Insurance Premium, Insurance Policy

The above points illustrate a central truth about insurance: it is a business, and insurance companies are not in business in order to lose money. In order to remain profitable, insurance companies have expended prodigious resources over many decades—centuries, in some cases—to achieve an increasingly precise, quantitative understanding of the risk factors influencing nearly any conceivable loss.

The resulting policy decisions sometimes feel like rank discrimination—a male teenager, for example, will pay several times as much to insure the same car as a married man in his mid-thirties with a similar driving record—but the risk factors underlying these differences are no less real.

A direct consequence of the nature of insurance as a profit-driven business is that, in the theoretical long run, it will always cost more to insure a set of potential losses than it would cost simply to pay for the losses as they arise (otherwise known as self-insurance).

So why bother? Two reasons:
Most people do not have the ability to keep $200,000 in a savings account against the possibility that their house might burn down, or that they might sustain a partially disabling injury.
Even if a person had such resources, he would be much better served to grow them through investment. Most significant investments—such as real estate, or interest in a business—limit the immediate availability of resources in the event of a loss.

In other words, insurance is best viewed as a single component of an integrated financial plan. A well-organized set of insurance policies can free funds for more profitable investment, the returns from which can more than offset the cost of the insurance. Based on these considerations, a competent insurance agent or financial planner can assist you in choosing types and levels of insurance coverage that provide an optimal overall return, and the best possible financial security and stability for you and your family.