Monday, January 29, 2018

Do not buy insurance based on "trust"

Someone said that he had bad experience with a past insurance claim. He has decided not to "trust" insurance.

It is better to understand insurance rather than to "trust" insurance.

Thirty years ago, insurance companies offered good life insurance products that gave insurance protection and a good return on the premiums.

The policyholders could not get a good return from other types of investments, except to invest in shares. But it was difficult and costly to invest in shares directly. The insurance company invested their savings in shares and bonds on their behalf.

Since 2000, the situation changed considerably. Insurance companies have to invest a large part of their funds in low yielding bonds. Their expenses increased sharply and take away a large part of their investment earnings. The return becomes quite bad.

It is now easier for the public to invest directly in shares or in an indexed fund. They offer superior returns compared to life insurance policies.

The public who understands this new situation avoid investing in life insurance policies. Those who continued to "trust" insurance out of ignorance have much to regret at some time in the future.

The public continued to "trust" that insurance will pay their medical claims, without understanding that the claims could be rejected due to non-disclosure or exclusions, and that the insurance companies might act unfairly in rejecting some of these claims. This blind trust, which comes out of ignorance, can come back to hit them with a big shock.

Should the public buy insurance? Yes, but it should be bought not based on "blind trust". They should know what are good insurance products to buy and what should be avoided. They must spend the time to learn about it. If they don't spend the time, it is best that they avoid insurance altogether.

Blind trust can be quite costly and financially damaging.

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