Is Insurance a Scam?

You’ve probably heard it said just as many times as I have. But what you may NOT have thought about is the two main sources which may have fed this type of thinking.

Auto insurance effect...

Many people who have paid insurance for many years and have not been in an accident, seem to feel some type of resentment as they’ve never gotten their money’s worth so to speak.

 

For many of them, the only fix for this is to get some kind of rebate for all they’ve contributed.

 

While on the face of it, this may seem fair, it may make sense to take a look below at a simple, stripped-down illustration of how insurance works.

 

After you do, then you can judge the practicality of what on the face of it may seem like a good solution.

 

Suppose

  • 10 people pay insurance premiums every year.
  • The insurance premium is $1,000.
  • 1 of those people get in an accident per year.
  • The accident costs $8,000.

In the example above, there’s $2,000 left over for the insurance company to pay all of its expenses as well as make a profit.

 

If it were to give back portions of premiums paid as rebates, would it not be in a predicament?

 

Remember that this is an over-simplification of how car insurance works, and I have simplified it in an attempt to show that insurance is based on a large group of us putting in a little bit of money into a pot, in order to cover the few of us who WILL be unfortunate enough to get into an accident.

 

And it goes without saying that neither of us can tell whether or not we'll be part of that so-called "few".

 

Having said that, if you accept what I’ve said thus far, then you’ve probably realized that in this model, it doesn’t make sense to give back to the insured what they paid in, when in truth and in fact, much of what they paid in was paid out to someone else in the pool.

 

And that is because that someone else was the one unfortunate enough to be involved in an accident.

Bad payouts effect...

In my time as an agent, I’ve heard all kinds of stories about issues with payouts.

 

What I can tell you without fear of contradiction, is two things. . .

 

1. Insurance companies are legally bound to pay an insured's claims.

 

2. Ninety percent (99%) of payout issues are due to clients' misunderstanding the details of their coverage or breach of contract on the part of the client.

 

Having said that, I’m not saying it’s the client’s fault necessarily as it’s not always clear what led to the misunderstanding.

 

However, it is my view that it should NEVER come down to whether or not the client has read the fine print.

 

The truth is that any insurance agent who puts his or her client first, will give you the main points of the contract in as simple a manner as possible so there is no future misunderstanding.

From my experience, the following are the main points in ANY insurance contract. Once you understand these, you should be good to go.
  • What you get if the qualifying circumstance occurs
  • Exactly what circumstance must occur for you to get what you get
  • The time period within which you MUST report that the qualifying circumstance has occurred
  • How soon will payment occur after the unfortunate circumstance hits.
To be clear, insurance companies are highly regulated entities, and they HAVE to follow through on their contracts once the client has met the requirements. And they also have to do so almost immediately, not months later.

I have no clue which agent you’re working with, but if you get the above four FULLY EXPLAINED, you nor your family should have any surprises if the unfortunate occurs.