If you're paying insurance, whether on your house, your car, or your wife's diamond ring, chances are you're getting the raw end of the deal.
You pay a premium month after month and you likely never use your policy. It's essentially just money down the drain.
You just pay it for peace of mind, but if you're like most folks, your house won't burn down, your car won't get wrecked, and your wife never loses her ring.
Now, I'm not suggesting that you shouldn't buy insurance. Let's face it, if you ever need insurance, you'll want it... Most of us can't fork out $400,000 if our home burns to the ground. But when you look at the numbers, insurance companies are making a lot of money off of us.
As an example, homeowners pay about $3.50 in home insurance for every $1,000 of their homes value. So on a $400,000 house, you'll pay about $1,400 per year.
Over a 30-year mortgage, you're paying $42,000 in insurance. That's basically a brand-new car.
Insurance companies make their living by cashing in on people's fears. Folks fear burglary. They fear natural disasters and even their own carelessness. And because they're fearful of all these things, they're willing to pay up for insurance.
While insurance companies sometimes have to pay out claims to policy holders, most of the time they collect your premiums and just walk away. It's a beautiful business... when done correctly.
It's done correctly when you don't sell home insurance to former arsonists, car insurance to teenagers who just crashed their parent's car, and jewelry insurance to someone with a history of losing expensive rings and necklaces. Insurance companies need to be selective about who they offer their services to. They need to do their homework or charge premiums to offset some of the risk for certain folks.
When they do, insurance can be extremely profitable. Premium checks flow in each and every month. And companies with reliable income streams are the ones that last.
Selling insurance is something I do every month. And it's the greatest source of income I've ever come across...
Well, not exactly selling insurance for things like homes or cars... I'm talking about selling insurance to folks who are scared of stocks falling.
And trust me, there's no shortage of investors who are fearful of stocks crashing. Especially after a decadelong bull market.
If you could convince worried investors to pay you a premium for market protection every month and – the majority of the time –keep their premiums and just walk away... sign me up.
Well, it's possible.
Let me explain...
In general, investors tend to be more bullish than bearish. As a result, most portfolios are betting on stocks going up.
Naturally, if you're long 20 stocks, you might be afraid of a bear market that could wipe out half of your portfolio. So you want some insurance against a market downturn.
The cheapest and one of the most common forms of protection is a "put option."
Puts options are just like home insurance. The buyer pays a premium and hopes that he never has to use it. And in most situations, the buyer of a put option does not need to use the insurance policy.
Stocks don't crash and the seller of the put keeps the premium and walks away.
There's no such thing as a free lunch, but this is as good as it gets.
Now I know many of you are probably wondering what happens when the put buyer, or the person who bought the insurance, needs to use his policy. Let's say stocks do fall. Won't the seller of the put be in big trouble?
They could be, sure... But like I mentioned earlier, you don't want to sell insurance to former arsonists. And you don't want to sell put options on risky stocks.
The best thing to do is sell insurance on big, sturdy blue-chip companies. These are giants like Disney (DIS), Coca-Cola (KO), and Microsoft (MSFT). These stocks rarely have wild price swings.
And even though these are fantastic businesses that generate massive amounts of cash, there are still investors that want to buy insurance against them.
The likelihood of Coca-Cola falling 20% in a short time is pretty slim, but people want to sleep well at night... so they buy a put option.
I'm willing to take the other end of that trade all day long. And here's the thing... If you only sell put options on stocks you want to own, you can't lose.
Let's think about the worst-case scenario... Coca-Cola falls 10% in a matter of days. The put buyer will use his insurance to sell his Coca-Cola shares to us for the price we agreed upon at the beginning of the trade.
So everything went wrong in this trade... but we end up owning shares of a world-class business for less than it was trading for when we entered the trade (we get to keep the premium he paid us).
If you sell insurance against low-risk, blue-chip stocks, you'll collect safe income each month that can help you grow your retirement fund, pay bills, and even pay for a trip to Aruba.
And again, worst case scenario, you end up owning shares of a great business for a cheaper price.
This technique is simple to learn. I've taught thousands of folks how to do this and I recently taught a retired police chief this strategy too. He followed my instructions, sold insurance against a blue-chip stock and collected his insurance premium of $1,000 in just a few minutes.
What We're Reading...
- House Democrats and the White House have a deal to move forward with USMCA trade agreement.
- Trump administration reportedly plans to delay China tariffs set to take effect Sunday.
- Something different: She argued Facebook is a monopoly. To her surprise, people listened.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig and the Health & Wealth Bulletin Research Team
December 11, 2019