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Pensions: What Does and Doesn’t Matter

The Biggest Mistake Most People Make in Choosing a Pension and The Best Opportunity to Save Hundreds of Thousands of Shekels
A long time ago, when Daniel Kahneman, future nobel laureate in economics, was teaching a group of Israeli Air Force officers about effective training and positive reinforcement, he was challenged by one officer.  “On many occasions, I have praised flight cadets for their clean execution of some aerobatic maneuver.  The next time they try the same maneuver, they usually do worse.  On the other hand, I have often screamed into a cadet’s earphone for bad execution, and in general he does better on the next try.  So please don’t tell me that reward works and punishment does not, because the opposite is the case.”
A powerful challenge, no doubt, and one I think we can all sympathize with in some of our personal and business relationships.
But the truth behind this challenge is explained by Kahneman using statistical principle called regression toward the mean.  In various situations where luck is present, you are always more likely to go toward your average.  If a variable is extreme on its first measurement, it will tend to be closer to the average on its second measurement—and, paradoxically, if it is extreme on its second measurement, it will tend to have been closer to the average on its first.
Take these pilots for example.  Let’s say that one a scale of 1 to 5, a pilot named Yosef flies a 3 on average.  Yosef flew a 2, for which his commander screamed at him.  Since Yosef on average flies a 3, the next time he is more likely to do better, irrespective of the yelling.  Similarly, if Yosef flew a 4 and was given a hearty shkeyach from his commander, the odds are still that he will do worse next time, since he flies a 3 on average and 3 is worse than 4.  Positive reinforcement is proven to work in the long run, but in the short run, specifically in a situation where luck is a major factor, regression toward the mean is king.
I bring up this to demonstrate what is in my opinion is the biggest mistake people make when choosing a pension, or making any investment for that matter.  People I have met tend to focus on the past performance of a fund or company to choose the right investment.  But if there is one thing that past performance has shown, it is that it is a never good indicator of future returns.  Also, due to regression toward the mean, people who choose the better performing funds are almost always disappointed within a year or so since, as regression analysis proves, the next year is more likely to be more toward the average return, which for anyone starting from a point above average, is worse.
Now that the year has ended, you will likely be bombarded by company after company showing off their past performance, as if it means anything.  Their salesmen and agents will admit that past performance doesn’t guarantee future returns, but they’ll end the sentence while pulling out a nice graph showing how well they did over the past five years. They’ll jokingly admit that their stock pickers are no better than chimps with darts, but still find a way to make them look prophetic.  You need to ignore these people and follow the science.
What does matter in choosing a pension is (1) getting a significant discount for the rest of your life and (2) that the company has the proper range of options available for investments for the rest of your life.  When you are young, or at least in good health, pension funds are more likely to offer discounts and if you succeed in getting a discount for life.  But when you get older, and especially if your health deteriorates, most pension companies won’t want you since your being in the fund will cause damage to the actuarial balance all pension funds must maintain.  And even if they do accept you, the chance of you getting a huge discount on fees is very slim since, as far as they’re concerned, you’re no longer a long term investment for them.  Remember, in your 50s and 60s you have the most money in your pension you’re ever going to have and having a significant discount on fees during this time will likely save you hundreds of thousands of shekels, on accumulation fees.  It’s up to you to take advantage of your youth,  health, and work connections to make sure you save this money before it’s too late.
Focusing on options is also important since you will need to solidify your investments as you reach retirement and unless the company that has given you a discount has the proper investment options, you could be left with the terrible choice of either settling on having too much risk or else moving your money to a new fund, potentially forgoing any discount and losing tens of thousands of shekels in fees.
Concentrating on investment options and fees doesn’t mean you should ignore פנסיה נט completely; you should have an idea how your fund is doing compared to the market and how it is performing and invested.  It means that you should take such information with a grain of salt and be less concerned with statistically insignificant issues such as how well the fund performed over a single year and more concerned with issues that will save you hundreds of thousands of shekels such as the investment options available by the company and the fees you’re paying.
Jonathan Degani is a licensed pension consultant by the Ministry of Finance.  If you’re looking for help choosing or reviewing a pension, please feel free to call 052-790-6824.
The anecdote at the beginning of the article above is taken from Daniel Kahneman’s book, Thinking, Fast and Slow.  The definition for regression toward the mean is taken from wikipedia.

