Which Conversation Do You Want to Have?

We all buy insurance to protect us from significant financial loss. If we’re in a car accident, we want the insurance company to pay for our car to be repaired, or for any hospital bills that may have resulted from the accident. If our house burns down, we want the insurance company to pay to rebuild our house and to replace everything that was inside of it. Most of us would not be able to bear the expense of having to pay those bills on our own if we didn’t have insurance.

The insurance company, in order to bear that risk for us and then be able to pay in the event any one of us has a claim, has to build up a pool of money to make those payments from. The company does that by collecting premiums from every policy holder. They collect from each of us to build up that pool, and then when one of us has a claim, they pay out of the pool. There always must be enough money in the pool, so the company has to collect enough premium to pay all of their claims, and to make enough money to pay their employees and remain in business.  The amount of money needed in the pool is carefully regulated.

The company will set the amount of premium based on a multitude of factors. As a buyer, there isn’t much you can do to change many of these factors. You can certainly be a safe and responsible driver and not get tickets, or install fire or burglar alarms in your house, but that only saves you so much.

So, as the buyer, how do you reduce your insurance rates? The only things you can do, really, are change your coverages, or adjust your deductibles.  Reducing coverage is not a good idea.  Increasing the deductible on your policies generally will help save you some money.  A deductible is the amount of money that you contribute towards the cost of damage.  Some may have a $500 deductible on your car, or a $500 or $1,000 deductible on your home policy.  Increasing those deductibles will same you some money.  

There are tons of TV and social media ads out there that promise to reduce your insurance costs.  While many buyers can find a cheaper cost, they don’t realize that they’ve usually given up a lot in good protection, policy features and customer service quality from those companies on the internet or those focusing on price to get your business. There’s a reason they’re cheap. It’s always attractive to save money, but what are you giving up?  You only find that out at claim time.

The best way I ever heard this explained was using boat policies as an example. After Hurricane Katrina, there were thousands of boats that were destroyed. Some customers had replacement cost policies. Some customers had actual cash value policies. If you had a replacement cost policy, your insurance company bought you a new boat. If you had an actual cash value policy, your company gave you a check for how much your boat was worth. If your boat was 10 years old and not worth what it used to be, you got enough money to buy another 10 year old boat.

The difference in premium between the replacement cost policy and the actual cash value policy was miniscule. Something like $50 per year. So, some people decided that they needed to pay a lower premium, just HAD to save that $50 every year. When their boat was gone, they were mad. What were they going to do with only a few hundred dollars from their insurance company? They certainly couldn’t get a new boat.

The customers who paid the higher premium were happy. They got a shiny brand new boat.

Who saved more money in the long run?

At American Advantage – IFS, when we advise people on coverages and options, we are trying to save you money, but even more than that we are trying to make sure that you’re protecting your financial futures and happy at claim time. We never want to have a conversation with a client, “Sorry, that’s not covered.” If you want the insurance company to cover it, you have to let them collect the premium for that coverage. We’d much rather have a conversation where we get to say “Yes, you’re covered.” We want you to get a new boat.

Which conversation do you want to have?

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