Why do we buy insurance?

The process of buying insurance can seem like a heavy load.  Many people are under-educated on insurance; but they all know one thing:  They need coverage.  Historically, that hasn’t always been the case.

Why has our society shifted this way?  Is it tradition?  Is it law?
It’s both.  Even in the democratic/capitalistic society we live in, insurance is mandated by both tradition and law.

Traditionally being uninsured/under-insured is a recipe for financial disaster.  Drive with state minimums on your car coverage?  Boom, a 3-car pile-up suddenly has you facing bankruptcy.  Not properly covered with your home insurance? Boom, one bad storm and you’re homeless.  You went the cheap route on your business or commercial insurance?  Yep, that’s right, one bad liability claim and you’re suddenly updating your resume.  Even reading this now, you probably aren’t getting that worried though, because insurance has been ingrained in your head since before you ever thought about buying it.  Everyone knows someone that once had a life changing event from not having the right coverage; and they made a point to make it very clear to learn from their mistake.

Why is insurance mandated by law?

This is broader, but it’s literally social welfare.  The earliest forms of homeowners insurance were nothing more than a group of people living in proximity to each other. This group also set aside a set amount of money to be used in the event that any of their members suffered a loss due to a natural cause.  Think about what would happen if you and your neighbors didn’t have insurance… if we suddenly had a tornado rip apart an entire zip code full of uninsured/under-insured residents, we would have a complete collapse of the entire local economy.  Like a series of dominoes, the entire zip code would require federal and state relief to rebound, if even possible.  Now imagine that on a federal level…

Insurance actually helps level out the disparity between social classes too. By making it a requirement, it drives the overall prices of premiums down, by adding more deposits into whole claims funds. Only the rich would buy coverage if it was not mandatory, therefore the demand for competitive rates would increase due to smaller sample sizes and less products on the market, effectively increasing the prices.

Keeping Real Estate pricing affordable is a key aspect of insurance also, as it allows financial institutions to loan money with reduced risk.  No coverage means significantly less loans and/or at hyper-inflated interest rates, typically regarded as not affordable in the first place.

Even if you never make a single claim, insurance is making your life easier, less expensive, and more secure from a societal standpoint alone.  Next time you see that premium payment leave your checking account, remember that you are protected and insurance is the reason our entire society doesn’t collapse after a disaster.

Written by Jordan Giesemann, from the Dubuque, Iowa office at Gnade Insurance Group.
Jordan is a Licensed Agent, specializing in Property & Casualty Insurance.
You can reach him at jordan@GnadeDBQ.com or www.GnadeDBQ.com

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