When it comes to buying insurance, you’ve probably heard this expression before. While it would be great if you could, in fact, purchase insurance at the time of an emergency, it’s best to be prepared for the unexpected, no matter the likelihood of an event. This adage could be taken as a reminder to not neglect your insurance policies, but what does it really mean, and how does it relate to purchasing life insurance?
Let’s look at the basics
Merriam-Webster defines insurance as “an agreement in which a person makes regular payments to a company and the company promises to pay money if the person is injured or dies, or to pay money equal to the value of something (such as a house or car) if it is damaged, lost, or stolen.” But how does the insurance company decide if they want to enter into that arrangement? And how can they be sure they won’t have to pay out that money before they’ve collected enough from all their customers to pay that one claim?
The short answer is: they identify the risk.
One way an insurance company manages risk is by underwriting each insurance application they receive. Underwriting is the process of assessing risk and determining the premium (price) charged to insure against losses. This implies an element of probability – the likelihood an event will occur. So in our example, the risk is the fire. The potential loss is the value of the house. The probability is the likelihood that the house will be damaged or destroyed by the fire. If the house is already on fire, the probability is 100%, and therefore so is the likelihood of loss to at least one party, usually the insurance company.
How does this relate to life insurance?
It’s easy to put your insurance (or lack thereof) out of mind. When you’re healthy, you want to enjoy your health. You don’t want to think about the possibility of becoming sick or disabled. But the reality is it’s better for you to get insurance when you’re young and healthy, and being prepared in case something happens will save you and your loved ones a lot of stress and money. Here’s why.
Insurance companies are far more likely to offer their best terms when the likelihood of loss (paying a claim for death or disability benefits) is low. That’s also when customers will get the best premium, or rates, on their insurance. To an insurance company, being old and/or sick is not favourable and has a higher likelihood of loss, so if insurance is available it will be expensive. The “house on fire” saying is used to encourage people to consider their needs when times are good, even if it means thinking about unpleasant events when we don’t want to.
So don’t wait to buy house insurance when your (theoretical) house is on fire. Life throws us curveballs and doing what we can to prepare ourselves is totally in our control. To make buying insurance easy, let us shop around and find you the best quote for your needs. We promise you’ll feel great for doing it, and you’ll have peace of mind knowing you’ve already extinguished future fires.