LET’S GET PERSONAL WITH OUR AUTO INSURANCE

Our thinking on auto insurance drives our perspective. In order to understand the importance of auto insurance, why you need it, and how it impacts you; let’s play pretend for a minute, although the following scenario plays itself out on the roadways, in some variation every day.

THE SCENE

You are driving along, kids in the car, going about your business, singing “The Wheels on the Bus go round and round.” ? Out of nowhere, another driver T-bones your car, and one of your kids end up in the hospital needing massive medical care. ?And, we all know how quickly medical bills add up.

You would want the other driver to pay for the medical care, right? ??Y

I know, you are sitting there going, “Duuuh, THAT is obvious.”

And you would be right!

You want that driver to pay. ?And he should pay!

At the risk of stating the obvious, what if YOU were the driver who T-boned another car, and sent their kid to the hospital needing massive recovery care?

You expect to pay, right?

By now you are reaching for your checkbook, ready to write a check. Right?

Hopefully, at this point, you are also saying, “Duuuh, of course! ?THAT too is obvious.”

So, to meet that potential obligation to the other person(s) who may be a victim of your driving accident, do you have around $100,000 or more in the bank to cover those potential medical bills?

If not, why not?

You see, if you don’t want to have to pay for auto insurance, in the event you cause harm to another person in an auto accident, you should have the money available. If you are at fault, you will be required to meet that liability. ?

IS INSURANCE AN INVESTMENT?

Many consumers like to talk about insurance as if it’s an investment like stocks. Like a gambling, an investment has the possibility of profit or loss. ?Gambling is not insurable.

Insurance is not an “investment,” and it is not designed for the purpose of providing you with a “profit.” ?It’s purpose is to restore you to the approximate financial position you were in, before a loss. ?

Insurance cannot bring a person back from the dead, or restore a person to perfect health. ?The next best thing insurance can do is provide some level of financial restoration.

SO, WHAT IS INSURANCE?

An auto insurance policy is a contract for a transfer of risk.

Every time you get behind the wheel, you have the risk of being in an accident and causing injury to someone. ?It might not be intentional; most accidents aren’t intentional, but they still happen.

Since you may not have a large sum of money sitting in the bank to cover your potential liability, you need someone to cover that risk for you. ?

With an auto insurance policy, you have contracted with the insurer, to transfer YOUR potential financial liability for any injuries YOU cause another party, to the massive shoulders of the insurance company.

You may have parents or other family members who have a sizeable amount of assets. ?Would they serve as your backstop and cover your liability if you were the responsible party in an accident? ?If no, why not?

I’ll tell you why not. ?They worked really hard to accumulate their assets. ?There is a high likelihood that serving as the party who would cover your liability may end up wiping them out financially and leaving them destitute. ?If they are older, they do not have the long timeline needed to start over financially.

Since you do not have the thousands in the bank, and you do not have rich relatives willing to cover your risks, that is why you turn to insurance companies.

RISK TRANSFER

The auto policy is an agreement between you and the insurer which goes something like this:

“Mr. Insurer, I do not have the thousands of dollars to cover my liability to pay for someone’s injury if I cause an accident. ?Would you allow me to transfer my potential liability from myself to you?”

And Mr. Insurer responds, “We have to determine if it makes sense to take on the risk that you represent, so we need you to complete an application, and go through our underwriting. ?Based on a number of criteria, we can determine IF we want to accept your potential liability.”

Insurance is two-party contract, but it is also a service. ?The insurer is not obligated to accept you and the potential liability you represent. ?

In the same vein, if you are not happy with an insurer, you can take your potential liability to another insurer who may be willing to accept you.

REFUND PREMIUMS?

Consumers who have driven 10, 15, 20 years accident free, tend to view insurance as a waste of money, and some even believe they should get a refund of their premium because they had no accidents. This would mean that the coverage which was provided during those accident free years would be provided free of cost.

So let’s break it down a bit. ?A risk is the possibility that a disaster may happen, but it may not happen. ?Insurance is a “just in case” service. ?

