When Is Insurance Worth It? | Hacker News Reader

When Is Insurance Worth It?

entropicthoughts.com

32 pointskqr48 comments

>The purpose if insurance is not to help us pay for things that we literally do not have enough money to pay for. It does help in that situation, but...

56% of Americans cannot cover a $1000 emergency expense. Insurance absolutely is a lifeline that most people need to avoid financial ruin.

Edit: My source for the 56%: https://www.cnbc.com/2022/01/19/56percent-of-americans-cant-...

Which downthread was pointed out that it was derived from this survey: https://www.bankrate.com/banking/savings/emergency-savings-r...

If I were to buy health insurance, it would cost between $400 and $800 per month. It would likely not cover me from financial ruin anyway. If I'm uninsured, I receive treatment and never pay the bill. Maybe this affects my credit, but it is not financial ruin.

In reality, I get good health insurance through an employer. When I am employed.

$1000 is nothing compared to the expense of being insured.

> If I'm uninsured, I receive treatment

I think this is true if you walk into an emergency room with a life-threatening illness; is this true if you start developing tooth problems, or diabetes? Can I walk into the ER with bad kidneys and get a round of dialysis on the house?

Yes, you can get a round of dialysis. Patients with end-stage renal disease qualify for Medicare which covers most of the cost.

How long does it take to get approved? I guess renal failure isn't exactly a thing that sneaks up on you, but I do wonder what happens if there's some catastrophic incident that results in an ongoing medical issue; can you just keep showing up to the ER for treatment while enrollment goes through?

The median bank account balance is $8000:

https://www.bankrate.com/banking/savings/savings-account-ave...

I'm not sure where you got that stat, but would like to know if it's reconcilable with bank account balances.

The stat is from Bankrate's annual survey [0].

Every year all the outlets breathlessly report on how many Americans can't afford a $1000 expense, but this is a disingenuous reading of the data.

The actual question asked is:

"Which of the following best describes how you would deal with a major unexpected expense, such as $1,000 for an emergency room visit or car repair?"

And the number reported (which is usually above 50%) is derived from everyone who didn't respond:

"Pay the cost from your savings"

[0]: https://www.bankrate.com/banking/savings/emergency-savings-r...

How is it disingenuous? The only other option for affording that ER visit is the 16% who say they could cut $1000 in discretionary spending to cover it.

Taking out an unsecured loan isn’t it.

Well, 5% said "Something else," so the most charitable reading already puts us at 65% being able to afford it.

But the way the question is worded leaves a lot of fuzzy room around the edges.

For instance, a financially illiterate person may elect to put it on credit despite having enough liquid wealth not to need to (to get the airline points perhaps?)

A shrewd investor may be able to cover it with a personal loan or by borrowing from family with a favorable rate that is lower than the expected return on their investments.

The question asks which best describes what you would do in an emergency and only invokes $1000 as an arbitrary example. Some respondents may simply be confused or pedantic in their response.

Additional bias can be injected when this number is re-reported by third parties, I've seen it reported as "X% of Americans..."

"...Don't have $1000"

"...Can't afford $1000 expense"

"...Don't have $1000 in savings"

"...Couldn't come up with $1000 in an emergency"

And several other hyperbolic variations.

I am not sure the reading is entirely unfair. If you cannot pay for the emergency in cash, the alternatives on the table are not great. The breakdown of answers:

  44% Pay the cost from your savings
  21% Finance with a credit card and pay it off over time
  16% Reduce your spending onother things
  10% Borrow from family or friends
  4% Take out a personal loan
  5% Something else

How many people have no bank account? How many people have multiple bank accounts? Do the people with multiple bank accounts have a higher net worth than those with one or none?

Yeah, I have several bank accounts, all over $8k. It's a terrible metric.

The unbanked rate is 4.5%. So unless the 45th percentile of bank account balances is $1000, or maybe $3000, I don't know how to reconcile these stats.

https://www.fdic.gov/household-survey

Not everyone with a checking account also has savings.

The median includes checking accounts.

Poor people don’t have savings accounts. Rich people will have multiple savings accounts.

