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Why Is Insurance So Expensive?

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Shuman Roy is an entrepreneur, business owner, and musician. He started RoysNoys, LLC in 2013 as a music production and education service company. He also offers small business consulting and advisory services to help businesses get from start-up mode to turn-key operations. Shuman earned his M.B.A from the Stern School of Business in 2001...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency...

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Reviewed byJoel Ohman
Founder, CFP®https://res.cloudinary.com/quotellc/image/upload/insurance-site-images/truthaboutins-live/2020/03/joel-ohman.jpg

UPDATED: Mar 13, 2020

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Anyone who has ever shopped for or purchased insurance has surely asked this question.

Many of us feel like we don’t really need insurance, and only purchase it because it is mandatory to operate a motor vehicle or necessary if we carry a mortgage.

Insurance agents regularly hear the complaint from clients who have paid for insurance for “X” amount of years without ever having an accident or filing a single insurance claim.

Insurance is a Cheap Risk Management Tool

The reality of the situation is insurance is an extremely cheap tool for transferring risk. For every one of us who hasn’t had an accident, we know of someone who totaled a brand new car, had a tree fall on the roof of their house, had something stolen out of their car, or worse, caused a car accident where someone was injured and needed expensive medical attention.

All of the above are “risks” we take every day by operating a car or owning property. That said, where would those who suffered one of these losses be had they not had an insurance policy to cover their liability or property damage?

Depending on the severity of the loss, the answer is likely bankrupt! Better yet; ask the individual who suffered the loss and was reimbursed, how they feel about it. Their point of view has probably changed drastically regarding the matter.

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Insurance Costs Are Spread Among a Group

It is important to understand how insurance rates are determined to fully grasp why the costs are what they are. Insurance is a social tool. This means that everyone in the group “pitches in,” or pays a small insurance premium to benefit the group as a whole.

In exchange for the small premium, the insurer might pay out a vast sum of money at any given time as a result of your negligence or to replace your property if it is stolen or otherwise damaged. The amount the insurer pays out would likely be much more than the average individual could afford at any given time, which is exactly what makes insurance so important.

Some people pay into the “pool” and don’t get benefits (file claims) while others do. The problem is you never know when your time to “get something out” will be, therefore, we must continually pay into the “pool” to ensure we get the benefits when they become necessary.

Cost of Insurance Varies Based on Individual Characteristics

The cost of insurance depends greatly on individual characteristics, some of which are under our control, and others that aren’t.

For example, you cannot help what age you are at any given time (such as a teenager), but you can certainly control how fast you drive, or how expensive of a home or car you purchase or how you manage your personal finances (insurance score).

There are also several discounts available to us (good drivers discount, good student discount) as insured that we can take advantage of when trying to snag a cheap rate.

It Pays to Shop Around

Independent insurance agents know one of the biggest reasons a person pays too much for insurance is their loyalty to a particular insurance company, which stops them from shopping their rate every few years.

Often times, insured will mistakenly believe that one particular insurance company is more dependable than another, based on limited knowledge of the industry, or simply by believing in a television ad campaign.

This leads to blindly accepting higher rates each year from your insurance company. Many of the largest insurance companies in the United States also have the highest insurance rates!

While there are less-than-reputable insurers in the U.S., they are few and far between. Each State Department of Insurance aggressively regulates insurance companies who conduct business within their borders.

Insurers must meet strict financial guidelines to ensure they can pay claims and answer to any consumer complaints filed against them. Additionally, a reputable insurance agent will not sell insurance for a company that has a history of poor customer service. It’s bad for their business!

Read more: Do I need insurance?

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