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How to Avoid Driving 3/4 of a Car; Insurance and Risk Management

Jim Correll, director Fab Lab ICC at Independence Community College, Independence Kansas 

The woman comes on the screen, standing with the Statue of Liberty in the background, talking about the fact that you wrecked your car and that your insurance company is only going to pay you about three-fourths of what it’s worth. “What are you supposed to do, drive three-fourths of a car?” Of course, if you were with her insurance company, you can opt to have not only enough money to buy a car of equal value, but one with up to 15,000 fewer miles. What she doesn’t say is that the premiums for her company’s option are drastically higher than the premiums for the policy that pays three-fourths of the value. 

The truth is that consumers and business owners can insure almost anything for almost any value. It’s all a matter of how much you want to pay, in the form of the premiums, to the insurance companies to assume all or part of the risk of peril. This should be a conscious, managed choice, not the outcome of a decision to find the cheapest premium possible. 

We are all at risk of losing everything; property, business, health and even life. We see this all the time in different parts of the United States and around the world. Floods, earthquakes, tornadoes, hurricanes, fires are all a threat as are damages by war, rioting and terrorism. There are both psychological and financial implications associated with the losses we incur over a lifetime. Finally, when we’re gone, these implications are experienced by our family, our employees and in some case our customers and vendors. 

Insurance companies exist so that we can elect to pay them, in the form of premiums, to assume somewhere between a very low percentage to all of the risk for us. The amount of money you pay in the form of premiums is directly proportional to the amount of risk you want to hire the insurance company to assume for you. Insurance companies are not benevolent organizations.  We should all be looking at insurance as a calculated agreement where we agree to pay the premium in exchange for the insurance company to assume part of our risk. To stay in business, the insurance companies have to estimate how much they have to charge in premiums in order to pay out the claims to satisfy their assumption of risk. Since they are not benevolent organizations, there has to be enough profit to make a reasonable return on investment for the people owning the company to think the venture to be worth their investment. 

It would be unreasonable to think that anyone could stand to read through even one, let alone all, the insurance policies related to our home, business and farm. That’s where the agent comes in. It is the job of the agent to work with their clients to establish the ratio of risk assumption to be shared with the company. The agent can present the premium cost difference between insuring a house or building for replacement value or current value; a vehicle for three-fourths replacement or more than replacement value. 

A good management plan would be to start today by saving a few extra dollars each month in an “insurance” savings account to use toward future deductibles and other risk losses. At some point in the future, work with your agent to gradually shift more of the risk away from the insurance company in order to lower premiums. The magic happens when you add the premium savings to your “insurance” savings account. If this process is done faithfully over several years, the “insurance” savings account will grow in value beyond what you take out to pay deductibles and lossesThis is a way to pay yourself instead of the insurance company. 

I’m no big fan of the big insurance companies. Ninety-two percent of them give the other eight a bad name. Instead of getting mad at the company that wants to give you three-fourths the value of the car you wrecked, find one of the many good insurance agents in our area to help you know what your coverage is and get the coverage you want. 

Jim Correll is the director of Fab Lab ICC at the Center for Innovation and Entrepreneurship on the campus of Independence Community College. He can be reached at (620) 252-5349 or by email at jcorrell@indycc.edu.


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