurance

This article was actually written following my conversations with several friends on the topic of personal accident insurance. In my opinion, this insurance is the most interesting to discuss, which is why I am dedicating a special chapter to it.

Regarding the insurance policies above, I have set clear rules that I believe will help everyone decide whether or not to take out each type of insurance. Personal accident insurance, in my opinion, Not recommended for anyone to do Therefore, this section will be broader so that I can provide justifications for this opinion. First, I will begin by sharing that my family and I are members of the community of Homeschooling In other words, parents who have decided not to send their children to school but to take responsibility for their education and homeschool them. Since our children do not attend school, they are not covered by the personal accident insurance that applies to all children in Israel, which has raised the question of whether to insure them privately. 

Before answering this question, I would like, as a good Jew, to ask another question:

Which group is larger in the UN: countries whose names start with the letter Y or countries whose names start with the letter K? Most Israelis would say there are more countries starting with Y. It’s obvious: in a second I can name countries starting with Y: Israel (ours), Jordan (right next to us), Greece (the cradle of Western civilization, annual vacation), Japan (Toyota), Yugoslavia (Petrovic, basketball). Countries starting with K? Canada …………

In practice, there are, of course, more countries in Group K. The countries we had in mind as examples of countries in Group J are All The countries in 'Y' (except for Yugoslavia, which was dissolved over a decade ago and actually became a country in 'K' - Croatia).

In contrast, the letter "K" includes 18 countries: Cuba, Canada, Kazakhstan, Kyrgyzstan, the two Koreas, the two Congos, Cyprus, Qatar, Cambodia, and others.

Another question: It’s clear to everyone that the odds of winning the lottery are low. Why does the lottery spend so much money on ads like: 'Araleh called Moti…” “Araleh called Yonit…” and so on?

The answer to both questions lies in the way our brain works; the brain interprets ease of retrieval as frequency (More examples). In other words, if it’s easy for me to think of examples (as Israelis, it’s easy for us to think of a country whose name starts with the letter 'Y”), it’s likely that these examples are more common. Similarly, if I hear about a man who won the lottery and a woman who won the lottery, I might (could) think that it is easy to win the lottery. In reality, this is not necessarily the case.

Let’s get back to personal accident insurance: Every time I say I don’t have personal accident insurance, I hear about a friend of a friend—or even the child of someone I’m talking to—who broke their arm, and as a result, the family received 2,500 NIS. My response is:

1. If someone you know has experienced this, it doesn’t make it any more or less likely to happen to you. Remember the 'Y” countries. Even though they’re easy to remember, their prevalence isn’t increasing.
2. 2,500 shekels is by no means an amount that could be considered an "economic trauma" requiring insurance. It’s nice to receive money, but it’s not nice to have a cast on a child’s arm. But There is no conflict between the two. Taking out insurance and "rejoicing" when you receive 2,500 shekels for a broken arm is like betting against the soccer team you support: if the team wins, you’ll be happy about the victory; if it loses, you’ll be happy about the money? I don’t think it’s worth paying the premium for that kind of bet or insurance. You can also look at the issue from a different angle. Let’s say I tell you that the probability (risk) of a child breaking a hand is 1 in 10,000. Would you buy a lottery ticket from me for 30 shekels a month that, with a 1 in 10,000 chance, would pay out 2,500 shekels? If I told you that my neighbor’s son won 2,500 shekels, would your answer change?
3. Please note the table of personal accident insurance benefits, taken from the Harel Insurance website (similar tables are available from all insurance companies):

 Source: Harel Insurance 

This table has a similar structure to the wedding insurance table presented above: There is no correlation between the amount of damage and the amount of compensation.

Please note, for fractures and burns you will apparently receive 10,000 shekels, even though the actual economic damage is negligible (a day in the ER or at a HMO clinic, a few markers to scribble on the cast, and the child can be sent to kindergarten and school, another day or two for check-ups). On the other hand, in the case of a severely disabled child (as mentioned, the cost of upkeep is about 10,000) In the month of), will entitle you to a payment Disposable of 10,000 NIS. In other words, this is a form of "insurance" that works in the opposite way we’d want it to: for a minor financial event that we can easily cover out of pocket, the insurance pays us the same amount as it would for a significant financial crisis from which we’d struggle to recover. This is not insurance, it is a gamble. We feel good because we think that by purchasing this insurance, we’ve taken care of our children’s health (what could be more important than that?), but in reality, we haven’t reduced the risk of an accident happening in the slightest. All we’ve done is create a situation where, God forbid a child gets hurt, we’ll supposedly be less upset because we’ll receive some kind of payment for it.

Why do I write "some payment" when I previously wrote "allegedly" regarding the 10,000 shekels that the insurance company promises for a breakage? Well, if you’re buying "not insurance but a gamble," you shouldn’t be surprised if the offer is written by savvy marketers with a special "fine print" section just for you. Please take note. There is a clear table at the top of the page detailing the benefits for each plan (want to know what the payment is? Look for it…). At the bottom of the table it says: "The full and binding terms are the terms in the insurance policy." Most people assume that if the table states that a fracture is covered for 10,000 NIS, then the "full terms and conditions" won’t contradict that. Your faithful servant, however, is a bit of a perfectionist who opened the policy and looked at "Table B," the one containing the 'full terms and conditions":

In other words, it's true that we promised 10,000 for a fracture, but that was actually a LIE. For a rare fracture of the spine or pelvis, you will receive 10,000 shekels, while for a common fracture like a hand, leg, skull, etc., you will receive only a third or less of what we promised in our "show window." You can guess that you won't receive what was promised on the main page for a burn either, but rather there is an additional table with deductions for burns, and so it goes for all the other misfortunes.  Tip: Whenever you see a statement like, "In the event of any contradiction between what is written here and what is written elsewhere, the text in the other place shall prevail," be sure to check what is written in that mysterious "other place.”.

