Insurance Is Not An Emergency Fund

We all have insurance.  Well, we should all have insurance.  At the very least, car insurance (if you own a car) and renters insurance (if you have anything at all.)  I’ve been meaning for a very, very long time to write about making claims on your insurance, and why you should avoid doing it.

The purpose of insurance is to protect you against catastrophic losses.  It is not designed to protect against little things.  Insurance companies employ special math-smart folks called actuaries to do all sorts of projections about the likelihood that a person will make a claim against the policy.  These projections help to set the premiums for your policies, since the total of all the premiums for a certain group needs to be enough to cover all the claims for that group.  (By law, in fact, it needs to be more because insurance companies are required to carry large reserves, but that is an entirely separate issue.)

Which brings me to the topic of non-catastrophic claims.  My friend once posted, on Facebook, a picture of her dented bumper.  The caption referenced her “$500 deductible.”  I wanted to scream through the computer.  The bumper wasn’t severely damaged; heck, I probably wouldn’t even bother fixing it.  (I’m just not that into cars.)  However, she obviously planned to make a claim against her insurance for the $200 or $500 or $1000 that the cost of the repair exceeded her deductible.  Bad idea!

First, your insurance company knows that, statistically, one small claim is very likely to mean another small claim.  That is why claims increase your insurance costs.  You could even have your insurance cancelled.  This happened to my husband and I, before I understood about insurance.  We had a personal property policy for my engagement ring and his college ring.  I lost my engagement ring and the stone broke in his college ring, within a few months of each other.  Our insurance company dropped our coverage.  It turned out OK, as I decided that we probably didn’t really need that coverage anyway.  However, it was an eye-opening experience.

Second, every claim you make against your insurance becomes part of your Comprehensive Loss Underwriting Exchange (CLUE), which is like a credit report but it deals with your insurance claims and inquiries.  That means that your claims history is available to any insurance company that you want to use, and they’ll have the same higher premiums or declined coverage if you have a lousy claims history.

My friend Hank Coleman recently posted on this topic at DailyFinance.com.  I don’t agree with everything he says, but I agree with the general principle of his article.  I know he is trying to evoke emotion with the title, but I don’t want anyone’s policy to be cancelled.  I just want their rates jacked up until they figure out that insurance isn’t for small stuff.

One way to help yourself save money and self-insure for small losses is to have the largest deductible possible.  For example, we carry $2500 deductibles on our houses, and $1000 deductibles on our cars.  This keeps our rates low.  The money we save on insurance goes into savings to pay for those little things that do happen.

Understanding how insurance is designed to work is the best way to keep your policy premiums from jumping or even having your policy be cancelled.

About the Author

Kate Horrell
Kate Horrell is a military financial coach, mom of four teens, and Navy spouse. She has a background in taxes and mortgage banking, and a trove of experience helping other military families with their money. Follow her on twitter @realKateHorrell.
  • Kate, thanks for the mention. You are 100% right. The title is meant to be a little controversial and thought provoking. But, in the end, I don’t want anyone to needlessly suffer with canceled insurance. I absolutely love your idea of insurance companies raising rates though to make it unprofitable for people to make fraudulent claims. Perfect! Thanks again!