Convert These Costs into Profits

It's fair to say that adding up your health, auto, homeowner's, life, and business insurance costs (to name just a few) can lead to a massive tab. And it puts a huge dent in your available investment capital.

But it doesn't have to.

Let's take a look at our insurance costs compared to some other countries, their drivers, and... most importantly, how to knock them down and profit from what we save.

It's Not Like This Everywhere

I have a lot of familiarity with Asian countries such as China, Taiwan, Singapore, and others. I can tell you firsthand that people in these countries do not spend nearly as much on insurance as Americans.

I live in Hangzhou, China, during parts of the year. There, even the wealthiest citizens in China and other Asian countries spend only a fraction on collective insurance policies compared to your average American household.

I also know quite a few new Chinese immigrants to the United States, and most are delighted by how little tangible goods cost here. Their delight turns into sticker shock, however, when they see the high cost of insurance, and local, state, and federal taxes.

Given the overall net worth of the United States, you would estimate that the cost of insurance would be far less than that of other countries. Yet that's not the case... why not?

The way I see it, there are two primary reasons why insurance costs in the United States are so high.

  1. Powerful transfer agents. The profitability, financial might, and lobbying power accumulated and implemented by enormous "transfer agents" is a significant cause of the high cost of insurance.

    Big insurers, lawyers, government administrators, and others make money by transferring risk from one group of insurers to another. These transfer agents make big money through the transference of what's known as "fat tail" risk to the broader market.

    Transfer agents such as lawyers serve a useful function in society, but they don't actually produce anything. They are trained to redistribute wealth and resources by using the legal system.

    Since most politicians running the country have a legal background, it's no surprise that the game continues to be rigged in favor of the transfer agents.

    The Affordable Care Act, a.k.a. Obamacare, is the latest and biggest example of a law that transfers the cost of insuring high-risk individuals to the general public. These costs are further increased by additional bureaucracy and other government personnel (like IRS agents) to administer and implement the new system.

  2. A highly litigious society. As we all know, our society is "sue-happy." The courts are very open to accepting frivolous litigation from businesses and individuals.

    Let's face it; the prospect of very large product liability damage awards increases the potential legal liability for everyone. It drives up costs, as people are forced to pay insurance companies to limit their litigation risk.

    Another contributing factor to the high cost of insurance in the United States is the wide range of mandated insurance. These include state-mandated auto insurance and homeowner's insurance, and now federally mandated health insurance.

Saving These "No-Return" Dollars

Statistically speaking, most people who buy insurance don't fall into the high-risk category. Sure, there will always be people who are high risk, or people who have a stroke of bad luck that makes them glad they spent their money on insurance. Unfortunately, it's impossible to know in advance if you'll be one of the unlucky ones.

In the end, you end up spending a big chunk of your income on insurance that you never use. This "no-return" money could be put to better use if you could, but in a lot of cases, cutting back isn't an option.

One exception is life insurance.

Life insurance gets more expensive as we age, when it's even more important to make sure you're smart with your coverage choices. So there's a real incentive to keep its escalating costs proportional to what you truly need.

For most people, buying lower-cost term life insurance instead of the more expensive whole life insurance (universal life insurance), and then using that savings to invest and build wealth, is a much better decision. You can convert these costs into profits.

Compounding those investments as you age, and building wealth through investments, you can gradually diminish the amount of coverage that you need.

So life insurance is one place you have more flexibility in your choices, can keep costs at a minimum, and exact at least a little bit of revenge on the transfer-agent dominated system.

Beating This Rigged Game

Another way to beat what is essentially a rigged game set up by the transfer agents is to take advantage of the way the system is skewed in favor of big insurance companies.

The way I see it, given the current sociopolitical climate, the U.S. government will likely push Americans toward having more insurance rather than less...

That push means ballooning profits for insurance companies. It also means there's a transfer-agent bid on the best stocks in the insurance space.

An auto insurance company I really like is Berkshire Hathaway Inc.'s (NYSE: BRK.B) Geico subsidiary.

We've all seen the ads with the talking gecko, and whether you love the ads or hate them, you all know the company's motto about 15 minutes and 15% savings. What a lot of people don't know is that Geico is one of billionaire-investor Warren Buffett's main sources of investable cash.

As with most Buffett companies, Geico is extremely well-managed and efficient. That efficiency allows it to pass a lot of cost savings on to the consumer in the form of lower insurance rates. So, from a personal cost-savings perspective, look into Geico as a way to reduce your up-front insurance costs.

In terms of an investment, Geico's parent company, Buffett's Berkshire Hathaway, has been a consistent performer over the years. And while BRK.B shares actually have slightly underperformed the wider market in recent years, as a business operator, Buffett still knows how to run a tight ship. He also knows how to deliver for long-term investors.

So, rather than spending your money on insurance, invest that savings on stocks like BRK.B and other stocks capable of generating strong total return.

And while there may be no getting around the rules set up by the transfer agents, you can get your revenge by beating them at their rigged game.