What is the point of putting money into an insurance company if they will never give you more than this amount

Question

The problem with insurance is that the insurance company must make a profit. So, if I have invested $100 000 in the insurance company, and my house burns down and the cost is $100 000, how much will I get for the damages? $100 000? No! The company must give you less so it can make a profit. So, why not just use my own $100 000 in the first place, without letting the insurance company become the winner?

Answer 1

First I will assume you are talking about life insurance. If that is the case I have never seen a life insurance policy that over a life time would ever cost more than the death benefit.

Answer 2

If you want to invest your own money and hope you'll have enough to cover whatever the emergency is then you don't need to buy insurance.  Just make sure that you have enough to replace your home and all your belongings as well as medical and dental, replace your car (or someone else's) and enough to cover if you ever get sued.

To me, it's worth the $100/year for the multi-million dollar umbrella policy.

Answer 3

As Mbrcatz17 stated, it is not intended to be an investment or savings account to get out what you put in, plus a little extra. First of all, you do not "invest" $100k to cover $100k, that would be rather rediculous. No one does that, or could. You pay a monthly or annual premium which is much smaller than the amount you are covering. Besides, if you ask for coverage of $100k, they will pay upto $100k. You dont get extra because you feel like you should & if your claim is for $73k, you also will not get $100k, you will get $73k.

If you want to play Vegas with your insurance, just allow a catastrophy to happen right after you make your 1st payment. Then, you only put in $500 & got a $100k payout! That will show them! Keep in mind that you may get denied due to suspicion & you may not be able to be insured again after that, but you would have taught them a lesson at least.

I know it is popular to beat up on insurance companies/agents & how they rip you off by denying your claim that you thought was covered but realy wasnt, or they charge you additional only because you are a higher risk, or dont cover things at all that they know will cost them thousands extra and so on. But that is done by those who dont understand what insurance is, or how it works.

Answer 4

Insurance is NOT an investment.  As you so clearly indicate, it's not INTENDED to "get your money back".  That would be a SAVINGS account.

Insurance is a tool to TRANSFER RISK.  That means, you pay a small (relatively) regular amount, in exchange for the insurance company taking the potential (but not absolute!) financial hit - a much larger loss - if a particular something happens.

Example:  You pay $100 a month for car insurance, but if/when you have an accident, the insurance company is on the hook for potentially a hundred thousand dollars - or even more.  You CAN afford the $100 a month (even if you resent it) but likely CAN'T afford the six figure loss, if it should happen.

Second Example:  You pay $300 a month for health insurance.  Sure, you'll probably put in about $500 of claims, but if something big and bad happens (think appendix removed, or an emergency C section, or God forbid, cancer) again, the insurance company will pay hundreds of thousands of dollars that YOU can't afford to pay.

If you want something that will give you your money back, put it in a savings account.  BUT, if you want to transfer the risk of something catastrophic happening, that would leave you with your wages garnished until you're 80 so you'll never OWN anything, buy insurance.

** RUN THE NUMBERS.  It doesn't WORK that way.  You DON'T have $100,000 in premium (remember, it's NOT an investment!), EVER.  Figure, a house insured for $100K, probably costs about $500 a year for insurance.  In order to pay in $100,000, you must pay that premium FOR 200 YEARS.  Please!  And you WILL have a few claims in that 200 year time!!  MOST people have a homeowners claim once every 5 - 10 years.  Some have them more often, some less, but that's about the AVERAGE.  Maybe 1 in 100 claims is a TOTAL LOSS, but there are lots of five figure partial losses.  

The point is - even if you pay cash for your house, unless you can afford to pay out a second time, $100,000, it's SMARTER to pay the insurance company the $500 a year, and do something ELSE with your $950,000.  Even if you put it in a CD, it will make more money than $500, AND you get paid if you have MORE THAN ONE CLAIM!!!

Insurance companies DON'T make money from the premiums you pay in.  The average homeowners carrier pays out $1.07 in claims for every $1 they take in, in premium.  

They make their money, by investing the reserves - the money set aside to pay claims.  THAT'S where their profits are.  AND it makes the extra money they need, to pay their claims, and keep premiums lower than claims payouts demand.