Why should we think of insurance as a last resort?


To some, having insurance only as a last resort can sound a little odd. You’re paying for it, so why shouldn’t you be using it? In today’s struggle for financial security, it can seem like a slap in the face to keep paying for something you won’t end up using unless you need to.

Treating insurance as a universal safety net, even when it isn’t necessary, can lead to excessive premiums and even more money out of your pocket. Let’s dig into that.

What is insurance used for?

Insurance is a financial product that is designed to protect against specific types of risk. Car insurance, for example, is usually designed to protect against physical repair costs, liability claims, and temporary arrangements for a replacement vehicle. By paying your premiums, the insured transfers over their risk of a larger, more uncertain loss to an insurance company. This model works based on the pooling of risk across many policyholders, allowing the insurer to pay out claims from the accumulated premiums.

Insurance limitations

Insurance isn’t a catch-all. Not all insurance policies are considered the most cost-effective method of reducing risk, especially when considering the risk’s magnitude and likelihood. Policies also have exclusions and limits, so not all scenarios are covered.

Another thing to consider is reliance. Insurance creates a dependency culture, where over-reliance can discourage businesses from managing their risks proactively.

Filing too many claims can increase your premiums

The more claims you file, the more you’ll pay for your insurance. Here’s how that works:

Individuals, entities, and households that have made numerous claims are perceived as likelier to make future claims. This is because they’ve created a pattern of dependence on insurance and are statistically likelier to need to file a claim again. Making plenty of small, unnecessary claims is generally not recommended since this causes your insurance to pay out more, and your insurance company, as a way to combat the risk for themselves, may raise your rates.

You might be thinking, “then what’s the point of insurance?” Well, for one, in many situations, it’s required. Two, it’s meant to be used for losses that would otherwise be financially damaging—not the occasional block of hail breaking a window or two in your home. If your car was destroyed in a wreck when someone T-boned you while running a red light, your insurance would come into play.

The homeowner who filed multiple claims for the hail breaking their windows might end up paying hundreds of dollars more for their insurance down the line, which ultimately outweighs what they would have paid had they simply fixed the windows on their own.

What happens if you file too many claims?

Accidents happen. If you need to file a claim, you should file a claim. However, determining when it’s necessary to file a claim is also a good skill to have.

If you’ve experienced a loss, consult with your insurance agent. This doesn’t mean you’re necessarily starting the process of making a claim. Discuss the full implications with your agent, if the claim is necessary, the estimated damage cost, and how your insurance premiums could be impacted in the future. They’ll advise whether it’s worth filing or if you should pursue other options.

If you have a claims-free discount or accident waiver, you’ll lose those upon filing your first claim. Filing frequent claims will continually reset the clock on these discounts, which you’ll generally receive upon having 3+ years of being claims-free. Again, you should rely on your insurance if it’s a significant loss, but if you’re 50/50 on filing a smaller claim, then you may want to think twice about what it will cost you in the long haul.

Filing numerous claims also has the potential to impact your insurability. Since insurers will need to know your insurance history when buying a new policy, all your past claims in the last 3–6 years will be made known. Your insurer may assess your previous claims and decide to alter the terms of your coverage by reducing limits, increasing your deductible, or even excluding types of coverage that you were previously eligible for. This forces you to bear more of the risk yourself. This can also put you in a bad situation if, say, you were required to carry comprehensive and collision insurance per your dealership’s requirements but your insurer will no longer offer it to you as a result of your claims’ history.

Not sure whether to file a claim? Let’s talk

Experienced a loss but are unsure whether to file a claim? Talk with an agent. They should be able to give you the advice you need on whether it’s worth it to file a claim through your insurer, or if it’s better that you handle the damages yourself to avoid a potential premium increase. It’s always good to know you have insurance to fall back on, but knowing when and where to file a claim is key to keeping your premiums low!