According to rumors (the website does not list prices, of course), personal accident insurance for a child costs about 30 shekels a month. A family with three children would pay about 90 shekels a month, which amounts to about 1,000 shekels a year. In other words, if we take compensation for a broken arm as an example, if such an injury occurs in the family less than once every three years, the insurance isn’t worth it, and when a broken arm does occur, the insurance only reimburses you a small portion of what you’ve already paid into it.

Risk of non-payment by the insurance company

Insurance is supposed to "hedge" (from the word “hedge”) our risks, that is, to limit them. Instead of risking the loss of an apartment worth 1.5 million shekels, we are willing to pay 1,500 shekels each year (as an example) or 60 × 1,500 = 90,000 shekels over the course of our lives. The certainty of losing 90,000 shekels is preferable to us than the uncertainty and risk of losing 1.5 million shekels.

Claims Adjuster

One risk that many people fail to consider is that insurance companies—which have collected premiums every month with the precision of a well-oiled Swiss watch—will try various creative ways to avoid paying out when an insured event occurs. Sometimes, you can learn a lot from the names of the representatives who are supposed to meet with you at different stages of the process.

If you need insurance money, you won't encounter a "customer representative" or any kind of "assistant." The man or woman responsible for policyholder claims at the insurance company is called a "Claims Adjuster"This means that’s what is supposed to solve the insurance company’s bothersome problem of money it’s supposed to pay.

They are allowed to deceive you, you are forbidden to deceive them.

Unfortunately, Israeli law greatly favors insurance companies. Apart from a tiny penalty interest for non-payment of undisputed amounts, insurance companies are not punished at all for not paying insurance money, even if it is proven in court that their employees defrauded the insured and lied to the court. This means that for any insurance claim, the insurance company can claim there is a "dispute," drag the insured to court for several years (during which they cannot, for example, fund medical or nursing care), and then, if the insured was lucky enough to stay alive and afford a lawyer despite their hardship, they will receive from the court what they should have received from the outset.

On the other hand, an insured person who is caught defrauding even a small amount, for example, if their entire house burns down but they claimed there was one extra television in the house, will lose All of the insurance money Including those to which he is legally entitled. Unlike Israeli law, U.S. law, for example, allows for the award of punitive damages, the purpose of which is not necessarily to compensate the plaintiff but to punish the company for its conduct; therefore, the amount can be high enough to make such misconduct unprofitable. For example, an American plaintiff who sued BMW for failing to disclose that the new car he purchased had undergone paint repairs prior to sale was awarded compensatory damages in the amount of $400,000 and punitive damages (the purpose of which, as noted, is to deter the company from repeating the act) in the amount of $2,000,000 (two million dollars).

The statute of limitations for insurance claims is three years (not seven).

Please note! Sometimes insurance payments are withheld legally but in a shady way. Many know that the statute of limitations for legal claims is seven years. Few know that insurance claims have a special rule that states Shortened statute of limitations of only 3 years. The year count begins from the occurrence of the insurance event. Imagine a family where a child dies under circumstances qualifying for insurance. In the first year, the parents are in shock, but despite this, they contact the insurance company and meet the Claims adjusters that require this document or that document. The document is sent, two months pass, the parents remember they didn't receive an answer, they contact again and are required to provide another document. And so on... Have three years and a day passed? The parents won't receive money. I wrote about this too In workplace life insurance as a substitute for mortgage insurance.

Do not check the policyholder's statement

A final practice to avoid payments is not checking the insured's statement when the insurance is taken out, but only when the need to pay arises. For example, an insured person is required to fill out a health declaration when taking out insurance. The insurance company receives permission from him to open his medical file but does not use it at this stage. If the insurance company is required to pay, it will open the insured's medical file and look for discrepancies between his statement and the medical file. The insured forgot that he was hospitalized for two days at the age of two? Too bad... he actually could have received all out-of-pocket medications at the insurance company's expense.

Advanced riddle. A person took out insurance for their apartment's contents and declared property worth 50,000 ILS. Their home was burglarized, and the insurance company discovered that the value of the property in the home was 100,000 ILS, not 50,000 ILS as the insured declared. What is the amount of compensation the insured will receive? Whoever thought of 25,000 ILS will receive a t-shirt and a record.

If you want to read more about the antics of insurance companies (a Parkinson's patient who cannot drink water from a cup, but is not considered bedridden because only water spills on her, a person with a cancerous brain tumor who is not receiving insurance money because they did not provide test results which hospitals stopped performing many years ago, etc...), you are invited to read In the excellent column by attorney Haim Klir on YNET.

In summary

• Insurance should only be purchased against an economic risk from which we cannot recover on our own. The wealthier we are, the fewer risks there are from which we cannot recover, and therefore, the less insurance we need. 
• All adults in the household need to know which insurance policies the family has. All Insurance documents should be kept in a centralized and organized manner. It's possible that the person who has to handle the insurance claim will not be the one who took out the insurance in the first place. It's advisable to scan insurance documents and save them online (DROPBOX, etc.). Remember that insurance is meant to cover, for example, a house fire. It will be more difficult if the documents are burned or soaked by the firefighters. 
• It is advisable to approach with caution recommendations from those whose compensation depends on them recommending increased consumption of a particular product.
• When the compensation amount is not dependent on the damage amount, there is a high chance that it is not insurance but a "lottery ticket" and it is best to avoid it.