the hidden costs of ‘free’ travel insurance policies (from Ha’aretz)

 

Haaretz put out a great article about the buying insurance when going abroad:

The hidden costs of ‘free’ travel insurance policies

Nobody wants to think about ending their vacation in the hospital. That may be why, unlike car, health and life insurance, travel insurance is usually a last-minute affair.

By Rina Rozenberg

Nobody wants to think about ending their vacation in the hospital. That may be why, unlike car, health and life insurance, which most people investigate thoroughly before choosing a provider – consulting with friends and experts, comparing prices, even (shudder) reading the policies – travel insurance is usually a last-minute affair, arranged in between packing your bags and checking the weather forecast at your destination.

Another reason people take travel insurance so casually could be that it’s relatively inexpensive. Somebody offers you a policy with your ticket, or you get it through your credit card. Roughly half the travel insurance policies in Israel are issued by the country’s health maintenance organizations, the kupot holim, according to estimates by industry insiders. Most of the rest are from credit card companies and travel agencies, while actual insurance agents are believed to control only 10% of the market.

The price differences among these sources are negligible. But when it comes to coverage the differences are significant, making it important for travelers to do a little homework before setting out for the airport.

1 Don’t make do with the free coverage provided by your credit card issuer. It may not cover the cost of hospitalization.

The credit card companies do not charge customers for basic travel coverage, and in some cases it is automatic; the customer doesn’t even need to contact the company for it to kick in. The problem is that free policies tend to have more constraints and limitations than policies you pay for. Any serious injury or illness requiring surgery or protracted hospitalization will probably leave the policy holder owing huge sums to the overseas hospital.

That’s because they do not provide for full reimbursement. Free policies issued by the credit card companies set a cap on daily hospitalization and other costs, while policies that cost money generally cover more.

For instance, the Visa Cal credit card company will pay up to $450,000 for hospitalization and other medical costs, but has a $2,000-per-day limit on hospitalization reimbursement. If your medical care costs more per day (or in total ), you are responsible for the balance. Isracard has the same daily cap. Leumi Card’s is lower, at $1,350 a day. Sources in the insurance sector say hospitals in Europe and the United States charge at least $3,000 a day.

The credit card companies do offer policy upgrades – for a fee, of course.

2 Do you have high blood pressure, heart disease or some other preexisting condition, chronic or otherwise? You may need special coverage as part of your travel insurance.

A preexisting medical condition is a “medical condition for which the policy holder received drug treatment, medical care or hospitalization in the six months before the trip,” says Michal Weiner, head of the medical-insurance and personal accident department at AIG Israel. If you travel abroad without coverage for a preexisting medical condition that causes you trouble you will wind up footing the entire cost of care yourself, she warns.

The credit card companies’ basic, free policies do not provide this coverage; you can get it, but you have to pay.

Anyone with a chronic condition such as asthma, slipped disc, heart disease or diabetes – even if the condition is stable – should think about this carefully.

Of the kupot holim, Leumit and Maccabi each offers a one-size-fits-all travel insurance policy that cover preexisting conditions. Clalit and Meuhedet both offer riders, supplemental insurance, at a reasonable per diem rate.

3 Even if you bought an insurance policy through your health care fund, it isn’t the actual insurer, and the actual insurance company won’t be aware of your medical condition. You should advise your insurance agent accordingly.

A few months ago the insurance commissioner at the Finance Ministry, Oded Sarig, issued a draft clarification on medical insurance policies sold by insurance agents, which for the purposes of this article include the health-care funds.

One of the reasons for his paper was that, as Sarig noted, a health-care fund member could mistakenly think that when they purchase travel insurance from their health care provider, the policy is tailored to their medical profile. That’s a big mistake.