Based on the questionnaire for the SCF on the fed's website, it looks like the figure is per person, not per account. Therefore the "rich people have multiple accounts that skew the results" effect won't exist.

I don’t know what you’re looking at. On the questionnaire I see the first question is how many accounts, then what institution and how much in each.

>and how much in each.

that question only exists for certain types of accounts. On page 13, compare

>Have any checking accounts? (up to 6) > ... >Amount in account

with

>Have any IRA/Keogh accounts?

>For each person ask:

>Amount in each type

Note the lack of "each" in the former.

Moreover, on the main page[1] it's explicitly stated that figures are per-family, not per account.

>For each variable and classification group, the charts show the percent of families in the group who have the item and the median and mean amounts of holdings for those who have any.

It's further stated that 98.6% of families have "transaction accounts", so the effect of excluding people without transaction accounts is minimal.

[1] https://www.federalreserve.gov/econres/scf-documentation.htm...

You’re parsing the phrasing beyond any rational meaning or common sense. The person administering the survey would not ask about multiple accounts then record the value of only one. (Which one?)

The documentation you’re looking at refers to one specific data visualization. Transaction accounts are not savings accounts. Give it a rest.

>The documentation you’re looking at refers to one specific data visualization. Transaction accounts are not savings accounts. Give it a rest.

First, the original topic of this conversation was:

"The median bank account balance is $8000:"

The linked bankrate.com article mentions "savings accounts" in the title, and the subsequent reply also uses that term. However, the bankrate.com article body clarifies it's actually talking about "transaction accounts" as defined by the SCF, not just "savings accounts".

"The median transaction account balance is $8,000, according to the Federal Reserve’s Survey of Consumer Finances (SCF), with the most recently published data from 2022. Transaction accounts include savings, checking, money market and call accounts, as well as prepaid debit cards."

Yes, there's some loose definitions being used and conflation going on, but when it comes to the question of "can Americans cover a $1000 emergency expense?", it doesn't materially impair the "$8000 median account balance" argument.

Second, "one specific data visualization" you talk about is the source of the $8000 figure. If you select "transaction accounts" in the dropdown, you'll see the latest figure is $8.0 (in thousands of dollars).

https://www.federalreserve.gov/econres/scf/dataviz/scf/chart...

Third, on the topic of "parsing the phrasing beyond any rational meaning or common sense", I actually can't find any place on the fed's site that suggests that the figures (eg. the $8k figure) are per-account. For instance the above chart has a title of "Transaction accounts by all families", which at best is ambiguous as to whether it's per family or per account. It seems like someone just made the suggestion and others took it at face value.

Poor people often have savings accounts along with checking to take advantage of benefits that their banks offer. That doesn't mean they keep a significant amount of money in savings.

> 56% of Americans cannot cover a $1000 emergency expense. Insurance absolutely is a lifeline that most people need to avoid financial ruin.

If you can't muster $1000, then you are in financial ruin. Insurance is pointless for these people.

Indeed. Those people have real imminent problems to prepare for above and beyond hypothetical ones that insurance is for. Except for legally required insurance I think they probably shouldn't get insurance, and instead dedicate their resources to being healthy and improving their finances.

I've been thinking about this lately.

For a couple weeks, I was worried about my health insurance for next year through my state's marketplace and I was considering whether it would be worth the unsubsidized price of $350-450 per month. Ultimately, I don't have enough information about my risks to feel comfortable with my analysis. While it would be mentally soothing to use the calculator, it's not really helpful.

I'm also curious what's going on with insurance prices this year. The health insurance premiums this year are 33% more and just today I got my home insurance renewal asking for 25% more with the exact same coverage amounts. Did something happen to justify these increases?

> I got my home insurance renewal asking for 25% more with the exact same coverage amounts. Did something happen to justify these increases?

Climate change.

This is a nothing answer. Climate change has been happening for decades. What exactly changed this year that led to this increase.

What happened this is year is the need to cover payouts from last year’s record losses due to wildfire, flooding and wind.

https://www.nytimes.com/interactive/2024/12/18/climate/insur...

https://www.nytimes.com/interactive/2024/05/13/climate/insur...

https://www.nytimes.com/interactive/2024/05/13/climate/home-...

