# Life Insurance



## HowIsMyFinancial (May 18, 2011)

I am approaching 30 and with dependants on the way, I am starting to think about life insurance.
Of course I've often seen and heard "buy term and invest the difference", although I can see from the outset that doing so sounds more advantageous, I still can't convince myself that it is REALLY better.

Keep in mind that the purpose of life insurance for me is not simply covering for any debts and funeral costs, I want to be able to leave money behind for my dependants, even if they are financially independent by the time I die, I would like to leave them a "bonus" financially when I die.

For all the other products I've seen, term makes more sense - but I've been offered by an agent for a Universal Life Insurance - where I pay about $3,000 premium a year until I am about 60ish (I can stop earlier if I want to depending on the investment portion). Some of that $3,000 will go towards an investment account, some will go towards insurance charges. The insurance charges of course is rising every year. As the investment account grow, I can stop paying premium as they will use my investment account to pay for my premium. If I stopped paying and for whatever reason my investment account is not enough to cover the premium, then I simply have to top up the difference. Insurance charges constantly rising until I am 85, at which age the insurance charges stop and from 86-100 I am only paying $120 a year for "admin costs", and at the age of 100 if I haven't died yet, they will simply give my death benefit to me as cash (pay me off).

The problem: If I take money out of my investment account it will reduce the death benefit by equal amount, but I stop paying premium and they use the investment account to pay my premium, it doesn't reduce my death benefit. That means - the most ideal situation is that I stop paying at year X such that at the time I die, my investment account is $0.

I can't get my math or head straight.

Is term always better, ALWAYS ?
Term insurance gets ridiculously expensive as I get in the 50s, 60s, 70s ... pretty much to the point that it's quite prohibitive. Which mean I won't be able to leave my dependants with some financial "bonus". While with the Universal Life Insurance - if I leave past 85, I am only paying $120 per year until 100 and I am still covered for my entire death benefit!

Add: The agent said most insurance companies already stopped selling this type of insurance (Universal Life) because it's not making them money - so I should get it before this type of product is completely gone.


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## MoneyGal (Apr 24, 2009)

Hiyoooo, sure sounds like you've been listening to the insurance agent! 

The first thing to understand is that when you buy permanent insurance, you are buying something that mixes together TWO things: investments and life insurance. 

So, given your goal of "leaving a gift" to your heirs, you could accomplish this goal another way: by building up an inheritance using investments not nestled inside an insurance policy. 

Term gets expensive as you age because your risk of dying increases. If you want insurance to protect against your premature death, term is the way to go, but make a plan to be self-insured before you think the cost of insurance is too significant (there's also the issue of insurability; you may not be able to purchase term insurance later in life).

My advice, for what's worth, is to figure out what you want. You've created a case for permanent insurance, based on what you say your goals are. But would you achieve these goals just as easily / more inexpensively / with less risk / insert your own comparator here if you took another path? That's the question to answer, in my view.


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## Hobotrader (Feb 10, 2013)

Also be aware of the systemic risk out there, a lot of babyboomers going to retire or die within the next few years and interest rates are at record lows and are likely to stay. Both these factors can really impact an insurance companies ability to survive lol. I would stick to term for myself to cover my kids (if I had any) for 20-25 years [till they can finish an undergrad + masters]. I would assume my money hoard can do the rest lol. There are a few books that discussed this - Moshe Milevsky I believe? From all the literature on personal finance I read they were always drilling in term insurance. This particular professor's father had 0 insurance but had a wealth stash in the millions lol.


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## OptsyEagle (Nov 29, 2009)

Well you never said how much insurance this plan entails so it is difficult to offer alternatives.

First, Universal Life is one of the most common types of insurance available and the insurance companies are not having any difficulty in making money from it (explained later), so the first un-truth by this agent, has been revealed. So whatever you do, once you determine that the individual giving you advice, lacks ethics, you definitely want to find another advisor/agent.