“The policy holder figures the health-care provider knows them thoroughly and checked their medical records before offering the policy, but it isn’t so,” says Yaron Baron, sales manager at the DavidShield insurance agency. “The kupat holim is serving as a marketing channel. Clal Insurance or Harel is providing the actual insurance.”

4 Usually a $500,000 policy is adequate. All travel insurance policies have a coverage ceiling of between $500,000 to $1 million; the truth is that the number usually doesn’t matter much.

“In most cases the coverage offered by medical and hospitalization policies is high enough,” says Baron, even though his agency offers PassportCard, with coverage of up to a million dollars. He thinks the number is mainly a marketing gimmick: He says he cannot recall a single case of a traveler needing more than $500,000, the lowest ceiling of any Israel travel insurance policy.

That does not mean that such cases do not exist, of course. Gabi Nakibly, VP marketing and sales at Clal Health Insurance, recalls the case of a customer who collapsed while in the United States and ended up in the hospital for 10 weeks. The bills came to $2 million. “Since we have working relations with hospitals, we managed to get the bill reduced,” Nakibly says, adding, “But that was an extreme case.”

5 Tailor your policy to your trip. If you’re going to spend your vacation mountain-biking on single-track trails skirting deep gorges, white-water rafting or doing some other extreme sport, do mention it to your insurance agent so you can purchase appropriate coverage. If you’re taking along expensive equipment mention that too, and find out how to get it insured as well.

Note that standard baggage insurance also has a cap, usually $1,000 per piece but sometimes as much as $3,000.

If you’re taking expensive items, such as a laptop, gold jewelry or a smartphone, you’ll need extended coverage.

6 Make sure your travel insurance picks up the cost of flying you back to Israel for medical care, if necessary. It will raise your premium for your entire trip by about $15 at Meuhedet, for instance.

7 No matter what insurance policy you buy, there will be co-payments: You will pay part of the bill. How much depends on the policy and the issuer.

And one other thing. Make sure to hold onto all your receipts; without them your insurer won’t reimburse a single cent.

insurance part 2: how to buy insurance

In my last post about insurance, I discussed different kinds of insurance in Israel.  This post will continue the topic of insurance and deal with how to buy insurance in Israel.

I hate trying on clothes.  To me, nothing is more annoying than getting undressed and dressed when the clothes you buy are supposed to be sized already.  That is why, at the ripe age of 22, I decided what size and brand of boxers, jeans, shirts and shoes I will be wearing for the rest of my life.  So when I buy jeans, for example, the process is pretty straightforward.  I check a few stores and see who has the cheapest pair of 38 x 30 blue wrangler carpenter jeans.  Nothing else interests me.  I may see other jeans, perhaps some nice shirts, but that is not what I want now.  I want these particular jeans.

Buying insurance should be no different.  First, you need to build yourself a policy.  How much life insurance do you need?  What kind of car insurance do you need? Etc.  Then you call up at least three insurance providers, get price quotes and choose the cheapest one.

But it’s never so simple.  Insurance agents are social beings who love to visit you in person in order to tell you horror stories and statistics that will scare the crap out of you (that kid at summer camp who told all the scary stories – he has a bright future in insurance.)  Obviously, these stories and statistics are designed to scare you into buying extra insurance that, when you were thinking rationally, you decided that you do not want.  Sometimes the insurance salesman is right; you may need more insurance.  But just because you need more insurance does not need you need to buy more insurance from him.  Once you decide you need more insurance, go back to step one, and reshape your desired policy and then call up a bunch of providers and find the best deal.

Like everywhere else in Israel you can bargain with insurance.  In this case you have two bargaining tools – BATNA and the amount of insurance you are willing to buy from one provider.

BATNA (Best Alternative to Negotiated Agreement) – Since you can call up a number of insurance companies and compare prices, you can also use one against the other in order to lower the price.  As you speak to each potential provider, get a direct phone number to call back the salesman.  This way, you can easily call back the salesman, tell him an offer you received from a competitor, and ask him if he can beat it.

