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Your insurance policy is not a bank account – contrary to popular belief.

April 13, 2009
Chris Garlasco, Owner & Managing Partner The Founders Insurance Group

Chris Garlasco, Owner & Managing Partner - The Founders Insurance Group

“I have been paying all these years for my insurance coverage and I have never had a claim yet the price goes up and I get nothing in return!” I hear this complaint so often that I can now say that phrase in six different languages and write it in three. No, not really. The very fact that I have dreamed about the ability to explain this common misunderstanding is in itself a bit disturbing to me. That desire speaks loudly to my need for a vacation.

In my last (and very first) blog, I spoke about the concept of insurance. If you are one of the rare few that may have missed my first entry, a quick review of “So….you want to be an insurance man?” may be very helpful.

Now for the common misconception: Your insurance policy is not a bank account. It is a contract to protect you, the consumer, for a given period of time. If you have any assets, your auto insurance should never be less than a minimum $300,000 of coverage. So for the upcoming year you purchase an insurance contract to cover that exposure. In some ways it is similar to placing a bet at the casino. You are betting your $1,500 premium (it could be more or less depending on your situation) in exchange for a possible $300,000 payout.

When the year is up, the contract is complete. If you didn’t have a loss, the money that you spent to cover that time period is gone and it has been used to cover the losses of others and the expense and profit of the insurance company. If you were one of the unfortunate ones that did have the $300,000 loss, the insurance company loses and you do not have to pay that money back. It cost you that premium to cover that exposure for that period of time. If you would like to purchase another yearly increment, the insurance company will offer you another contract. Depending on your driving performance and other factors, and your insurance company’s performance during that year, the upcoming year’s price will be offered to you in the form of a renewal policy. If you are fortunate enough to have a quality independent agent managing your risk, that renewal offer will be reviewed in detail and if needed, marketed out to other companies prior to reaching your mailbox.

It should be noted, when talking about auto insurance, not all insurance companies offer a one year contract. There are some insurance companies that only offer a six month contract. Although there are exceptions to the rule, generally it is in your best interest to purchase a one year policy whenever possible. It protects your rate level for the full year. Insurance carriers that only offer a six month auto policy want the flexibility to raise or lower rates more quickly. Which do you think happens most often?

Thank you for spending a moment with me, your humble risk manager.

Chris Garlasco

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