Mattu's Tax Loss Picks

[WTMHouston]

Matt:

Much of what you argue has some validity. People's willingness to take risk varies greatly depending on what else is occurring in their life.

For example, when I was in that auto insurance hell-hole of single male, 16-25, I thought much like you do. Why the hell am I paying all this money. I was (and still am) a good driver. But, I was single, had few meaningful assets, had lots of time to recover if catastrophe hit, so I (like you now) was willing to take some risks that I would not take now.

Insurance companies manage risk. Some do it very well and make money. Some do it very poorly and lose lots of money. The thesis of your argument that the real role is to part a fool and his money disregards the risk they assume. Not all insurance companies make money because of that risk. Look at those who covered the WTCs -- they are looking at a HUGE loss, because they lost on the risk equation.

Today, for example, I spend a significant portion of my total income on insurance -- auto, home, flood, health, life, and disability. The older I get the more insurance I get because the more I have to lose without it. There will come a time, when some of my insurance needs (life and disability mostly) will begin to decline.

When I was 20, I could afford to only carry the minimum $20K auto coverage because I was judgment proof for any more and had no other responsibilities. Today, I am not judgment proof and do not want to risk my personal assets and my families standard of living on an "accident." No one plans to have them and even the best of drivers make mistakes. If that "accidental mistake" happens to be a husband with multiple kids who dies, my exposure will be substantial. At my age (north of 40), it will be much more difficult to financially recover than when I was 30 or 20. Thus, today, rather than carrying the minimum $25K coverage, I carry $500K.

Mandatory insurance laws were designed to spread the burden. Most States allow someone to independently prove financial responsibility by posting a bond and self insuring. Some folks do that either alone or in combination with a policy with a large ($25K) deductible. I thought about it at one time, but did not want to tie up and expose the cash.

One other nice part about liability insurance is that it also creates a duty on the part of the insurance company to defend your interests in the event of a claim or suit. That duty to defend means they pay the legal bills regardless (usually) of what happens.

<<I simply can't understand the argument..."It's to protect you if you get in a wreck.">>

Think of it this way -- it is a hedge. It is (in a basic sense) the same reason why some folks sell calls and why some folks buy puts when they own the underlying stock. It protects and limits one side of the risk equation.

<<I'll take responsibility personally.>>

That is easy to say, but not so easy to do if the loss is catastrophic. Even if not catastrophic, a significant loss can alter your life style and plans -- for a very long time. Get a big judgment filed against you and you might find it hard to get hired at some jobs. It may prevent you form making future life choices. Insurance protects against it.

Mandatory insurance, such as auto insurance, also protects others by ensuring that there is a fund from which to satisfy their damages in the event of an "accident." Your willingness to take responsibility means nothing to the other guy if you do not have the resources to back it up. Insurance provides that resource.

All for now. Time to get my butt home and take a look at the sleeping reason for some of my insurance.

Troy