Amount of insurance – Ask the insurance company how much he can give you off on your life insurance if you buy your car insurance or other insurance from him as well.  Offer each salesman the full list of insurance you need and consider different combinations of policies and providers in order to get the cheapest price.

A few guidelines for bargaining insurance: 

1 – You can insist on a price quote over the phone even if the insurance guy does not want to give it to you.  Of the 7 insurance providers I called to buy life insurance recently, only one would not quote me a price quote over the phone and even then, I was able to ask him “Company X will sell it to me for ₪ Y.  Can you beat it?”  When he told me he could not, I knew that no meeting was going to be necessary.

2 – Never get bullied into buying additional insurance.  Don’t be afraid to tell the insurance agent, “You’re right, I do need this insurance.  Let me price check and get back to you in a week.”  If he gives you a hard time, just make up an excuse and walk away.

3 – Make sure that you are getting the agreement you need.  Be sure that the policy you choose really is a bargain and not just you getting swindled.  Play out the disaster scenarios in your mind and compare them against the contract in order to ensure that you are covered.

4 – Insist on honesty.  An insurance salesman wants you to buy insurance; unfortunately, some of these salesmen do not care if the company will actually pay you in the unfortunate event.  One salesman kept trying to convince me to lie on the questionnaire and write that my wife did not have any surgeries over the past 10 years when I explicitly told him that she did.  His advice is very dangerous because if, God forbid, anything would happen to my wife, the insurance company will not pay because they will claim, and rightfully so, that she lied on the initial paperwork.  The insurance companies will do anything in their power not to pay you, so don’t leave out any details.

Have you ever bought insurance in Israel?  What has your experience been?

insurance: part 1: what insurance is and what you need

Insurance is one of those touchy subjects where a fine line must be walked.  On one hand you don’t want to be unprepared in case of disaster; on the other hand, you don’t want to waste money while at the same time encourage your close relatives to pray for your demise so they can strike it big.  And as usual, American insurance companies aim to strike exactly the wrong balance.  I grew up watching commercials for life insurance where some elderly couple talks about (1) how important life insurance is (2) how inexpensive their policy costs and (3) how great they feel now that they have the policy.  Now seriously, why would an old couple need life insurance?  They seem to have no dependants.  No one would suffer financially if they die.

On the other hand, many young couple with small children suffer financial disaster when loosing a loved one.  How often do we hear about some Kollel guy who tragically died and left a wife and ten kids with no money?  This man has doomed his family to a life of begging because he was too foolish to get insurance.

Just because death is taboo, does not mean one should ignore the subject of insurance.

In the following posts, I plan to approach the subject by discussing::

(1)   What insurance is and what you need

(2)   How to get insurance and review your policies

This post will discuss part 1 – What insurance is and what you need

Insurance is a transference of risk; nothing more.  If you have a risk you don’t want to have, you can pay an insurance company to absorb it for you.  And we all have risks in our lives.  What if you die tomorrow – what will become of your family?  What if you become disabled?  What if your identity is stolen?  What if your house burns down?

So what kind of insurance do you need?  There are 6 basic types of insurance:

(this list is taken from Dave Ramsey and adjusted for Israel)

(1)  Health (בריאות) – This is mostly covered by bituach leumi and your kuppat holim.  Most kuppot have the option of extra insurance for additional treatments.  I am still unsure if they are worth it.  Additionally, you can buy extra insurance for more treatments and operations al over the world.  I would advise that if you do not get the additional insurance, begin setting aside your own money every month and become self insured in case you need one of these treatments.

(3)  Long-term care (סיעודי) – This kind of insurance covers you if you cannot do basic funtions such as easting, getting up and sing the bathroom (it also covers alzheimers).  Some decide to get it from a young age, but some people advise to get this around age 60.  The cost of old age facilities is outrageous (although much worse in the US than in Israel), and if you do not want do go through your life savings in a few short months, you will probably need this insurance.

