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One of America’s celebrated cultural values is individualism. We idolize people who are self-made, who rise up from their own bootstraps, who can say “I did it my way.” This individualism is part of the American dream, the idea that with enough effort and perseverance anyone can be anything, even President of the United States.
This glorification of individuality not only inspires us to pursue our dreams, it also makes for great marketing opportunities. The essence of the do-it-yourself (DIY) business is if anyone can be or do anything, why not do it yourself?
- Want to build your dream home? You can do it yourself! (With our plans, our materials, our tools.)
- Need a will or trust? Write it yourself! (Using our inexpensive legal forms and advice.)
- Car trouble? Fix it yourself! (The parts store is just down the street.)
- Don’t want to pay for a tax expert? File the returns yourself! (Download our program!)
From a popular culture standpoint, there can be an almost obsessive compulsion to find ways to operate independently. At the same time, this obsession can lead to a distrust of all large institutions – governmental units, banks, Wall Street, big corporations, even religious organizations. While some institutions perhaps deserve our distrust, it’s not always because they are big. Even in America, some large-scale cooperative efforts often yield better results than going it alone.
In Garrett Gunderson’s 2007 book, Killing Sacred Cows, the author takes on 10 prevailing financial strategies that he believes are harmful “myths” that diminish or deter prosperity. One of those myths is the idea that self-insurance is a profitable strategy.
“Are we better at providing insurance than the insurance companies? Can we provide equal benefits at a comparable price? If so, then we should become an insurance company for more than just ourselves. But if we cannot provide insurance as efficiently as an insurance company, then economically it is much less expensive to use insurance companies.” – Garrett B. Gunderson, from Killing Sacred Cows
The “DIY” Version of Self-Insurance
In a nutshell, self-insurance is the idea that you can accumulate reserves of assets and resources so that you no longer need to pay an insurance company to protect you from the risks of life. If your house burns down, you have the money to rebuild it yourself. If your car is involved in an accident, you could make the repairs yourself – and pay for any damage you might have caused.
Self-insurance is the ultimate DIY financial project, and it has many advocates. From the perspective of the DIY financial gurus, insurance is something that should be bought in the smallest amounts possible, for the lowest price possible, and kept for the shortest time possible.
A prime example is self-insuring one’s life. The DIY philosophy is to buy the cheapest term insurance possible in order to devote as much capital as possible to accumulation strategies. In time, the accumulation balance will be large enough so as to make life insurance unnecessary.
Defined this way, self-insurance seems theoretically possible. But is it practical?
Self-Insurance Is Really No Insurance
Insurance is a method where individuals can share the financial risk by spreading the cost of potential loss amongst many people. But when you self-insure your home, you assume all the risk for any losses that might occur on the property. When you self-insure your medical expenses, all the bills that may result from an illness or injury will be paid out of your pocket. According to Gunderson, “there’s no such thing as self-insurance…You either have a way to transfer the risk of loss, or you retain that risk. Self-insurance is really no insurance.”
This might sound like semantics. If you decide you won’t buy homeowner’s insurance because you have a pile of cash, you don’t have insurance, that’s true. So maybe the real question is “if I have enough cash, why do I need insurance?”
Gunderson’s answer: “Producers (i.e., productive, wealth-building individuals) love insurance because it transfers their risk, and they know it saves them money in the long run.” In other words, the more assets and resources you have, the more you should want insurance, not want to get rid of it.
Gunderson provides the following example: “If a person owns a $1 million home and has no homeowner’s insurance, and also has $1 million in cash, where can he invest his cash in such a way as to keep his home protected?”
If he wants to be sure he has fully protected his home, how aggressively can he invest the money? If he is serious about protecting the value of his home, most likely his investment options will be limited to those that are very safe – and lower in rate of return. On the other hand, if a $2,000 annual premium for homeowner’s insurance means he can invest aggressively without fear, isn’t buying homeowner’s insurance a profitable financial transaction?
Risk vs. Return
Mainstream financial commentary often emphasizes the interrelated nature of risk and return in the context of a particular financial product. The typical comment is: higher return vehicles also come with higher risks. But there’s another paradigm for risk and return when insurance is involved. Using insurance to decrease risk in one area makes higher returns possible in other areas. Go back to the example of the homeowner with $1 million. With insurance, the homeowner can pursue greater opportunities and still know one of his financial risks (damage to his home) is covered.
Understanding this connection between reducing risk and increasing return through insurance, Gunderson concludes that the most effective financial arrangement is to buy as much of it as possible, and make it the best coverage available.
The Economic Value of Certainty
When people pool resources to share risk, one of the benefits is a higher level of certainty. Even if something unexpected or undesirable happens – i.e. your house burns down, you suffer an accident – you know you can respond. Knowing that you have decreased or eliminated the risk of financial loss provides a greater level of economic certainty. This certainty allows individuals to make better decisions, pursue bigger dreams, and focus on long-term results.
The value of economic certainty is not just an individual benefit. Entire societies benefit from economic certainty. Historically, tribal and feudal societies often languish at the subsistence level because of economic instability; when you are fearful that enemies or acts of nature may wipe out your wealth in an instant, it is hard to commit time and resources to any long-term projects.
In his 2000 book, The Mystery of Capital, Hernando de Soto declares that capitalism has triumphed in the Western world and failed everywhere else because of two cultural “insurance” factors: the rule of law and property rights. When people know the law will be applied equally and what they have is theirs to use, sell, or borrow against, the certainty allows them to focus on prosperity.
In an August, 2003 opinion paper, financial commentator Les McGuire expanded on the economic value of certainty:
“What people really want, when their minds are opened to the possibility, is the maximum value in every area of their life with as much certainty as possible. Even those who are self-proclaimed risk tolerant are kidding themselves. We should assume that every one has a risk tolerance of zero, meaning that if it was possible, [EDIT AUDIO] they would want every economic choice they ever make to work perfectly. No one really wants to lose money; they just think it is a prerequisite to making big money because that is what they have always been told. If they could make the same returns with no risk, everyone would want to.”
Now, More Than Ever, Insurance Matters
For many Americans, one of the consequences of the recent economic upheaval is the loss of insurance. Maybe they no longer have health insurance or group benefits through an employer; maybe they are currently out of work. Even if they are still paying their bills, these people are feeling the effects of economic uncertainty. They know they don’t have their risks covered.
At this point, some Americans feel that do-it-yourself reflex take hold. “Well, I’ll just have to take care of it myself. I can do without cable TV; I can eat out less often. I’ll stop paying the premiums or reduce the coverage amounts for these three insurance policies and use some of the savings to create an emergency fund that will cover anything that might come up. I’m probably better off doing that than wasting money on insurance.”
Admittedly, there’s sometimes a difference between what’s ideal and what you can afford. But right now is not the time to try the do-it-yourself insurance program. You want as much of your financial risk to be shared by as many people as possible, not to have more risk put on you. There are a lot of productive things you can do on your own, but insurance definitely works best as a group effort.
That’s why now might be a good time to meet with us and review your situation. Our economic prosperity knowledge might give you options to rearrange your coverage, yet maintain a higher degree of economic certainty that can help you maintain your prosperity plans, and/or reposition you to succeed again.
