Why do people buy insurance? I’ll take a hand. Better yet, just shout out your answers.
I just imagined someone sitting in a cubicle suddenly shouting, “It’s the law,” and that thought makes me laugh out loud while I try and write. It’s ok. The people that I work around are used to it. Here are some of the answers that I imagine you might have.
“It’s the law.”
That’s probably an answer that you see often. We all know people who wouldn’t buy auto insurance except that the law requires it in their state. Even when the law requires it, a large number of people drive without insurance. According to this Insurance Journal article, the number of uninsured motorists is on the rise and in five states, more than 20% of drivers don’t have insurance. That doesn’t even count the number that carry the state minimum limits. “It’s the law” is a bad answer.
“My mortgage company made me.”
I bet that’s a common answer. I know that’s the answer when many people buy flood insurance. I’ve seen what happens when people pay off their mortgage and decide that they no longer need the expense of their homeowners’ coverage. It’s similar to what happens when we suggest flood insurance when there’s no “requirement” to buy it. They drop their insurance or they just don’t buy it. What happens if the house catches fire? What happens when the flood comes. They have nothing left. What happens if they have a dinner party and someone trips, falls, and injures themselves seriously? Without homeowners’ insurance, a family loses everything and has to rely on the kindness of others to restart life. “My mortgage company made me” is another bad answer.
“It gives people peace of mind.”
I’ve heard that a lot around insurance companies. I’ve even been involved in teaching that. Here’s the problem. It just isn’t true. Peace comes from other sources. Peace doesn’t come from insurance. Peace is an internal sense of calm without regard to the circumstances of life. Peace is something that cannot be purchased in an insurance contract. A person without peace can’t buy enough insurance. A person at peace won’t feel the need to buy insurance. “Peace of mind” is another really bad answer.
“It helps manage their risk.”
Does it? Insurance certainly is a part of the risk management program for a family or business. We are all aware that families and individuals don’t have any kind of formal risk management program, except for that guy. He has a formal risk management program and he’ll show you the spreadsheets to prove it. He probably works in insurance somewhere. He doesn’t count. Does insurance help manage risk? Yes and no. Insurance is a way that someone finances the risk in their personal or business life so it’s a part of the risk management process. Yet, it isn’t an end of itself. Insurance in perspective helps to manage risk because we become aware of the risks that we have. Sometimes, we take steps to reduce our risk because it’ll lower our insurance costs. “It helps manage their risk,” is really a pretty good answer, but it’s still not the best answer.
“We can’t afford our life without it.”
I don’t know that I’ve ever heard this answer, but it feels really honest to me. Think about it. For many people, they accumulate property over time. They have clothes that they bought last week and a t-shirt or two from their freshman year in college. Their living room furniture is probably five years old and they just replaced the bedroom furniture. People purchase their homes on 15-30-year mortgages. They borrow on 6-7-year loans for their cars.
Beyond the property exposures, no one could afford to drive without insurance. Even if you have a small fender bender (do any cars even have fenders anymore?), the other driver is going to file suit for thousands of dollars. The other day, I was having a conversation with my barber and he told me about a car accident that he had. Hopefully, the other driver had enough liability coverage to make him whole.
Businesses couldn’t afford to operate after a loss because many of them operate in a cash poor position, or in a heavily leveraged (took out a lot of loans) position. Without property and liability insurance, most businesses will fold. Even with insurance, without the proper coverages, most businesses won’t survive a catastrophic event.
Many times, insurance purchase decisions are made based on whether the insured can afford the policy. I would say rather; can you afford not to have the policy?
Can you replace your home or building without the insurance policy?
Can you replace your stuff in your home or business without the insurance policy?
Can you afford to defend yourself in court if someone slips and falls and hurts themselves at your business?
Can you afford to replace your store’s stock if the power goes out for three days because of a hurricane?
Can you afford to pay medical expenses and wages for employees if they get hurt in your business?
Insurance isn’t about the law, the lender, or peace. It’s about providing money to get the insured’s life back to normal as quickly as possible.
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