A reader asked me the following:
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?
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.
By David Merkel, CFA of Aleph Blog