If the disaster happened, and you were without coverage, then you would be personally responsible for paying the liability costs. ?This might mean, you would have to liquidate your assets to meet that obligation.

FLOOD INSURANCE AS AN EXAMPLE

Flood insurance serves to replace your home if a flood should happen. ?The fact that a flood has not happened in 100 years, does not mean that the money spent on flood insurance was wasted. ?And it does not mean that since there was no flood, then you deserve to have your premiums refunded. One flood event is all it takes to drive home the necessity of flood insurance. ?You can’t get flood insurance AFTER the flood has happened. ?At least, not for that flood event.

It’s that “unpredictability” that you are paying for. ?We all face unpredictability, which may leave us in a black hole drowning in thousands of dollars of liability.

So, the fact that you did not have an accident is 10, 15, 20 years, is not necessarily a function of your great driving skills. ?

It is a function of careful driving yes, but also luck. ?Many careful drivers have been involved in serious accidents. ?That’s why they are accidents, they are not intentional.

WASTED MONEY

Another consumer favorite is to refer to auto insurance premiums as “wasted money,” because they pay the premiums, but if there is no accident, they believe that they did not get any “benefit” from it. ?

This viewpoint drives the fundamental misunderstanding of auto insurance.

The consumer received the benefit of auto insurance coverage, ie if the unthinkable happened, he would have a financial backer who will come to the table with a check to take the customer’s rear end out of that financial sling he found himself in with that accident which he caused.

SOMETHING FOR NOTHING

Providing insurance coverage for your potential liability is not a charity business. ?If you do not have the money to cover your risk, and your wealthy relatives are not willing to put their assets on the line to cover your risks, then expecting the insurer to provide free insurance coverage is unreasonable. ?

You contracted to transfer your potential risk to the insurer. ?Providing you met your contractual obligation and paid the insurance premiums, you were provided with auto insurance coverage during that policy period. The insurer “earned” that premium during those accident free years that the auto insurance coverage was provided.

Insurance is a business with employees, expenses, obligations, commitments, claims, and legal mandates they must meet. The thinking that consumers should get their money back because they drove accident free for years, speaks to a desire to get “something for nothing.”

The insurer provided the insurance coverage that was needed during those accident free years. Those who drive without auto insurance coverage are, like the song says "riding dirty." ?

Remember, you do not have the cash in the bank or a rich uncle willing to step in and cover your potential liability. ?So the insurer is basically the stand-in for that rich uncle. ?

The fact that you may have driven for years without an accident does not void the service that was provided, made the premium unearned, or made it “wasted money.” ?

"WASTED MONEY" IS SUBJECTIVE

Most consumers have hundred of cable channels which they can never watch because there is just not enough hours in the day. ?Yet, they continue paying for it anyway, even consider it a necessity in their lives, and do not view it as a “waste of money.” ?Nor do they expect a refund because they did not watch all the cable channels.

However, I guarantee if you have an accident and you are deemed the responsible for the other person’s injuries, your cable company will not be covering your financial liability.

That overpriced cup of fancy coffee we must have every morning on the way to work could be considered “wasted” money. ?The cost of that daily cup of Joe, added up over a one year period of time, could easily add up to a couple thousand dollars. ?Approximately the same amount of money that many people are paying for auto insurance. ?But, I guarantee that coffee company will not pay out for your liability in the event of an auto accident.

There are so many things we pay for daily, which in no way enhances our lives, improve our health, and certainly will not pay for out for our financial liability in the event of an auto accident. Yet, we do not view them as "wasted money."

THE RICH UNCLE YOU DID NOT HAVE

Insurance is not something you can see, smell, taste, and touch. ?It’s value is not appreciated until you are looking down the barrel of an outsized liability. ?Until one is faced with such an unfortunate circumstance, it’s easy to dismiss it as being a "waste."

Auto insurers stand in place of that rich uncle we do not have, who will come to our financial rescue when the unthinkable happens.

Unless we are all obscenely wealthy, we all need a rich “Uncle Croesus.” ?The auto insurance company is our “Uncle Croesus,” if we are deemed the guilty party in a serious auto accident.

These factors need be taken in consideration.

Perspective is everything.