2nd. Although I do not agree you should be looking into buying an estate that in all likelihood will not be paid for 50 or 60 years, if you must, I would recommend that you do not buy the UL plan as described. The problem with yearly renewable term is that, the insurance cost increase is guaranteed to happen, but the growth on the investment part is not. If the growth doesn't keep up, you will require more insurance. Since your plan is: insurance + investment = death benefit. So, if you don't have the growth on the investments, you will be paying for more insurance. If you pay for more insurance, but do not pay any additional premium, your investment account will be reduced. If your investment account is reduced, you will need to pay for more insurance. If you pay for more insurance, but do not increase your premiums, your investment account gets reduced... I could do this all day, until you eventually see your heirs inheriting absolutely nothing, but I will stop now.

This is how you should design the plan, if you must leave an inheritance. 1st, figure out how much money you need to leave your family in the event of your untimely death. Here I am talking about replacing your income and paying down your mortgages and debts, if you died tomorrow. 2nd, figure out how much you can or want to contribute to this. Now design a UL plan with a term 20 rider that meets those 2 objectives. Death benefit amount and premium cost. 

So for example. Let's say you want to contribute $3,000 per year and you need $500,000 of life insurance. If $500K of UL costs $5,000 per year, get a quote for something like $200K of permanent UL with a $300K term 20 rider. Let's say that one costs $3,000 per year. So the $200K is permanent and the $300K is temporary term that you will get rid of later when your obligations are significantly reduced. OK so far?

Now with the UL, forget about the permanent insurance with the rising yearly renewable term costs. That is a possible disaster, waiting to happen. Get level cost permanent insurance. This has two really big benefits. The first is you know how much it costs right at the beginning and can design a more appropriate premium deposit to cover it. The 2nd benefit is the more important one, a thing in the industry they call "lapse subsidized". I know this is confusing, but if you think about level cost insurance. All it is, is a structure where the insurance company charges a premium higher then what the yearly renewable cost would be. They take that extra amount (amount above the yearly renewable term cost) and put it in a reserve to be used to payout this inevitable claim. You will never see this reserve amount (it is not the cash value of the policy). Now, this is where it gets good. Since not everyone will keep these policies, but none of the insureds have a right to this reserve (again, I am not talking about the cash value), the insurance company makes an estimate of how many people will buy their insurance, pay a lot of premiums and then cancel the policy before they die. You would be quite surprised at how many people actually do this. Since they get to keep the reserve amounts for anyone that cancels their policy, they use this estimated winfall to reduce the premiums required for anyone buying this type of insurance. So, in other words, with level cost UL insurance, other people who are cancelling their policies, are actually helping to significantly reduce the cost of the inheritances of the ones who are smart enough to keep them until death. This doesn't happen nearly to the same degree in the yearly renewable rising cost insurance plans that you described. 

I hope that makes sense. You may need to read it a few times to understand it. It took me a while, myself. Good luck and don't forget to get rid of that insurance agent.


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## My Own Advisor (Sep 24, 2012)

Why not just go Term?

http://www.lifeinsurancecanada.com/term-life-insurance

You're approaching 30, term costs will be low and you're protecting against a catastrophic loss (early death with dependents). As you get older, if you don't need income replacement, you might not need any insurance.


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## Spudd (Oct 11, 2011)

The financial bonus you leave for your kids doesn't have to be from insurance. Instead you can plan to save up money and leave that to them. This plus term life for the years where you can't afford to die will be the cheapest option. The insurance company is making money off these universal policies - they wouldn't sell them otherwise.

Chances are that you won't use the term either, but if you do die early, your heirs will appreciate it.


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## supperfly17 (Apr 18, 2012)

Some good advice in this thread. So far I understand only about 50% of it )


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## HowIsMyFinancial (May 18, 2011)

MoneyGal said:


> Term gets expensive as you age because your risk of dying increases. If you want insurance to protect against your premature death, term is the way to go, but make a plan to be self-insured before you think the cost of insurance is too significant (there's also the issue of insurability; you may not be able to purchase term insurance later in life).


