The Low Cost Insurance Myth in 3 Visuals
The Myth: The lowest cost insurance is all you need because buying insurance is a waste of money to begin with.
OK, so the title is a little click-bait-y. Occassionally, the lowest priced option is the right choice or at least not the wrong choice. And some insurance for your business, organization, or non-profit is always better than none. However, the world of insurance solutions is so complex that more often than not, the lowest cost option doesn’t protect you from everything you need or expect it to. And most folks can’t be faulted for leaning towards the lowest priced option because we are constantly bombarded by advertisements and sales people that promise to ‘Save You X%’. That and you only know the pain of having an insurance claim gone wrong if it has happened to you…and it’s only nerdy insurance types, like yours truly, that go looking for stories about insurance claims gone awry. The following three examples will demonstrate why you shouldn’t jump to purchase the lowest cost insurance and give a second look at those higher priced insurance solutions, just in case they represent a better value for your money.
1. Swiss Cheese
Insurance policies are like swiss cheese. What? Yeah they are. You order a block of cheese at the local grocery store or peapod or amazon. You expect to get a whole block of cheese but what you get is a block of cheese with holes in it. Well that’s actually a good and bad thing. It’s good because if insurance covered every single loss, claim, or bit of damage you might incur, it would be like buying a $1 million block of cheese. Covering every possibility would make insurance way too expensive for almost anyone to afford. Often (not always) insurers need to make more and bigger holes to be the ‘cheapest’. Now the downside. Those holes represent the claims you have to dig into your pocket to pay a large chunk of, or in the worst-case scenario, all of.
Here’s the kicker. No two blocks of cheese are the same, just like insurance policies from different insurance companies. The gaps in the coverage (the things the insurance companies don’t want to pay for) differ greatly. Sometimes, you need to pony up a little extra money so your cheese is closer to a full block or set aside a little extra cash in case you’re left unfulfilled by your ‘hole-y’ cheese. Especially if the holes that get plugged are the ones that are most likely to affect your business or organization. In either case, the lowest priced cheese may not exactly be the cheapest!
Don’t like cheese? Try on this quote from Eric Schlosser:
“Fast food is popular because it’s convenient, it’s cheap, and it tastes good. But the real cost of eating fast food never appears on the menu.”
2. A Motorcycle
Hang with me now. I know what you’re thinking but we’ll get there. Everyone has a need to travel between two points at some point in their life. Most of us have that need daily. You have a huge number of options to get from A to B. Most of us choose an automobile. But did you ever think that a motorcycle can achieve the same goal? Plus, it’s cheaper! Lower cost for the vehicle, less gas, lower insurance premiums, etc. So why don’t more people choose to travel on a motorcycle? In short, it’s more dangerous. There’s more of an opportunity that you could suffer harm. How do responsible motorcyclists offset that higher risk of ending up in the hospital? They buy a helmet, leather jacket, leather pants, boots, and additional driver training.
This is exactly like knowlingly going with a cheaper insurance policy if it doesn’t protect you from as much. Your business or organization will need to offset the missing protection from the insurance policy with more spending on risk management to reduce the likelihood that you’ll have a loss. Safety training, safer equipment, and updated ways of doing business all carry an expense. Now you always have the option of throwing caution to the wind and operating without all that stuff but we all know where that could potentially end up…
Regardless, the higher risk of the vehicle and the money spent on additional safety and risk management expenses mean the cheaper option isn’t as cheap as the sticker price might have you think.
3. A Rotary Phone
A pretty obtuse example, I know. But is it? Technology changes every day. If you told someone 30 years ago that there’d be a phone you could not only make calls from but use to make video calls, text, play music, take high quality pictures, play video games, and automate your life…they would’ve lauged themselves silly. And yet, here we are. You still have the option to choose a rotary phone with a land line to make phone calls. It will dial internationally and connect you fairly reliably to whomever you want to call. However, you would be giving up on the massive innovation that exists inside of a smart phone. Plus I’m sure a rotary phone and land line cost a lot less than a brand new iphone and the cell carrier’s data package. But you’re not going to give up on all of the advantages the new, more expensive gadget gives you.
This has never been more apparent in insurance than right now. The evolving coverages of cyber liability and data security insurance are perfect examples. Older versions of policies are out there and they’re typically cheaper. The more complex the world of cyber gets, the more insurance carriers need to innovate. And unfortunately, newer risks are always more expensive to insure because the insurers don’t have years of data to back up how they price things. So they will always try to shoot for the over and not the under. I could make the argument that any present day business or organization that doesn’t have cyber insurance or is relying on an add-on of cyber coverage to one of their other policies is leaving themselves open to a world of pain. Especially with the rate at which cyber attacks are increasing. But that’s a topic for another article.
I think you see the point. Cheap doesn’t always equal affordable. In addition, the higher insurance premium option isn’t always the more expensive one. Especially if you have a major claim! So finally, a word of advice. Focus on the total value of what you’re buying. Just like you would when buying cheese, a way to get to work, or a device to communicate with.
Want to take the next step? Try your hand at identifying what major risks different business owners and organizational leaders might face by taking our short quiz. Maybe your type of operation is represented and you can double check your own assumptions!