An older man walks into a building. The security cameras above watch his every move as he heads down the carpeted hallway. He sits down at the table, and fingers his wallet while his mind is occupied with calculations. It's unclear whether the man will profit from this meeting. The payout that is at stake is more than he has ever seen in his life.
He hesitates as the suit across the table sits comfortably. The man makes his decision. A small sum is worth the risk for the potential prize. The ink is drying on the paper when his insurance agent says, "Congratulations. You've done a very selfless and responsible thing today."
Gambling has always been taboo; relegated to back alleys and race tracks. How is Life Insurance such a respectable business? The Insured (Gambler) pays a Premium (Bets) with the Insurance Company (Casino) based on Life Expectancy (Chance) to get a Death Benefit (Prize). Looks like gambling to me.
Come to think of it, Investing looks a bit sketchy too. The Investor (Gambler) Buys an Asset (Bets) from his Broker (Bookie) to Earn Profit (Win a Prize) based on the Asset's Performance (Chance). Where is the line between Warren Buffet and the Wynn in Vegas?
In medicine, there is a concept that applies here.
The Dosage Makes the Poison.
Rice contains arsenic, but we've all had shrimp fried rice without keeling over.
Life Insurance Policies and Investments contain many of the same ingredients as Gambling. The difference is in the details. Each of these transactions have what we will call a Prize, a Risk, and a Timeline.
First lets take a look at the prizes.
Gambling: Payouts for scratchers and slot machines are generally massive. Betting 5 and getting back 10 is receiving a 100% return. Most slots and scratchers advertise returns of 100,000% or more. These high payouts attract paying customers, and keep casinos in business. There are more conservative gambles. Betting on a ten-time boxing champ to beat a rookie may only yield a 10% return. In this regard, Gambling is actually very similar to investing.
Investing: Like gambling, investment returns depend on risk. A share of McDonald's may only have a 1% yearly dividend, but it's likely Ronald will be able to pay that for decades. Options trading is done through an investment account as well. These derivative trades help to manage risk and hedge investments. They can also be extremely risky with high payouts. An online forum called Wall Street Bets has taken these high risk trades into the main stream. They have turned the stock trading app Robinhood into their own personal casino.
Life Insurance: Life Insurance has an obvious difference. The person paying for it will never see the return on their money. Returns can be significant, especially if the policy is recent, but the money has a purpose. Death benefits cover final expenses, pay off outstanding debts or provide stability for the family. People don't buy a life insurance policy to win big; they buy it for peace of mind.
Life insurance can't be gambling. There's nothing in it for the owner of the policy. Investing looks quite a bit like gambling after looking at the "prize" criteria.
While the allure of a huge prize is powerful, most people will forget a prize if the risk is too great. The amount of risk determines the legitimacy of an investment or insurance policy. Gambling often ignores risk, with many parties expecting losses.
Risk comes in many forms. With both gambling and investing, the risk is monetary. The risk of putting five dollars on black is five dollars. Buying 100 shares of Tesla has monetary risk too. The value of the stock follows the success of the company and the whims of the market. No company can guarantee their success, not even Elon Musk. If the stock price falls, investors lose money.
Unlike gambling and investing, Life Insurance reduces fiscal risk. The risk of losses due to death are hedged by the policy's death benefit.
It could be argued that there is risk because policies can lapse or become void. Most policy owners are aware of any stipulations going in to the contract. Lapses in coverage are usually caused by missed payments or falsified information. With proper planning, most customers can avoid these losses.
Term policies are another matter altogether. Whole life policies build a cash value and are clearly advertised as investments with monetary gain as the main goal. Term policies are a service that is paid for, not invested in.
For the length of the term, the company provides insurance at the agreed upon amount. This service is paid for by the premium payments, and the service is peace of mind. The company continues providing financial protection for the length of the term. At the end of the term, the company closes the contract and the transaction is complete.
In both cases, Life Insurance proves to be the easiest of the three to manage. Benefits are predetermined and guaranteed. Risk is clearly defined and often non-existent.
The third factor is the timeline of the transaction.
Gambling: When looking at the timeline of each transaction type, gambling is an outlier. Slot machines, roulette, poker and most sports bets are instantaneous. An even larger majority take place within a few hours from placing the bet to the results. Besides the occasional season long sports bet, gambling is quicker and dirtier than investing or life insurance.
Investing: Ask any investor, and they will brag about either being a short or long term investor. How short is short though? Apart from the Wall Street Bet crowd, most stock market investors keep holdings for a year or more to avoid short-term capital gains tax. Conservative investors can hold onto a position for decades. It's these long timelines that help balance out any market swings and allow for a positive return.
Life Insurance: With life insurance, the hope is that the timeline is a long one. Term policies can range from 10 to 35 years, and a Whole life can last a lifetime once it is paid up. Similar to investing, life insurance customers are planning for a long term inevitability. This proactive thinking stems from a different part of the brain than the urge to gamble.
At first glance it's not surprising so many people think of life insurance as gambling. All the pieces are there. After taking a closer look though, investing is more like gambling than life insurance. Investing is meant to benefit the individual rather than their family. Investing has a higher risk of loss. Investing can even have timelines that match gambling.
With all this in mind, let's remember what the real difference is between life insurance and gambling. Gambling is inherently selfish. It's a way to feel powerful; to feel like you can tell the future. Gambling is addictive and can ruin lives.
Life insurance is inherently selfless. It's sacrificing now for comfort and security later. Life insurance protects wealth where gambling destroys it. It's a way of showing your family that you care, that you plan ahead and that you understand how quickly life can change.