Say at age 70ish where the term gets so expensive and as you said, I should be "self-insured", but does the investment I've build by putting away the difference - would that be comparable to the death benefit amount?
Would my investment be worth enough in comparison to the $500k - $750k death benefit that comes with Universal Life ?



OptsyEagle said:


> Well you never said how much insurance this plan entails so it is difficult to offer alternatives.


This is for $500k - $750k range


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## kcowan (Jul 1, 2010)

Stop talking to insurance salesmen! Get a quote for level term online. That saves you the costs of paying high commissions.

Make it level until 60. That is an expense for having a wife and children. After 60, your net worth will look after you and your family.


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## james4beach (Nov 15, 2012)

Personally I don't trust the insurance companies to make good on their obligations to me... in other words I'm concerned about the insurer's creditworthiness.

Can someone help me understand what kind of guarantees, if any, actually back life insurance? I'm not about to lend money for 40 years without some serious guarantees. Let's NOT assume that the government will simply bail out the insurer. I'd like to know what kind of formal guarantees exist. What if Manulife or Sun Life go bankrupt and shut down. I realize another insurer may "buy" my policy in the company liquidation. Or they may not, right? Where would I be then?


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## uptoolate (Oct 9, 2011)

+1 on kcowan's comment. If all you have is a hammer, everything looks like a nail.

It seems that everyone but insurance sales people strongly agree that permanent life insurance products are a (very) bad way to save for retirement or even insure one's life for all but a very small segment of the population. There are several reasons for this but three that come quickly to mind are: 1) the huge drag caused by the commissions and fees imbedded in the products (ask the agent what they will be paid over the life of the policy for selling it to you), 2) lack of flexibility as far as getting at your money and managing the investment component, 3) if you look at the returns at the end of the policy (when it has been fully funded and is 'paying for itself' - lol!) you will find that returns are very close to (and not necessarily above) inflation. Oh yes and 4) they cost way more than term over the period that most people need the insurance and 5) they are so incredibly opaque that even most of the selling agents don't understand them.


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## OptsyEagle (Nov 29, 2009)

james4beach said:


> Personally I don't trust the insurance companies to make good on their obligations to me... in other words I'm concerned about the insurer's creditworthiness.
> 
> Can someone help me understand what kind of guarantees, if any, actually back life insurance? I'm not about to lend money for 40 years without some serious guarantees. Let's NOT assume that the government will simply bail out the insurer. I'd like to know what kind of formal guarantees exist. What if Manulife or Sun Life go bankrupt and shut down. I realize another insurer may "buy" my policy in the company liquidation. Or they may not, right? Where would I be then?


http://www.assuris.ca/

If your life insurance company fails, your Term Life policy will be transferred to a solvent company. 
_
"On transfer, Assuris guarantees that you will retain up to $200,000 or 85% of the promised Death Benefit, whichever is higher."_


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## uptoolate (Oct 9, 2011)

This is the very worrisome paragraph at the Assuris site that OptsyEagle linked:

'Your deposit type products will also be transferred to a solvent company. For these products, Assuris guarantees that *you will retain 100% of your Accumulated Value up to $100,000*. Deposit type products include accumulation annuities, universal life overflow accounts and dividend deposit accounts.'

Really 100k guarantee! This is a serious joke as once you have fully funded a policy over many years you are certainly hoping that the value of the investment component would be much more than 100k. So fingers crossed that no more of these companies bite the dust and of course they are getting killed in the current low interest rate environment.


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## james4beach (Nov 15, 2012)

Assuris is a private insurer, right? Why the hell would I trust their solvency any more than I trust Manulife etc?

Without a government guarantee, it's meaningless.


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## MoneyGal (Apr 24, 2009)

Someone (that would be me) made an argument in yesterday's Globe and Mail ROB about how you could spread your insurance purchases over different companies to lower counterparty risk. :biggrin:


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## MoneyGal (Apr 24, 2009)

james4beach said:


> Assuris is a private insurer, right? Why the hell would I trust their solvency any more than I trust Manulife etc?