(3)  Disability (נכות)– What would happen if you became disabled tomorrow?  This is partly covered by bituach leumi and usually partially by your keren pensia.  If you have a keren pensia, you cannot buy any more.  If you do not have a keren pensia you should buy some extra.

(4)  Life insurance (חיים) – This is probably one of the most basic types of insurance that every person needs and few understand.  There is one golden rule for life insurance: the more dependants you have the more life insurance you need. If you are retied and all your children have moved out and live on their own, you no longer need any life insurance.  On the other hand, if you are young and married with children, you need a fair amount of insurance.  How much?  Probably about 10 years worth of expenses – for example, if your family spends ₪ 200,000 a year, you should be insured for ₪ 2,000,000.  And remember to insure both spouses, even if one does not work.  After all, if a stay at home parent dies, you’ll have to hire someone to help out around the house, babysit etc. and your expenses will skyrocket.

Life insurance is partially covered by bituach leumi and usually partially by your keren pensia as well, except in place of a lump sum, they will pay a portion or all of your salary to your dependents as a sort of annuity.

 Do not be put off by the cost of life insurance.  You’d be surprised how inexpensive a ₪ 5,000,000 regular term life insurance costs (I’ll discuss how to buy insurance in an upcoming post).  It is much better to spend the few shekels now for insurance than risk sentencing your family to a life of begging if you die.  Death alone is a tragedy; there is no need to add more sorrow to it.

(5)  Homeowner’s/renters – If you own a home, you need this.  If you rent, it is often covered by the rental agreement, but if it is not, then you need it as well.  Find out what happens if you house burns down, is broken into, or anything else.  If the answer isn’t great, you need insurance

(6)  Auto – By law, you are required to get bituach chova, which only covers physical injury for you or the person you hit.  The insurance for damaging someone else’s car (tzad gimel) is optional, as is insurance to cover any damage done to your car (meikif, which also includes tzad gimmel and chova).  I would strongly advise always having chova and tzad gimmel.  If your car is worth a lot, then get Meikif as well.

In part 2, we’ll discuss how to get insurance and review your policies.

what kind of health insurance do you use?

Every time I watch the health care mess in America, I think to myself, “thank God, Israel’s health care system doesn’t look like this.” Likewise, every time I have to sit in an emergency room in Israel for 3 hours to see a doctor, one of my few comforting thoughts is that in America, I used to wait much longer. At the same time, our healthcare system is tumultuous and confusing; I am still trying to work out all the kinks in order to know which kind of service to get and what sort of insurance.

Just to make it more complicated, not every healthcare plan (kupat cholim) in every city is equal. Some cities have better doctors for different healthcare plans than others. For example, maybe the best gynecology department in Petah Tikvah is in Meuchedet, but perhaps in Rishon lesion it could be in Leumit. This means that when evaluating my healthcare plan, I first have to know the doctors where I am living.

Additionally, there is extra insurance you can buy in order to supplement your insurance. The lower level extra insurance (meduchedet adif, maccabi silver, clalit mushlam, and leumit silver) basically gives you a discount on some drugs and some lower level, once in a while procedures (including a very limited dental insurance.) The higher level insurance (meuchedet si, maccabi magen zavav, clalit platimum, and leumit gold) includes coverage for more surgical procedures and the hospitalization that you will spend afterwards. Some of the health insurance funds (most notably macabbi) also offer fringe types of insurance; for example, maccabi offers insurance that provides discounts on natural healing products.

So how much insurance should you get? I remember an episode of Third Rock from the Sun when John Lithgow’s character said he would never get insurance, “it’s just a wager against myself,” he said. That’s true, but at the same time, we need to be realistic and be prepared in case something happens.

I personally follow the middle path: I get more insurance only for the ones who are more likely to need it. Those with a specific chronic illness, women of childbearing age, and the elderly are the most likely to need the benefits of additional insurance. In my family I have the lower level additional insurance (I’m American; I believe drugs will fix whatever is wrong with me), while my wife has the higher level one.

What kind of insurance do you have? How has it been working out for you?