The Same Premiums, Invested Instead

By Neil Solomon · 2 min read

Priya, from the last article, pays about $33,000 a year for insurance. Say she and her husband could send that same money somewhere else on the first of January each year for thirty years. Whether they could is a practical question. This article asks only what the numbers would be.

Say they use one of two places. The first is an index fund, which holds a small piece of many companies at once, so it follows the market as a whole. Over long stretches, such funds have averaged about 7 percent a year. The second is a savings account paying 3 percent. Neither rate is a promise.

What $33,000 a year, deposited every January, would be worth

After thirty years, the same $33,000 a year would be a little over $3.3 million in the index fund, or about $1.6 million in the savings account. Paid as premiums, it comes to $990,000, and it is gone.

Now look at the other side. What do insurers pay back? For most households over thirty years, it is a windshield, some urgent-care visits, a storm claim once or twice, and a procedure or two. Some years it is thousands of dollars and most years it is nothing. In all, it adds up to tens of thousands.

A little over three million dollars on one side. Tens of thousands on the other.

Insurance exists for the year something goes badly wrong, and in that year it can be worth far more than it cost. The numbers above are about the years when it does not.

Using the insurance has its own wrinkles. After a claim, premiums often rise at the next renewal, and some policies are not renewed. After a long illness, a plan’s limits, exclusions and network rules can move part of the cost back to the patient, including a bill from a specialist outside the network at a hospital that is inside it. Nobody in this is a villain. An insurer is rewarded for paying out less, and the people inside it respond to what is rewarded.

You could multiply your own yearly premiums by thirty and set the result beside what you have received back so far. If you are thinking about another country, you could ask what the same cover costs there and what it pays.

If you added your premiums over thirty years, what would the total be? Tell us in the comments. Someone reading may be about to run the same math.