This is a good question and I wish the issue of counterparty risk got more attention generally. FWIW here is the Assuris record on dealing with insolvencies: http://www.assuris.ca/Client/Assuri...solvencies!OpenDocument&audience=policyholder

I don't agree, though, that we want/need a government guarantee.


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## james4beach (Nov 15, 2012)

I don't want government guaranteeing everything either. But at the same time, without government guarantees insurance like this may just be a token gesture.

The financial world has taught us in the last decade that financial companies are nothing without government guarantees. Financial institutions can't manage themselves or make good on their promises without a taxpayer covering their losses. This is the message I am hearing loud and clear... the big five banks are "safe" only because government backs them. Mortgage investments are only safe because government (CMHC) backs them. And the big American banks that didn't collapse have the same government backing. AIG the insurance giant was totally supported by government, at enormous (and ongoing!) expense to the US govt.

Consequently, it's not worth doing business with any financial company that isn't backed by the taxpayer.


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## My Own Advisor (Sep 24, 2012)

+1

"The financial world has taught us in the last decade that financial companies are nothing without government guarantees."


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## GoldStone (Mar 6, 2011)

kcowan said:


> Stop talking to insurance salesmen!


+1

Australia and UK banned commission-based sales of investment products. They are now looking to extend the ban to all financial products, including insurance. Commissioned salespeople have a massive conflict of interest. Any advice they give is tainted.


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## OptsyEagle (Nov 29, 2009)

GoldStone said:


> +1
> 
> Australia and UK banned commission-based sales of investment products. They are now looking to extend the ban to all financial products, including insurance. Commissioned salespeople have a massive conflict of interest. Any advice they give is tainted.


Not wanting to add any help to these people, but in my opinion, if you can justify that rule here, then you need to extend it to real estate sales, electronic stores, apparel retailers, auto mechanics, vacuum cleaner sales, etc. Then we start looking at industry to industry stuff and anywhere else where a salesperson is incenticized to make a sale. 

Now, I would love to live in a world like that but the downside to all this not a world with a huge reduction in GDP and a massive number of unemployed people, because too little is getting sold. That is the underside of all this.


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## RBull (Jan 20, 2013)

Not to mention I would not have had as much fun in my career and be able to be semi retired as early. LOL



OptsyEagle said:


> Not wanting to add any help to these people, but in my opinion, if you can justify that rule here, then you need to extend it to real estate sales, electronic stores, apparel retailers, auto mechanics, vacuum cleaner sales, etc. Then we start looking at industry to industry stuff and anywhere else where a salesperson is incenticized to make a sale.
> 
> *Now, I would love to live in a world like that but the downside to all this not a world with a huge reduction in GDP and a massive number of unemployed people, because too little is getting sold. That is the underside of all this.*


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## james4beach (Nov 15, 2012)

But maybe this just shows you how many people in the economy are totally redundant, not serving a useful purpose. I would extend that to say that a lot of people working in finance/insurance serve no useful purpose at all. They're just intermediaries, helping push numbers from one ledger to another. One guy pushes numbers from A to B, and another guy pushes the numbers back from B to A. Each collects a fee along the way. MANY finance jobs are totally obsolete already and the clock is ticking before a simple computer program replaces them.

The financial industry is huge in Canada and, unfortunately, I think much of the workforce is useless. Some even describe them as "parasites" as the only thing they are capable of doing is leeching away money from their customers (pension funds, retirees, government, and income-producing industry) without adding ANY value.

I certainly think the workforce in asset management and pension fund industry are largely parasites. I know enough people who work here. The whole nature of the business is skimming fees from pension funds, or leveraging other peoples money (OPM) to make money for yourself. Often you put OPM in danger, and collect the income yourself. And each parasites along the way takes a cut, adding zero value. Do you know what kind of lifestyle these fund managers lead? Lavish business meetings, trips to exotic destinations, cruises, all on the accumulated savings of hard-working people.

But as you reach retirement, if you're wondering where all your hard earned money has gone... THAT is where it's gone. A line-up of useless, redundant, parasites has each sucked a way a little of your money. They're living the good life.


