Friday, August 2, 2013

Is Insurance A Big Fat Waste of Money?

I had a call yesterday from a gentleman that was looking to replace his business insurance. He was incensed that the premiums had gone up and was venting to me about how unfair the insurance community was and how insurance was a big scam to take his money. He has gone 30 years without a claim and all that money was wasted. He could have gone all that time without insurance and would be thousands of dollars richer.

As an insurance professional I do get calls from people who are frustrated and I do understand the frustration. And, the industry that I represent doesn’t always reflect compassion and clearly outline what insurance does and does not do. The confusion grows to anger especially when the insurance is mandated by government, a lender or another business that you need to do business with.

I used the following example to explain: I asked the caller if he had a home and he said yes. I asked him what the replacement cost value of his home was approximately and he said about $625,000. I asked him if he had a loan on the home and he said yes so I then stated that he probably had to have insurance on the home and he said yes and don’t get him started on the cost of homeowners insurance! I asked him approximately the cost of his homeowners insurance and he said $750. So I said you have been paying that premium for about how long on your home and he said 21 years. I said you have never had a claim and he said that was correct and all that premium he has paid over 20 years has just gone down the drain, in fact he could have burned the money and would have gotten the same value. So, I added, just to make sure that I understand you have paid about $750 per year for 21 years and never received any benefit from a claim? He said that was right. So, he had paid out $15,750 over 21 years (maybe a little less as the premium was lower 21 years ago).

Now it just so happened that our agency had a client whose home burned to the ground and was valued at $550,000. He had been with the company that insured him for less than 5 years and the insurance company paid the full replacement cost to rebuild the home and picked up the cost to haul away the debris from the ruined home and picked up the cost to build to current building code. In addition, the insurance company provided funds to find a temporary place for the client and his family to live. The total cost was about $600,000. The client was only out $1,000 for his deductible and the sum of his insurance payments to the insurance company for less than 5 years was $3,750. But if we use the example the caller had provided me then he could have paid for 21 years and $15,750. If our client was faced with paying $15,750 over 21 years to recoup $600,000 and his family’s financial health would he consider the $15,750 a fair investment? I guarantee you that he would and so would anyone else in the same situation.

There are two frames of mind when considering insurance: One, it’s an expense that costs me or, Two, it’s an investment in my family’s plan for developing wealth and protecting our assets. In the end I didn’t change the callers mind but it reminded me why I protect my clients and why I look to find value for them and why I prefer to work with clients who understand how insurance works for them and not against them.

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