Life Insurance (though it shouldn't be) is to this day a very controversial issue. There seems to be a lot of different types of life insurance out there, but there are really only two kinds. They are Term Insurance and Whole Life (Cash Value) Insurance. Term Insurance is pure insurance. It protects you over a certain period of time. Whole Life Insurance is insurance plus a side account known as cash value. Generally speaking, consumer reports recommend term insurance as the most economical choice and they have for some time. But still, whole life insurance is the most prevalent in today's society. Which one should we buy?
Let's talk about the purpose of life insurance. Once we get the proper purpose of insurance down to a science, then everything else will fall into place. The purpose of life insurance is the same purpose as any other type of insurance. It is to "insure against loss of". Car insurance is to insure your car or someone else's car in case of an accident. So in other words, since you probably couldn't pay for the damage yourself, insurance is in place. Home owners insurance is to insure against loss of your home or items in it. So since you probably couldn't pay for a new house, you buy an insurance policy to cover it.
Life insurance is the same way. It is to insure against loss of your life. If you had a family, it would be impossible to support them after you died, so you buy life insurance so that if something were to happen to you, your family could replace your income. Life insurance is not to make you or your descendants rich or give them a reason to kill you. Life insurance is not to help you retire (or else it would be called retirement insurance)! Life insurance is to replace your income if you die. But the wicked ones have made us believe otherwise, so that they can overcharge us and sell all kinds of other things to us to get paid.
How Does Life Insurance Work?
Rather than make this complicated, I will give a very simple explanation on how and what goes down in an insurance policy. As a matter of fact, it will be over simplified because we would otherwise be here all day. This is an example. Let's say that you are 31 years old. A typical term insurance policy for 20 years for $200,000 would be about $20/month. Now... if you wanted to buy a whole life insurance policy for $200,000 you might pay $100/month for it. So instead of charging you $20 (which is the true cost) you will be overcharged by $80, which will then be put into a savings account.
Now, this $80 will continue to accumulate in a separate account for you. Typically speaking, if you want to get some of YOUR money out of the account, you can then BORROW IT from the account and pay it back with interest. Now... let's say you were to take $80 dollars a month and give it to your bank. If you went to withdraw the money from your bank account and they told you that you had to BORROW your own money from them and pay it back with interest, you would probably go clean upside somebody's head. But somehow, when it comes to insurance, this is okay
This stems from the fact that most people don't realize that they are borrowing their own money. The "agent" (of the insurance Matrix) rarely will explain it that way. You see, one of the ways that companies get rich, is by getting people to pay them, and then turn around and borrow their own money back and pay more interest! Home equity loans are another example of this, but that is a whole different sermon.
There wasn’t a lot of talk about auto insurance at this year’s annual meeting of Berkshire Hathaway, but when the subject came up, Warren Buffett acknowledged the continued dominance of one competitor—a mutual insurer.
“The largest auto insurance company in the United States was started over in Illinois by a guy who didn’t know anything about insurance particularly. And it’s a mutual company. It’s not supposed to succeed in capitalism,” said Berkshire Hathaway’s chair and chief executive officer, referring to State Farm.
Saturday’s six-hour event wasn’t the first one that featured Buffett referring to State Farm’s dominance when asked to comment on the competition between Berkshire’s GEICO and Progressive Insurance. “We will see five years from now or 10 years from now which one of us passes State Farm first,” he said as recently as the 2019 annual meeting. (Related article, “‘I Worry Much More About Progressive’ Than Tesla, Buffett Says“)
This time around, however, when CNBC Journalist Becky Quick read a question from a shareholder who wanted to know why GEICO is lagging Progressive in terms of top-line growth and underwriting profitability, Buffett did not talk about ever moving ahead of State Farm. To his mind, the auto insurance industry and the success of State Farm should be studied in business schools.
“If you go to business school, they teach you that only because you have incentives and compensation, all kinds of things, can companies succeed. [But] nobody’s really gotten rich off State Farm. They’ve sat there, and they are the largest insurance company,” he asserted. “When Leo Goodwin started GEICO 80 some years ago, he probably wanted to get rich,” he said, referring to GEICO’s founder. “And probably at Progressive, I know people wanted to get rich. And at Travelers and Aetna. You can name them off, dozens and dozens of companies.” (See related article, “Scoop, There It Is: GEICO Drives Up Berkshire 2020 Underwriting Profit” for more about Goodwin.)
“And who wins? A mutual company,” Buffett concluded.
“In terms of presence, of size, they still are the largest company. If you leave out Berkshire, they have the largest net worth by far. They’ve got $140 billion or something like that in net worth,” Buffett said, speculating that Progressive’s net worth is roughly one-sixth of State Farm’s.
“We spend $2 billion a year telling people the same thing we’ve been telling them for 70 or 80 years.” But when all is said and done, “State Farm is still doing more business than anybody, and it shouldn’t exist under capitalism.”
“If you [had] a plan to start a State Farm today and had to compete with Progressive, who would put up the capital [for] a mutual company that you’re not going get the profits from? It doesn’t make any sense at all,” he said.
Progressive Still Crushing It
Ajit Jain, who chairs Berkshire’s insurance operations, spoke before Buffett to give a direct response to the original question of Progressive’s outperformance of GEICO, conceding as he did at last year’s meeting that GEICO needs to catch up to Progressive on telematics. (Related article: “Progressive ‘Crushing It’ on Profit: Berkshire’s Jain and Buffett,” May 6, 2021)
“There’s no question that personal automobile insurance business is very competitive business. Having said that, both GEICO and Progressive are two very successful competitors. Each one of them have their pluses and minuses,” Jain said.
“There’s no question that more recently, Progressive has done a much better job than GEICO…in terms of margin and in terms of growth rate. There are a number of causes for that, but I think the biggest culprit as far as GEICO is concerned…is telematics.
“Progressive has been on the telematics bandwagon for, I don’t know, more than 10 years, 20 years. GEICO until recently wasn’t involved in telematics. It’s been only the last two years that we made a very serious effort in terms of using telematics for segmentation and trying to match rate and risk.”
“It’s a long journey, but the journey has started, and the initial results are promising. It will take a while, but my hope and expectation is that hopefully in the next year or two, GEICO will be in a position to catch up with Progressive in terms of telematics, and hopefully that will then translate into both growth rate and margin,” Jain said, drawing applause from shareholders who attended the Omaha meeting in person.
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