General economic conditions prevents new capital from entering the market to undercut current insurers.

Behind the scenes much of this tighening of available capital happened more than a year ago but it's being passed on to consumers only now. Nothing in particular has happened this year -- it was fairly ordinary in terms of catastrophies.

> The purpose if insurance is not to help us pay for things that we literally do not have enough money to pay for. It does help in that situation, but the purpose of insurance is much broader than that. What insurance does is help us avoid large drawndowns on our accumulated wealth, in order for our wealth to gather compound interest faster.

Neat. What about people who don't have accumulated wealth?

The linked article explains it further down. In common cases it boils down to "if you're rich don't bother with insurance, if you're poor you should pay it".

> In a concrete example, let’s say that our household wealth is $25,000, and we’ve just gotten a motorcycle with some miles on it already.

> Assuming no deductible, would this be worth it? Yes!

> If our wealth had been $32,000 instead, the insurance would no longer have been worth it

>In common cases it boils down to "if you're rich don't bother with insurance, if you're poor you should pay it".

This is way too simple. If you're rich then you stand to lose more in many situations, and may be deemed a lower risk so insurance is cheaper. If you're in reasonably good health and on the verge of being evicted if you miss a paycheck, paying hundreds per month for health insurance to head off unlikely risks is a bad idea. Probability is supposed to account for this but you might know that you're not getting pregnant or having expensive surgery, for example. An insurance company cannot assume such a thing. So they are obligated to charge you way more than you can ever get back. It is also relevant that if you miss insurance payments, you will lose coverage.

Another wrench in this methodology is that some costs are not purely financial. What price do you put on the risk of dying from a lack of treatment? Is that risk higher than the risk of ending up destitute and uninsured anyway?

I don't think this is sound advice. The Kelly criterion has been thoroughly explored in the finance world and pretty much everyone agrees it's way too optimistic in situations where it's hard to determine accurate probabilities, such as real life. It's given rise to many alternatives such as Half-Kelly, Kelly minus constant, etc, but that just goes to show you how inaccurate of a proxy it is. Insurance companies have a reasonably good grasp of probabilities because they have actual data. They can see how many of their clients actually use the insurance and when and this gives you real inputs to go from. It's complete nonsense to make up a number like oh my car has a 33% chance of developing a big fault this year out of thin air, and to then make financial decisions based on that.

I'd consider fractional Kelly (whether half, quarter, two-thirds, etc.) still a member of the Kelly family. After all, it arises when one performs a full Kelly allocation on some fraction of one's wealth, keeping the rest out of the market. It's not that Kelly is an "inaccurate proxy" -- it is provably the allocation that maximises growth -- but that people for various reasons don't want to maximise growth. They prefer slower growth in exchange for other properties, such as more cash being available for emergency needs.

> It's complete nonsense to make up a number like oh my car has a 33% chance of developing a big fault this year out of thin air

Are you claiming regular people cannot learn to make calibrated probability judgments and/or look up car failure rates? Maybe that is the problem with the Kelky-based framework: it requires forecasting a probability distribution and many people are not great at that, although they could learn it.

Since it wasn't clear from your comment, what alternative framework are you proposing for the insurance decision?

Insurance isn’t about maximising overall outcome (we know it doesn’t do that!) It’s about managing critical (often existential) risks. You buy insurance when you need to protect against an unrecoverable loss (house burned down, car was stolen, permanently injured and unable to work, etc.) that you can’t just “ride out” and self-finance.

> (we know it doesn’t do that!)

...but it does do that under the assumption of compounding, and that's part of why it exists. I recommend learning about the Kelly criterion and E log X strategies to see why.

The key insight is we shouldn't look at the arithmetic expectation of profits of isolated bets beccause that causes us to overinvest in uncertain profits and underinvest in insurance.

I don’t believe I can come up with accurate numbers like that. I have no chance against a big company with a bunch of actuaries who do that for a living.

I think I really can sometimes tell if I’m riskier or safer than the average person. I can observe other people’s behavior and compare it to mine. But even then, my impressions will be subject to a lot of biases (eg. everyone thinks they are an above-average driver).

