Friday, May 15, 2015

Basics of Understanding Insurance

I AM NOT an economist or an insurance expert, but I do understand the basic concepts, and as a teacher, I feel compelled to share a bit. The reason I feel this compulsion is the TV ads I see for car insurance.

These company's adverts say things like:
  • "We'll insure you even though you have a bad driving record!"
  • "You have a fender-bender and your rates go up!"
  • "You destroy your brand new car and they only give you 75%, and say it's 'depreciation'!  How can your car depreciate before it's first oil change?"

My unofficial advice, from a non-expert, non financial counselor, is DO NOT deal with any company with these kinds of adverts.  Why?

  1. Money is neither created (except be the Feds) nor destroyed (except by inflation), it merely changes hands.  All insurance companies, whether life, car, property, liability, disability, or other has to do the following:
  2. Find willing customers
  3. Collect premiums from said customers
  4. Pay all legitimate claims
  5. Cover their own overhead of sales forces, actuaries and other risk forecasters, adjusters, adminstrators, buildings, utilies, etc.

The premiums MUST increase as claims increase, all other expenses being equal.  SOOOOOO, don't insure with companies paying out a lot of claims.

"But how do I do this?"  you might ask.

You look for companies that assess risk very carefully.  You want to be "the riskiest person" in your particular pool of customers.  It's simple logic and economics.  Stay away, stay far away, from any company that is seeking other customers who are MORE risky than you!!

But keep in mind, as many have said, "Advice is worth what you pay for it."

And, remember the key caveat, "Phil isn't as smart as he thinks he is!"  And in truth, I don't think I am all that smart, so apply my advice only with great care.

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