You shouldn’t take out any insurance – 04/13/2023 – From Grain to Grain

Most of the insurance you take out doesn’t make sense. That’s right. Insurance is expensive and must be well chosen. Only a few are reasonable. So, which insurance makes sense to take out?

One of the simplest forms of insurance that almost everyone buys is health insurance. If we stop to analyze it, it doesn’t seem worth it. However, it makes perfect sense. I am not going to argue about the need to use a private medical network, as the public network is precarious.

The big problem is the “what if”. What if you have an accident and need to be hospitalized? What if a more serious health problem occurs with expensive treatment? And so on. It’s a lot of “What ifs”.

As much as you are disciplined in investing, you would hardly be able to afford to cover the “what ifs”.

So something that seems expensive when you think about the average spend without counting the “what ifs” becomes cheap when the worst occurs.

The same occurs with various types of insurance, but not all of them make that much sense and, inconsistently, are more used by Brazilians.

For example, car insurance. You know how much your car costs. Additionally, the amount covered for damages to third parties is also known in the policy. Worse, you have the ability to control the risks, as much of the risk is related to the way you drive.

If the maximum losses are known and controlled, and also, considering that you are buying the asset, that is, you have the financial capacity to acquire it, why take out insurance when it is better and cheaper to plan?

Someone might argue, what if they steal the car parked on the street? Just don’t stop on the street. Risks are controlled.

Most of the time, the amount of car insurance is more expensive than you take out personal accident and disability insurance. But many inconsistently prefer the former.

For example, insurance for a car worth BRL 100,000 costs close to BRL 4,200, that is, BRL 350 per month.

Insurance worth R$ 1 million for disability due to accident or illness and accidental death, for an individual aged about 42 years, costs the same R$ 350 per month.

Notice the difference. For the case of the automobile, it is possible to plan with a reasonable time. The other falls into the “What if”. Planning to accumulate R$ 1 million in equity to cover the event of an accident and personal disability would take a long time. So you are subject to the “What if”.

You don’t need insurance for risks that are easily planned. For example, insurance for the car, cell phone and electronic equipment. These are goods you can plan to purchase and replace if the worst comes to worst.

Other risks do not fall into this category, for example your health, your life and your ability to earn income to live on.

Incoherently, Brazilians prefer to take out insurance on assets that they know exactly the risk of loss, that is controlled and that they could easily and quickly plan for. But, they despise insurance on risks that they should really protect themselves, because they don’t understand the risk they run.

Therefore, for those risks that fit the “What if” and that would take years to plan a savings that covers them, insurance is cheap and makes perfect sense within financial planning. The problem is that most of the time we don’t think or consider the “What if”.

The habit of investing can also be compared to taking out insurance to have a good retirement. That is, “What if” you don’t have enough income in old age? To cover this risk, you invest today. Many also despise this form of insurance.

Michael Viriato is an investment advisor and founding partner of Investor House.

Talk directly to me via email.

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