Should I file an insurance claim?

If something happens to your home or auto, and it is covered by your home insurance or auto insurance, should you file a claim? Why wouldn’t you file an insurance claim? Isn’t that the reason you buy insurance? Sometimes filing an insurance claim, even though it is a legitimate claim and you have coverage, is not in your best interest.

Isn’t that a rip off? The insurance company wants you to pay for insurance, but they don’t want you to use it. Why bother having insurance in the first place?

Before I explain why filing some insurance claims is bad for you, and not just bad for the greedy insurance company wanting to keep your money, let me explain the real reason why you need insurance.

The purpose of insurance is to protect you from an event which would ruin you financially if you do not have the insurance.

For example, you buy a house, financed by a mortgage. You make your mortgage payments for 10 years without incident.

Then, in the 11th year, 75% of your house burns in a fire. Your house was worth $300,000 when it burned down. You still owe $150,000 on your mortgage. The city requires you to pay for the cost to demolish and remove the 25% of your house still standing.

Without any homeowners insurance, you have lost the $150,000 equity in your house, your mortgage company will demand you pay the $150,000 balance owed on your mortgage immediately, and your city will charge you for the demolition & removal costs of the remains of your home.

You no longer have a place to live. You lost all your personal property in the fire. You paid $120,000 in mortgage payments over the last 10 years, and end up with nothing.

Without homeowners insurance, or without the proper amount & coverage, many people would be financially ruined and have to file bankruptcy. You lose everything you own in the fire, you are broke, in debt, and you can’t rent an apartment because of your ruined credit.

That is what insurance is for: to protect you from catastrophic events which can ruin your life. Obviously, these are the types of claims you DO file.

Fortunately, catastrophic events do not happen to everyone. Most people go their whole lives without having a house fire.

Although you are not likely to need your homeowners insurance to protect you from financial ruin, losing your home to damage from fires, hurricane, tornadoes, etc. is not so unlikely you can ignore the risk. This is why insurance was created.

Here is how you should consider insurance: you give up a relatively small amount of money (the insurance premium) to have the insurance protection you need if you are one of the unlucky few who need it.

Insurance companies can afford to pay you $500,000, to rebuild your house & replace your personal property, when your home burns down, even though you have paid only $7,500 in homeowners insurance premium over the last 10 years, because of all the other homeowners insurance customers paying their premium and not having a claim.

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Say, in the example I used above, The customer’s home did not have a fire. The customer paid $7,500 in homeowners insurance premium over 10 years, and has never had a claim.

Does the customer wish his roof will blow off his home, so he can pay his $500 deductible, but get his “money’s worth” from his homeowners insurance? I should hope not.

Home & auto insurance is not gambling. You don’t “win” by having a claim. The insurance company does not “win” by you not having a claim, because the insurance company will be paying someone else’s claim. And there is ALWAYS someone having a claim.

When you look at a large number of people, the number of people having claims, and the average dollar amount of a claim, is predictable. This is how an insurance company knows how much to charge each customer to pay claims, and make a profit.

Paying for auto or home insurance is the lesser of two evils. You give up your money in exchange for protection from a large financial loss which may never happen — and you hope it never does.

Over the years, insurance coverage has become broader to attract customers. Fire insurance became homeowners insurance, covering much more than fire.

Some auto insurance companies offer deductible rewards and accident forgiveness to get your business, but these features encourage you to file a claim.

Some homeowners insurance companies offer expanded coverage for personal property.

Say someone steals your $1,000 mountain bike, and you have a $500 deductible. You can file a claim and get paid $500.

Having your bike stolen is unfortunate, and it’s a shame for it to cost you money. But when you think about the real purpose of insurance, would the theft of your mountain bike cause you financial hardship?

Small claims are a big expense to an insurance company, and filing them can make your insurance expensive, or get your policy canceled by the insurance company.

Future blog posts will discuss property insurance — home, condo, mobile home & renters, then auto insurance, to help you know when and when not to file claims, and what can happen to your insurance when you have a claim.

Have you filed an insurance claim? Did you regret it later? Please leave a comment on my facebook page. Or, you can e-mail me at help@smartshopyourcarinsurance.com if you have questions and would like my help. Follow me on Twitter for important insurance consumer news and new blog entries at CarInsWatch.