Why do we buy Insurance?
The process of buying insurance can seem like a heavy load. Many purchasers of the products are severely under-educated on the subject, but all know one thing: They need insurance. Historically, that hasn’t always been the case.
Why has our society shifted this way? Is it tradition? Is it law?
It’s both. Even in the democratic/capitalistic society we live in, Insurance is mandated by both tradition and law.
Tradition has taught us that being uninsured/under-insured is a recipe for financial disaster. Drive with State Minimums on your Car Insurance? Boom, a 3-car pile-up suddenly has you facing bankruptcy. Not properly covered with your Home Insurance? Boom, one bad storm and you’re homeless. You went the cheap route on your Business or Commercial Insurance? Yep, that’s right, one bad liability claim and you’re suddenly updating your resume. Even reading this now, you probably aren’t getting that worried though, because Insurance has been ingrained in your head since before you ever thought about buying it. Somebody you know that cared about you, knew somebody that once had a life changing event from not having the right Insurance, and they made a point to make it very clear to learn from their mistake.
So why is it mandated by law? This is broader, but it’s literally social welfare. The earliest forms of Homeowners Insurance were nothing more than a group of people living in proximity to each other, that all agreed to pool a set amount of money to be used in the event that any of their members suffered a loss due to a natural cause. Think about what would happen if you and your neighbors didn’t have insurance… If we suddenly had a tornado rip apart an entire zip code full of uninsured/under-insured residents, we would have a complete collapse of the entire local economy. Like a series of dominoes, the entire zip code would require federal and state relief to rebound, if even possible. Now imagine that on a federal level…
Insurance actually helps level out the disparity between social classes too. By making it a requirement, it drives the overall prices of insurance premiums down, by adding more deposits into whole claims funds. If Insurance was not required, only the rich would buy it, and therefore the demand for competitive rates would increase due to smaller sample sizes and less products on the market, effectively increasing the prices.
Keeping Real Estate pricing affordable is a key aspect of insurance also, as it allows financial institutions to loan money with reduced risk. No Insurance means significantly less loans and/or at hyper-inflated interest rates, typically regarded as unaffordable in the first place.
Even if you never make a single claim, Insurance is making your life easier, less expensive, and more secure from a societal standpoint alone. So next time you see that premium payment leave your checking account, remember that you are protected, but also the reason our entire society doesn’t collapse after a disaster.
Jordan is a Licensed Agent, specializing in Property & Casualty Insurance