After many years of paying insurance premiums, one of my clients expressed, “This has got to be one of the worst investments I have ever made. Look how much I pay every year and I have never even got a dime in return. I should go to Las Vegas and take my chances with the slot machines.” I guess he was working under the impression each premium dollar he spent was going into some kind of account set up for him to draw from when he would have to file a claim; or, if he never filed a claim he could get the premium back with interest. He must also have thought by paying his premium he was betting against himself in a gambling scheme. Neither of these thoughts are applicable to or compatible with the concept of insurance.
Insurance premiums are based on the possibility of loss with the hope no one would ever have the loss. Since none of us know the who, where, when, or how a loss may occur, we pool a fair share of the projected potential loss according to how much we have exposed to that potential loss. If we project $1,000,000 of loss among premium payers, and there are 1500 of us paying we would each have an annual premium of $666.66 to cover those potential losses. Since we are not all going to be insuring our houses at same value we can break our cost down to per $1000 of value which would mean someone insuring their home at $220,000 would pay $.000666 per 1000 or $146. A payer with $550,000 of exposure would pay $366, and so forth. If any of the premium payers has a $60,000 claim, their share would be the premium they paid while the rest of the loss would be covered by the reserves created by the combined premiums. In a perfectly calculated scenario at the end of the year claims would equal premiums paid in, and we would start the next year with a new set of calculations. It is apparent there are other forces, i.e., unexpected losses, administrative expenses, return on investments, etc. at play in calculating premiums; but this give an idea of how insurance premiums are projected. I have written in another article about the actuarial “high priests” and the important role they play in a company’s staying profitable.
The unfortunate thought that one is betting against oneself by paying his premium can be summarized very quickly. In gambling one person must lose for another one to win. In insurance one person takes the high ground in recognizing she may not have the loss, but by participating with an insurance premium she helps minimize the pain and suffering another may have to financially endure in order to maintain a quality of life. Win win.
If a person wants to continue thinking he is making an investment with a monetary return sometime down the road, he may want to be grateful this is an investment where you don’t want a return. Houses can be rebuilt, vehicles may be repaired, stolen jewelry can be replaced–but paintings done by your six year old of your old hunting dog, wedding photos showing the excitement of a new adventure, pictures of you with your veteran buddies, of a son standing by his mother smiling because he is taller than her now, of a daughter showing off her award-winning 4-H calf, of you sitting by the outdoor BBQ on the patio covered by the shade of the big maple tree–gone because the flames of the fire scorched them. Priceless and irreplaceable. I will take the premium payment yearly and keep those memories to be enjoyed from the veranda of my old home.