Does anyone really like insurance? I own an insurance agency and I don’t even like insurance.
Insurance is boring.
Insurance isn’t fun.
Insurance is extremely annoying.
One of the most annoying things about it is the cost, and it always seems to increase. In Arizona, the increase at renewal is only getting worse.
Why do insurance companies continually increase the cost of your insurance policy? Why does this annoying thing have to be part of life as an adult?
I am not only going to answer this question, but through the answer, I hope to reveal a more sober-minded approach to insurance so it is less annoying.
It will still be insurance, but by the end of this blog, it will hopefully be something you better understand. And with a better understanding will come a better level of appreciation.
The first thing we need to do is properly define what insurance is and what it does. It is more than a required monthly bill that you must pay to drive a car or own a home. It is a financial product designed to make you whole in the event of a loss. Although we often insure things, what insurance is really about is the value associated with these things OR potential financial loss you would incur as a result of an insurable event.
- Insurance is a financial product.
- Insurance is designed to make you financially whole after a financial loss.
Now that we know what insurance is, we can have a better understanding of why insurance costs increase. Ironically, that insurance increase is something you want.
Say you buy a house. As part of the home buying process, you also purchase home owner’s Insurance because the lender requires it. Let’s also say that at the time of the home purchase the home value was $400,000 and the insurance company estimated the cost to rebuild the home at $350,000. Because the cost to rebuild a home changes as the world changes (inflation, construction costs, lumber costs, and more), the insurance company will have to make adjustments to the policy costs to ensure you can be made financially whole.
If the home you purchased increased in value to $500,000, and the cost to rebuild the home also increased to $450,000 but the insurance company did nothing and the replacement cost on the policy stayed at $350,000 – that would not be good. You would be extremely upset if your home caught fire and you were unable to rebuild your home because the insurance policy was $100,000 short.
So, again, the change or increase to your insurance policy is actually a good thing.
Here are a few other things to consider to help understand why insurance costs go up.
As mentioned in one of our recent One Minute Money Tip videos, cars are becoming extremely impressive pieces of technology. It seems that most vehicles have at least four cameras or sensors to help create a better driving experience. Even simple cameras like a backup camera are now standard in most cars. So, a fender bender five years ago is different from a fender bender today. Previously, to make a vehicle whole, costs only included the bumper, paint, and labor. Now it must include the cost of the camera, sensors, wiring, and other technology that is now part of that car.
This is just one example as it pertains to auto insurance. Road signs, red-light cameras, and the cost of medical bills associated with auto accidents are other things that must be considered for an auto insurance policy. Each of these items is getting more expensive. So, the insurance designed around these finances must also increase in cost.
Home Owner’s Insurance
As previously mentioned, the cost to build a home is increasing. Supply, demand, lumber, shortage in labor, and more have contributed to this. But another increase in costs is the items people have in their homes. Almost every home now has a big screen TV, smart appliance, tablets, computers, Amazon Alexa, jewelry, collectibles, and other items that have a significant financial value.
Because the finances associated with what’s covered under an insurance policy increase, so must the cost of that insurance policy.
So, what should you do about it?
First, make sure your insurance is set up correctly. I STRONGLY suggest connecting with your insurance agent to ensure the replacement cost on your home owner’s insurance is properly set based on all the recent changes in our economy. You do not want your replacement cost coverage on your policy to be less than the actual cost to rebuild your home.
In addition, mention any valuable items that you have in your home so the agent can make sure these are covered. The bottom line is, rather than being annoyed by the cost, try using the insurance for all it is worth. Get what you pay for! Have the proper amount of coverage for you, your things, and your family.
Is insurance still annoying? Yes. But my hope is the understanding of how it works has not only made insurance easier for you to stomach but armed you with a wise mindset to help make the most of the insurance you are paying for.
For more information on the proper mindset of insurance, check out one of our recent podcasts “How Wealthy People Think About Insurance.”