Insurance Is Not a Commodity

By Richard A. McGrath, CIC, LIA

The Internet is a great place to buy books, clothing, tools, sporting goods and other commodities. However, it may not be the best place to buy your insurance coverage because insurance is not a commodity.

A commodity is a standardized product, such as grain, oil or gold.  When you buy a commodity, you can purchase it online, sight-unseen, and know what you’re getting.

When you buy insurance online, that is not the case.  There are some standard features in insurance policies, but there are also plenty of differences.  When you purchase it online, without help from a knowledgeable independent insurance agent, you risk purchasing coverage that doesn’t meet your needs.  You may also be wasting money on coverage you don’t need.

Auto insurance, as one example, may seem to be pretty much the same no matter which carrier you use, but it’s not.

Some auto insurers may not provide you with coverage if you are using a rental car or driving a loaner vehicle while your car is being repaired.  The policy may exclude coverage for undisclosed household residents, including a child who has moved back home and used your car.  It also may not cover you if you are a delivery driver.

When settling a claim, some auto insurance policies may not provide coverage if you are hit by an uninsured or underinsured driver.  Certain auto insurers may depreciate your brakes and tires if they need to be replaced as a result of an accident.

Homeowner’s insurance, likewise, differs between insurance carriers.  As one example, some homeowner’s policies now cover water and sewer service from the mainline to your home, in case there are breaks or leaks.  Most policies previously excluded such coverage.  Here in New England, as a result of freezing during the winter, line breaks are fairly common and coverage for them is worth considering.

We all want to save time and money, and the Internet can help accomplish that goal, because you can buy direct and cut out the middle man.

But when you buy insurance, you need a middle man, just as when you purchase an expensive suit, you need a tailor.  The middle man – your independent insurance agent – can fit you with the right insurance, ensuring that you have the right coverage at the right price.

Some forms of insurance – such as auto insurance and term life insurance – may seem like commodities, but there are important differences to keep in mind.  Different insurance policies and carriers have different exclusions, restrictions and claims settlement practices.  Some policies offer discounts when they are bundled with other policies.  You may also need certain riders to provide special coverage.

Price is one factor, of course, but it may not be the most important one.  You shouldn’t buy the cheapest insurance for the same reason you wouldn’t buy the cheapest clothes, the cheapest cuts of meat or the cheapest car.

You need to know what’s covered and what’s not, what your deductible is and the financial stability of the insurance carrier.  If you purchase insurance that you may not use for many years, such as long-term care insurance or life insurance, your premiums will be wasted if the carrier goes out of business before you or your beneficiaries file a claim.

Buying Insurance

Buying insurance is a lot like buying healthcare.  The comparison is appropriate – like healthcare, you need insurance when something bad happens, such as when you’re sick or when you have an accident.  When you’re sick, a doctor examines you, determines what you need and prescribes a cure, such as medication or an operation.  When you buy insurance, the insurance agent meets with you, diagnoses what you need and prescribes an insurance policy to meet those needs.

Your doctor, like your insurance agent, will take many factors into account, such as your age and your current health.  If the doctor does his or her job right, you should be cured or, at the least, the impact of your illness should be minimized.  If your insurance agent does his or her job right, you should end up with the coverage you need and the impact of any catastrophe or accident should be minimized.

The medicine a doctor prescribes is standardized, like a commodity, although there may be many choices of what and how much to prescribe.  Your doctor will choose the drug that he or she believes will do the best job, but often will also take into consideration what is covered by your insurance.

Like medication, insurance has some standard features, but your agent will make a recommendation based on your coverage needs, price, and the claims-handling experience and financial stability of the carrier.

You probably wouldn’t consider treating your health yourself, even though there is plenty of information online that can inform you about your medical condition.  Too much is at risk and, without a medical education, you don’t know enough to make your own medical decision, but it can be helpful to go online and become informed about potential options.

Likewise, with insurance, if you’re not in the industry, you likely don’t know the pros and cons of various insurance carriers, the regulations affecting coverage and the gaps that may exist in one policy in comparison with another policy.

No one is trying to sell healthcare as a commodity, but plenty of companies are trying to sell insurance as a commodity.

This might work if all people were alike, but they’re not.  Some are young, some are old.  Some are healthy, some are not.  Some have special coverage needs.  People differ by gender, income level and tolerance for risk.  The same insurance policy does not work for everyone.

When insurance is sold as a commodity, the client is, in turn, treated like a commodity – as if everyone were the same.

Consumers who buy insurance online and who think of insurance as a commodity may save money today, but the few dollars they save now may be a fraction of what they lose when they file a claim and find out that they don’t have the coverage they need.

Cheap insurance is only cheap until you file a claim.


Richard A. McGrath, CIC, LIA is President and CEO of McGrath Insurance Group, Inc. of Sturbridge, Mass.  He can be reached at rmcgrath@mcgrathinsurance.com.

This article is written for informational purposes only and should not be construed as providing legal advice.

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