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## Hobotrader (Feb 10, 2013)

james4beach said:


> But maybe this just shows you how many people in the economy are totally redundant, not serving a useful purpose. I would extend that to say that a lot of people working in finance/insurance serve no useful purpose at all. They're just intermediaries, helping push numbers from one ledger to another. One guy pushes numbers from A to B, and another guy pushes the numbers back from B to A. Each collects a fee along the way. MANY finance jobs are totally obsolete already and the clock is ticking before a simple computer program replaces them.
> 
> The financial industry is huge in Canada and, unfortunately, I think much of the workforce is useless. Some even describe them as "parasites" as the only thing they are capable of doing is leeching away money from their customers (pension funds, retirees, government, and income-producing industry) without adding ANY value.
> 
> ...


If only the government didn't bail them out every time they get into trouble...I think the financial economy created a MASSIVE dislocation in the real economy and it'll be incredibly ugly when that comes home to roost. Can you imagine finance and insurance going down? You'd slice Canada's economy down in half or more. Miracle that they got bailed out during the S&L crisis, LTCM, tech bubble (I'm regretful I wasn't old enough to play this one), housing bubble...These jobs/roles should have died. What you said there reminded me of this book title: Where are the customers yachts?


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## james4beach (Nov 15, 2012)

Hobotrader said:


> If only the government didn't bail them out every time they get into trouble...I think the financial economy created a MASSIVE dislocation in the real economy and it'll be incredibly ugly when that comes home to roost. Can you imagine finance and insurance going down? You'd slice Canada's economy down in half or more. Miracle that they got bailed out during the S&L crisis, LTCM, tech bubble (I'm regretful I wasn't old enough to play this one), housing bubble...These jobs/roles should have died. What you said there reminded me of this book title: Where are the customers yachts?


Well said. Yes I think there's a big dislocation and terrible capital mis-allocation going on. I worry a lot about this. Yes, the process that started in 2008 should have killed off a lot of finance jobs and certainly investment banking jobs. Due to bailouts, they came back with a vengeance. We are now in another financial speculation orgy.

Here is my best illustration. In my university years I met a few extremely bright people (scientists, mathematicians, engineers) with incredible minds. What are they doing now? Are they building space ships, solving the world's energy problems, making life better? No... are they coming up with new inventions and revolutionizing technology? No... every single one of them works either at an investment bank, or hedge fund. Every single one. These are also the highest income earners among my friends.

My opinion: society won't enjoy progress and real development, as long as the brightest and most capable are drawn to financial speculation professions. Once that parasitical field gets wiped out, THEN you'll have smart people working on real problems and solutions.

"Where are the customers yachts?" .... oh that's a good one! My hedge fund friends have read that.


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## lonewolf (Jun 12, 2012)

Howismyfinancial

Why do you want to take responsibility for something that is not yours to begin with ? Once your dependents become financialy independent its not your job to worry about them anymore. Make sure you have enough money first to be able to live off your investments. If something happens to you the kids can be left in your will. I would go term untill your kids are old enough & get out in the work force. As you get older you will be less likely to provide for yourself then your kids. It does not make financial sense for a weak link to insure a stronger link.


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## HowIsMyFinancial (May 18, 2011)

lonewolf said:


> Howismyfinancial
> 
> Why do you want to take responsibility for something that is not yours to begin with ? Once your dependents become financialy independent its not your job to worry about them anymore. .


I think that's a personal and subjective choice. Which is why I said in my first post I explicitly mentioned that it's one of my goals. Not everyone has the same goal.
Keeping that goal in mind, I would like to know the best way to achieve it. Life insurance vs buy-term-and-invest


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## kcowan (Jul 1, 2010)

OptsyEagle said:


> Not wanting to add any help to these people, but in my opinion, if you can justify that rule here, then you need to extend it to real estate sales, electronic stores, apparel retailers, auto mechanics, vacuum cleaner sales, etc. Then we start looking at industry to industry stuff and anywhere else where a salesperson is incenticized to make a sale.
> 
> Now, I would love to live in a world like that but the downside to all this not a world with a huge reduction in GDP and a massive number of unemployed people, because too little is getting sold. That is the underside of all this.


