Why Buy Insurance & Understanding Risk

Why we buy insurance and understanding the risksWhether personal insurance is just one of those monthly premiums that you pay without thinking about it or it is the cause of a stress migraine when you see how much it costs. Either way, it means something maybe just a little different to most of us.  If you find yourself in the second group, you may be asking yourself: “why am I even paying this when it costs so much, anyway?  Why not just pay out of pocket?”  It’s a totally normal question, and here’s what you need to know about risk management.

Numbers are key

Obviously, insurance is all about the numbers, but we’re talking about the risk too, and the percentage of having an issue.  Insurance companies are responsible for paying out policies if a customer makes a claim, or at least evaluating the claim. They have to do their due diligence to make sure they aren’t assuming too much risk and putting themselves in a situation where they’re paying out a lot of money every single year for the exact same customer.

For example, when you are looking at flood insurance, your insurance agent will offer different levels of protection in case a flood happens. But if you are living in a zone where you flood year after year, the risk that they are going to have to pay out the policy is going to increase, too.  If you live in an area that doesn’t flood but have insurance, you will likely see lower premiums because the risk is less.

With regard to home insurance, and if you have a house with a wood stove, the likelihood that you can have a house fire may be higher, which may increases the risk.  These examples could mean higher premiums for the customer that finds themselves in either of these situations!

Hey, wait a moment…why the higher premium?understand insurance and risk assessment for your bottom line

Sure, it’s no fun to have to pay higher premiums since you are trying to protect yourself, but it is a reality for just about anyone who has insurance (such as home insurance, auto insurance, or anything else).  It should make a little sense of why you may be paying higher insurance premiums on your brand-new $50,000 car, than someone else who has a 1990’s junker that has the same kind of policy.

What can I do to reduce risk?

If you want to make the numbers work in your favor — who wouldn’t? — you can take a look at the other forms of controlling risk.  Perhaps you could replace your wood-burning fireplace with an electric heating system, or maybe add security systems to help protect your assets (car, home or otherwise), or maybe contact your insurance agent to see what other things you can do to reduce the risk… and the premium. Having a personal relationship with your agent is helpful as they likely know you well and might ask the questions you might not have thought about.

With these examples, the risk of the worst-case scenario (paying out) happening is reduced significantly, and you may find that your premiums go down because the insurance company sees that the numbers aren’t “in the red”, so to speak.  Or, they’re workable, at least.

We all rely on insurance to help protect us, but insurance companies have to protect themselves, too.  Not sure how you can mitigate your risk completely?  Get in touch with Paula Smith Insurance at (281) 488-8880 and we’ll be happy to help sort it out with you!

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