If I assume the insurance company has done the math so they make a decent margin, and if I’m confident I’m a better or worse risk, it’s possible I can use that reasoning to guess whether insurance is a good value for me.

It seems like you're assuming a zero-sum game here where you are hoping to earn more from insurance claims than you paid in premium. This is not how insurance is supposed to be evaluated, as TFA points out.

You're not against the insurance company. Your decision is relatively separate from theirs.

If I believe insurance is well-priced, the cost ought to be pretty close to the value it’s providing me, maybe cheaper if the insurance industry has some advantage like good rate of return or higher if they are uncompetitive. That makes me indifferent to whether I have insurance in a lot of areas. Therefore, I’m not spending a lot of time purchasing insurance. Nothing against the industry.

Given I’m unable to produce the probabilities necessary to compute the Kelly criterion, I can’t use that to make the decision. Instead, I have to use dumb heuristics like “I need liability insurance to get rid of my risk of ruin” or “I can easily afford to replace my car, but my passion is parking underneath dead trees during storms, so I should pay for comprehensive coverage.”

In either case I have no idea how to compute the probabilities, but I’m still pretty sure I made the right decision.

> If I believe insurance is well-priced, the cost ought to be pretty close to the value it’s providing me

The value of insurance to the buyer depends on the buyer's wealth. The insurance the electronics store offers on the tablet I buy is well-priced for their target audience but not for someone with my emergency expense buffer.

But how do I evaluate how the magnitude of effect of my income on the value I get from the insurance (relative to the average buyer who sets the market price) if I’m lacking the figures to compute the Kelly criterion? Is it useful to me at all as a consumer? Is there version of the formula I can use if I want to implicitly accept the work of the insurance company’s actuaries, but skew the result to account for how I differ from the average customer?

That's an interesting question! The actual risk assessments thr insurer does are obviously confidential, but you're asking whether we can reverse engineer their premiums into underlying probability estimations? So we'd still be estimating probabilities, but based on information leaked from insurers instead of first principles.

Could work! I don't know how, though.

This was my exact thought when I hit that point in the article. How am I supposed to know the probability to make these calculations? And if I make up numbers that "seem" reasonable, how is that better than buying insurance to sleep better?

Many of these probabilities can be looked up in official statistics. Then you can adjust a tiny bit depending on whether you think you have more or fewer risk factors than the average.

When I feasibility tested by asking my wife to guesstimate a couple of these she ended up very close to official statistics. The first-level trick she used is Fermi estimation.

You can totally do it and it's worth practicing. There are even competitions in it open for anyone! I like the Quarterly Cup at Metaculus. The next iteration starts early January.

This makes sense in the context of trying to maximize log wealth (or I think any concave function of wealth, though the arithmetic is different). But in one of OP's other articles [1], he says the Kelly criterion doesn't require trying to maximize log-wealth, that this is just a common misconception -- all that's required is maximizing something growing geometrically over time.

This I don't understand, maybe someone help me out? Say the real growth rate of capital (or interest rate available to me, whatever) is 2%/year and I have a 10 year time horizon. So $1.00 today is ~$1.22 in 10 years. More generally, if I have wealth X today I will have 1.22X in 10 years. And if X is not a constant but a random variable and I want to maximize future expected wealth (not log wealth), that's just max(E[1.22X]) and by linearity of expectation I should just maximize wealth today to maximize in 10 years time.

So Kelly being appropriate must have some other conditions, right? Wanting to maximize log wealth is surely sufficient (and individually probably ~rational). What else?

[1]

Whoops forgot the link https://entropicthoughts.com/the-misunderstood-kelly-criteri...

setting aside the difficulty in getting probabilities that sister commenters have brought up, i think what these kinds of articles often miss is that these decisions actually often are about vibes. even if i had accurate numbers and Kelly says that it's not worth it to buy insurance, it very well could be worth the peace of mind for me personally, regardless of wealth.

in general i don't like when someone else tries to tell me how i should be using a product i buy, and that includes insurance.

In general i don't like when someone else tries to tell me how i should be using a product i buy, and that includes insurance.

You shouldn't make yourself miserable thinking about advice you don't like. Just ignore it.

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