I agree with your point and I spent 10 years as a commisioned sales person, making out very well indeed.

But we are in a financial forum and there are readily available alternatives to achieving better financial results without the drag of cost-of-sales. Plus many of the other sales positions are gradually being eroded through access to superior online buying services (comparative shopping sites). Even though I were one, I feel no compulsion to fund a travel agent, car salesman, or Best Buy rep. The world has changed permanently.


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## OptsyEagle (Nov 29, 2009)

If you look at our insurance industry, companies like Manulife and Great West Life, etc., probably employ many thousands of people who would most suredly lose their jobs if they stopped the commission sales of life insurance. Life Insurance, for the most part is sold, not bought. There would still be an industry, but it would be much smaller and many, many more people would become a ward of the state, if it were not for the motivations of the commissioned sales agent.

This would be even truer for the auto industry. Here we have millions of people dependant on the efforts and motivation of the few car salesmen and women, that exist today.

I could go on to almost every other industry. Many people live in a nice comfortable world, bad mouthing commission based sales people without the knowledge that their lifestyle begins and ends with the sale those people will make or not make, tommorrow.

As I said before, it is not the world I wanted to live in, but it is the world I do live in.


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## RBull (Jan 20, 2013)

OptsyEagle said:


> If you look at our insurance industry, companies like Manulife and Great West Life, etc., probably employ many thousands of people who would most suredly lose their jobs if they stopped the commission sales of life insurance. Life Insurance, for the most part is sold, not bought. There would still be an industry, but it would be much smaller and many, many more people would become a ward of the state, if it were not for the motivations of the commissioned sales agent.
> 
> This would be even truer for the auto industry. Here we have millions of people dependant on the efforts and motivation of the few car salesmen and women, that exist today.
> 
> ...



Well said. For full disclosure it was and is the type of career I've lived for 3+ decades.


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## MoneyGal (Apr 24, 2009)

Not only that but: insurance is a "grudge purchase." People don't want to buy it and the benefit is uncertain and in the future; the only impact in the present is a pain point ("you give me your money now; I might give you some money later"). Totally different from selling a car, computer, or washing machine.


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## RBull (Jan 20, 2013)

kcowan said:


> I agree with your point and I spent 10 years as a commisioned sales person, making out very well indeed.
> 
> But we are in a financial forum and there are readily available alternatives to achieving better financial results without the drag of cost-of-sales. Plus many of the other sales positions are gradually being eroded through access to superior online buying services (comparative shopping sites). Even though I were one, I feel no compulsion to fund a travel agent, car salesman, or Best Buy rep. The world has changed permanently.



Bingo. The world has changed and the way many things are bought and marketed is much different.


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## james4beach (Nov 15, 2012)

Because the goods & services are so expensive, we mostly opt to do the work ourselves (self-serve gasoline, or spend hours searching for the best travel deals yourself). Of course you're just substituting your labour for someone else's... your time is worth money. The service hasn't really gotten cheaper.

But because we (consumers) do the work ourselves, it gives the illusion that pricing is efficient and the product is cheap. Economists then look at us and say "inflation is low". Well no, not really, I'm just spending a lot of my own hours of time=money and you're not seeing it on the corporate ledger of cost.

To put it another way, all this self-serve stuff is just an off-the-books expense in the cost of goods & services. Consumers keep getting saddled with more cost=time and in reality, it's price inflation. Self serve supermarket checkouts for example. What's really happening is that grocery price inflation is quite high. I'm just eating a bunch of the costs by doing the work of the checkout cashier myself. The company does better (cost cutting), more cashiers are unemployed, and I get the illusion that my groceries are still a good deal and economists get the illusion that there's no price inflation.


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## the-royal-mail (Dec 11, 2009)

I agree with you james. There is no shortage of spin doctors out there who deny the real inflation that is rampant in our economy. It's hidden in plain sight for those who are able to look past ideology, vested interests and rhetoric.


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