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Opinions from a trained actuary: Stick to simple insurance

In my insurance blast these few weeks, we talked about a particular trained field of mathematicians who assist in valuing the risks of insurance products, how they don’t seem to buy whole life insurance and investment linked policies.

I managed to get into contact with a US investment professional David Merkel. David is a trained life actuary as well as a CFA. He current managed his own fund, Aleph Investments, and talks about investment mainly in the domain of bonds and insurance companies at The Aleph Blog.

So I pose this question to David:

When I know that you are trained as an actuary it got me curious. They say that actuary assess the risks of insurance products to find value for consumers, at the same time evaluate the probable risks of the product.

What kind of insurance does an actuary actually buy for his and his family? Insurance are often sold with economic bias so what better way to know then find out from people that use actual data and determined it through quantifiable methods.

I heard that actuaries often buy only term life insurance only and that investment linked and limited whole life policies do not make sense. At the same time, it would seem that the way you can claim critical illness is such that most of the time you can claim it, you are almost very disabled or near death. In such a scenario wouldnt [sic] a pure death and tpd [sic] term life be suffice?

David’s reply was as follows:

This is my opinion, given my dealings among actuaries.  I could be wrong.  Actuaries avoid complexity in insurance products.  Why?  In general, complex products hide high profit margins.  Products that are easy to analyze, like term life insurance, are competitive, and profit margins are low.

The same is true for savings products, like deferred annuities.  Actuaries tend to buy simple products that cover basic needs.

Also, they tend to use insurance as catastrophe cover, because they know that having insurance companies pay on a lot of small claims is expensive on average.

There is an exception to all of this.  If you are so rich as to need to stiff the taxman, buying cash value insurance policies can make a lot of sense.  In that case, wealthy actuaries with clever tax advisors buy cash value life insurance.  Death benefits do not pass through the estate.

Actuaries are generally conservative, and avoid insurance products that are not easily analyzed.  That should be true of most insurance buyers.

I think that’s why my AIA insurance agent kept selling to me that his well heeled clients buy a lot of endowments.

We wonder whether many of us are in the same situation.

Whatever it is, the common myth in a person not knowledgeable in insurance is cheap equals lesser benefits. This sort of debunks it since guys factor in multi factors in their computation. Then again I could be wrong since there may be some important factors that were assumed, which could be gravely wrong when put into practice.

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