It's Saturday night and you and some friends decide to have some fun at the local casino after a tough work week; nothing big, just a little fun. When you arrive, the place is packed and there are only 4 slot machines available. As you look at each one, you realize that each has a different set of odds for winning. The odds for the first machine are 1 in 1200, the second is 1 in 240, the third is 1 in 3 and the fourth machine has odds of 1 in 2. Which machine would you choose? Why did you choose that machine? While the question may seem a bit elementary the important thing to remember is that if you chose the machine with a 50% chance of paying out, it was probably because it had the best odds of paying out. In other words, the likelihood of a win occurring was with the machine touting 1 in 2 odds. However, what if we applied these odds in the context in which they actually exist?
Here are the odds in their actual context:
1 : 1200 - The probability of using your home insurance
1 : 240 - The probability of using your auto insurance
1 : 3 - The probability of developing a critical illness such as cancer
1 : 2 - The probability of requiring long term care
Most people that I come across consider their homes and vehicles among their greatest assets. Because of this, they typically want to insure them for their respective replacement value (home) or fair market value (vehicle) should anything happen to them; however, as we've just learned, the odds of utilizing that insurance is 1 in 1200 and 1 in 240 respectively.
Alternatively, did you know that the cost for cancer treatment in BC can range between $20,000 and $80,000 per year depending on the type and severity of the cancer? These are not the costs covered by BC Medical. These are the costs that the patients and their families pay for out-of-pocket as they seek treatment. Could you afford an extra $20,000 or $40,000 in addition to not being able to work? Given that the odds are significantly greater than using your home or auto insurance, would you agree that it's worth insuring against the financial impact something like cancer can have on your life?
And what about long term care? Did you know that long term care can cost upwards of $5,000 per month, even if you're still living in your own home? This is in addition to your regular, everyday expenses. There is a 50% chance that you'll require some form of long term care, therefore your retirement plan should include a contingent to cover this likely eventuality.
When the odds involved slot machines and money, it was an easy decision to choose the most likely payout; after all, why wouldn't you? However, changing the subject to less appealing subjects such as our own frailty can cause us to avoid the subject altogether. Unfortunately, ignoring the subject does not negate the statistical probability of facing that fragility in our lives. While insuring your tangible assets, such as homes and vehicles, is a prudent and recommended action; be sure to protect you and your family from the financial impact that an illness and long term care can have on your financial objectives. After all, the odds are you'll be better off for doing so.