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Insurance is strange. It’s a product that most consumers buy, but few want to use. Many people find it confusing and it’s unlike any other consumer product on the market.
You can’t see it, touch it, smell it, hear it, taste it or try it on for size. But without it, the world would be a much different place.
No matter how diligently you plan, failure to purchase adequate insurance can quickly put you in a desperate hole. On the other side of the coin, you may pay too much for insurance or pay for insurance that doesn’t fit your exposures.
If you own things that will be difficult to replace without severe financial hardship you ought to insure them. In general, think of insurance as hardship avoidance, not convenience or hitting the jackpot.
From crossing the street to buying a new home to traveling on an airplane, we all face risks daily. We may find ways of avoiding or minimizing certain risks, but it isn’t possible to avoid them all.
Proper risk management means effectively using insurance to protect against events that would significantly impact your financial future if they occurred.
Spread the risk
Today’s insurance business still bases its practices on this simple concept of spreading risk. For example, consider a neighborhood of 400 houses in which, on average, one house burns down every year. If the cost to replace a house averages $200,000, then the cost of that loss — spread out among all the homeowners — averages only $500 a year.
The purpose of an insurance company is to organize this risk transfer. In addition, insurance companies determine insurable risks, which must meet the following criteria:
- The risk must be definite and difficult to falsify. Death is the best example of a definite, easy to validate risk.
- The risk must be unexpected and have a likelihood of occurrence of less than 100 percent. The risk of an automobile accident is insurable, while the risk that your carpeting will eventually wear out is not insurable.
- The risk must be large enough to cause a financial hardship. An insignificant risk, such as the risk that you’ll lose a pocket comb, is not insurable.
Not to be overlooked
Fun or not, insurance is one finance topic you don’t want to overlook. Contrary to some perceptions, insurance is not a rip-off; for most people it is a necessary and valuable financial service. Three key factors are:
- What types of insurance do you need?
- How much insurance do you need?
- How do you get the coverage you need at a reasonable cost?
What types of insurance do you need?
Could you afford to lose your health? For most people the answer is “no,” yet a large number of people (even some with quality health insurance) are not insured for disability. This is one type of insurance you need to consider.
What kinds of financial hardship would result if you were to die suddenly? If your loved ones would suffer financially due to your death, you should buy life insurance.
What if you own a car, home or business? If these valuables were damaged or lost by accident or theft, would this lead to severe financial hardship? If so, you should purchase enough insurance to replace them.
What about liability for damages or injury to others, person or property? This is the most complicated topic among these. You buy this to protect yourself from others.
If your negligence or error should lead to damage of their property or, worse, their health and quality of life, you definitely want to be prepared to cover these costs in case you are faced with a lawsuit.
How much insurance do you need?
Coverage limits are based on the value of tangible property, costs of services charged by providers, requirements of lending institutions, your net worth and other details of your financial health.
Price is not what matters in making these choices.
You buy insurance for times of need and you may hate to make the payments, but imagine how angry you’ll be if, after making all the payments, you have failed to adequately protect your financial investments.
You must determine how much of your net worth you are willing to use or can afford to lose in the event of unexpected accidents or otherwise insurable risks. At least an annual review of your insurance requirements is essential to your financial well-being.
How do you get all of this coverage at the lowest cost?
Your insurance agent can help you review your insurance needs, advise you of the impact of increasing deductibles and assist in making other adjustments to your insurance program.
For example, you may want to drop collision and comprehensive insurance when your vehicles reach the “licensed battering ram” status.
Meaning, if you are involved in an accident when your vehicle has reached this stage, the price you pay for coverage plus your deductible is nearly as much as the value of the vehicle.
The best protection
In summary, insurance is the means by which you secure protection for yourself and your family against unforeseen circumstances.
The insured transfers the risk of financial loss to another party, the insurance company or insurer. The contract between the policyholder and the insurer states what financial consequences of loss are transferred and expresses the insurer’s promise to pay for those consequences.
It is critical to know if you are shopping for the best price, that you are receiving comparable coverage. Ask your agent to explain exactly what is covered for the price being quoted and what may be excluded.
Ask how many other carwash risks they write to ensure they have experience and expertise in your type of business.
Know the name of the carrier your agent uses and check its history of paying claims, as well as financial rating.
These things may not seem important when you purchase your insurance coverage but you will definitely think so when you incur a loss. You’ll be glad you did your homework on the front end, and not when it’s too late to do anything about it.
Scott Brothers is the president and CEO of Joplin, Missouri-based The Insurancenter. The Insurancenter has been insuring the carwash industry since 1986 and is the leading writer of insurance for the industry nationwide.