Callagy Law: A Little Bit About the Nature of Insurance

Understand insurance the way it should be understood:  As gambling.  Insurance companies study tragedies of various kinds and assign to those tragedies probabilities. Once those probabilities are set, it is a simple mathematical formula to charge premiums and establish pay outs to ensure that the probability of the tragedy and the level of resulting payout are exceeded by the revenue taken in with the premiums.

Illegal bookmakers in the numbers racket years ago would pay out 600-to-1 on a bet as to what 3-digit number would be the number for the day.  There are 1,000 possibilities, from 000 to 999.  Therefore, a 600-to-1 pay out meant for every $1,000 bet, the bookie would make $400, after paying out $600.  In the long run and on average, for every 1,000 people playing at a $1 bet, one person would win.  This is incontrovertible and an absolute fact . . . in the long run.  Because of this, the gambler would have been better off taking the $1 they bet each day for 1,000 days, and placing it in an envelope, and on the 1,000th day, paying himself the $1,000, and acting as if he hit the number.  The payout would be $400 more than if the gambler actually hit the number with the bookie.

This is not so different from insurance.  When you purchase insurance, you are purchasing a policy that will most likely yield a profit to the insurance company.  They calculate the risk; they calculate the premiums they will charge you, modifying the levels of pay out to you to seek to ensure profitability–all for the purpose of yielding revenue for them that exceeds any likely pay out to you.  There is nothing wrong with this.  It is legal and often beneficial.

I mention it only for your understanding, because it is important to realize the only ones who receive a net financial benefit from insurance are those unfortunate enough to suffer a disaster that would have cost them more to address than they paid in insurance premiums.  If you are among those who never suffer a disaster warranting a pay out from your insurance company, know that you have greatly enriched them, while receiving nothing in return.

It is a pretty bad proposition for the insured no matter how you look at it.  And sometimes . . . just sometimes . . . you might be better off putting the premiums in an envelope, and when something tragic does happen, pulling out the money, as if you had insurance.  It might just be an amount greater than you would have received from the insurance company.