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Understanding Insurance: What Do You Get for Your Premium?

Understanding Insurance: What Do You Get for Your Premium?

Buying an insurance policy doesn’t give you immediate gratification in the way that buying a TV, a washing machine or any other item you use on a daily basis does. In fact, we often hear clients say:

“I’ve never been in a car accident.” Or “I never get sick.” Or “My employees have never been hurt on the job… So what am I getting for my premium?”

That’s a great question. And the answer requires a shift in thinking, as well as a little history about insurance coverage and its original purpose.

What Am I Buying?

In a nutshell, insurance is an important but intangible product. It buys you protection and peace of mind.

A good insurance policy allows you to protect:

  • Valuable assets in which you’ve invested a great deal of money, such as your home, car, boat, motorcycle or jewelry
  • People you care about and would want to help should they be physically harmed: your children, spouse and employees

Insurance also gives you peace of mind, knowing that:

  • You’re not gambling with your financial security
  • If something bad happens, it won’t financially destroy your business or put your family into bankruptcy

While you may not be able to hold these things in your hand, they are of value.

How Does Insurance Work?

The concept of “risk” is the single most important thing to understand. Insurance involves the pooling of similar types of risk and the transfer of that risk to a central entity, such as an insurance company that agrees to cover the costs of future “losses.” Depending on the type of insurance, a loss could be an illness, a car accident, a workplace injury, a hailstorm, crop damage, a fire or other life events that could prove financially devastating to an individual, family or business.

Customers pay a predictable premium in exchange for protection against such catastrophic events. In fact the term “catastrophic” is another important insurance concept. Originally, insurance was developed as protection from catastrophic, overwhelming losses, rather than everyday expenses.

A Bit of History

The origins of insurance date back to the 3rd millennia B.C., when Chinese merchants travelling treacherous river rapids would redistribute their wares across many vessels to limit loss due to any single vessel capsizing. They were, in essence, spreading their risk, much like an insurance company spreads its risk across many policies.

Insurance in the 21st Century

So here’s what you need to know about shopping for an insurance policy today:

  • You’re buying protection-an intangible product that you hope you’ll never need, but will be tremendously thankful to have should something bad happen.
  • The most basic insurance policies cover catastrophic events only-not day-to-day expenses, but the big costs that could wipe you out financially.
  • There are literally hundreds of insurance options available today, to fit every budget. Basic plans are a godsend to folks on a budget, while those who have the means may want to purchase a far more inclusive policy. The choices in between are almost limitless.
  • Your agent should be able to both simplify the complexities of insurance while presenting you with a number of options tailored to your needs and budget.

Perhaps the most important lesson about insurance: Don’t go without it. Financial catastrophes usually come hand-in-hand with emotional trauma. The last thing you need is to be worried about money at a time when you should be tending to your loved ones or employees.

If you don’t have an insurance agent, search online for someone local. Talk to several agents and pick one who doesn’t “push products” but, rather, listens to your needs and tailors a plan specifically for you. Developing a one-on-one relationship with an agent now is something you’ll be thankful for if, down the road, you, your family or your business should experience a catastrophe.