Paycheck Chronicles

Insurance Is For Disasters

So, the other day, my friend posted a picture of a small fender-bender and the caption mentioned something about having to pay the insurance deductible.  My personal finance side screamed, "What?  You claimed that?"

Fortunately, my good manners prevented me from responding, but it kept bothering me.  Here's why:  making small claims against any insurance will raise your rates and end up costing you far more than the amount of those claims.  This is true for homeowners, auto, and personal property insurance.

Insurance policies are important and a wonderful thing.  They help protect each of us from being financially ruined by some sort of accident or disaster.  Imagine if there were no such thing as insurance, and you had a house fire or a bad auto wreck.  You'd be in big trouble.  Thankfully, insurance is available to spread the risk amongst a large group of people.

That said, it isn't a good idea to use your insurance policy to cover every little thing that happens.  Your policy rates are based upon your claim history because the statistics show that people who make claims are likely to make claims again in the future.  In order to properly balance the risk across the group, people who have made claims in the past are often going to be charged higher rates than those who have not made claims, or have not made a recent claim.  There are all sorts of other factors that contribute to your insurance premium rates, depending on the type of insurance, but many of them are things that you can not control.  Your claims history is one thing that is  absolutely within your control.

Making small claims against a homeowners, renters, personal property or auto insurance policy makes you look like a higher risk customer, so you'll pay more.  The thing is, you'll pay more every year for many years in the future, and the savings you gain from making the claim will usually quickly be negated by the extra premiums you'll pay to maintain your coverage.

For example, let's take my renter's insurance policy.  I don't think we've ever had a claim on that policy, and we get a no claims discount of somewhere around $65 per year.  Let's say I make a claim for a stolen laptop that might cost me $350 to replace.  Then I lose the no claim discount, and in a five, I've paid more in higher premiums than the amount of money that I received from the claim.  Most importantly, that is before I've even considered the amount of my deductible.

That conveniently brings me to my second point about not making small claims.  Once you've decided that you won't make piddly claims against your insurance policies, it is easy and prudent to raise your deductibles to the highest available levels.  That means lower premiums, which you can bank to offset the cost of any of those claims that you are not going to make.  For example, I just realized that I was paying collision coverage on my $4,000 Toyota Prius.  Now, my deductible is already $1,000, so I'm obviously not going to claim anything less than $1,000.  I'm also not going to claim anything that is going to cost me less than a couple of thousand dollars out of pocket, because I don't want to lose my good driver status.  Therefore, I'm basically not ever going to make a claim against this policy.  So why in the heck am I paying $250 per year for collision coverage on this car?  That is $250 per year that could go into my replacement car fund, for when this car dies or if something were to happen to it.

Here's the gist of what I'm trying to say:  It isn't economically sensible to make claims against your insurance for small things.  Insurance is best designed to be used in the case of disasters.  A car accident on a brand new car with medical bills - yup, that's why you have insurance. You also have insurance in case of a house fire, or a huge theft of all your valuables, or some other seriously bad situation.  Not making claims for small things will save you money because it will keep your premiums low, and it will also allow you to maintain higher deductibles, lowering your premiums even more.

Think about it.


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