Insurance Policies are not Savings Accounts!

Published Date: 12/31/2023

Insurance Policies Are Not Savings Accounts: Understanding What You’re Really Paying For

One of the most common misconceptions about insurance—whether home, auto, or life—is that it’s a kind of savings plan. You pay into it, year after year, and somewhere in the back of your mind, you expect to get something back. After all, that’s how bank accounts, investments, and retirement funds work, right?

Not quite.

As insurance expert Karl Susman often reminds his listeners on The Insurance Hour, “Your insurance policy is not a savings account. Your insurance policy is an insurance policy. There is a difference.”

That difference is more than just semantics—it’s foundational to understanding how the entire insurance system functions, and why confusion about it causes so many people to feel frustrated, cheated, or misled.

The Core Idea: Hope You Never Use It

When you deposit money in a savings account, your goal is to grow your funds. You expect to get your principal back, plus interest. It’s a predictable, cumulative relationship between your money and your returns.

An insurance policy, however, operates on a completely different premise. You pay a premium not as an investment but as a shared risk contribution—a pool of resources designed to protect you and others from financial ruin in the event of a loss.

As Susman puts it:

“With an insurance policy, you put money in, and you hope you never get a penny out. Because if you get a penny out, it means something bad has happened.”

That’s the paradox of insurance—it’s the only financial product you buy hoping you never have to use.

Why the Misunderstanding Happens

Insurance feels transactional. You write checks, sometimes for decades, and see no immediate return. Human psychology naturally seeks reciprocity—if you give something, you expect something back. When that doesn’t happen, frustration builds.

But unlike a deposit, an insurance premium isn’t money you’re setting aside for yourself—it’s money you’re contributing to a collective safety net. That net helps thousands of other policyholders recover from fires, accidents, and disasters.

You’re not “paying into” your future claim. You’re buying peace of mind that if disaster strikes, your insurer will absorb the financial shock so you don’t have to.

This misunderstanding often leads to dangerous thinking—people start viewing their policies as personal piggy banks to be “cashed in” when times get tough. That mindset can lead to:

• Unnecessary claims for minor issues.
• Frustration when deductibles or exclusions apply.
• Cancellations or rate hikes from excessive claims activity.

The Math Behind the Model

Insurance is built on a principle called risk pooling. Every policyholder contributes a small, predictable amount (their premium) to a collective fund. That fund then pays out large, unpredictable losses to the few who actually experience them.

Imagine 1,000 homeowners each pay $1,000 a year for fire insurance. That’s $1 million in total premiums collected. If 10 homes burn down and cost $100,000 each to rebuild, the pool covers those losses—everyone shared the cost of the few who suffered major damage.

If insurance worked like a savings account—where everyone got their money back—it would collapse instantly. There would be nothing left to cover those catastrophic losses.

That’s why your premiums are nonrefundable. They weren’t saved for you—they were spent protecting others, and in turn, others are contributing to protect you.

You’re Paying for Risk Transfer, Not Refunds

The real product you’re buying is risk transfer—the ability to shift potentially devastating financial exposure from yourself to an insurer.

Without insurance, a single event—a house fire, car crash, or medical emergency—could erase a lifetime of savings. With insurance, that same event becomes an inconvenience, not a catastrophe.

You’re not pre-paying for a payout. You’re paying for a guarantee that if disaster strikes, someone else shoulders the bulk of the cost.

That peace of mind is the “return” on your premium.

The Problem with ‘I Want My Money Back’ Thinking

When consumers view insurance as an investment, they often make poor financial decisions—canceling coverage when they don’t “see a benefit,” shopping only for the lowest price, or filing small, unnecessary claims to “get their money’s worth.”

These short-term behaviors can have long-term consequences:

• Frequent small claims can push you into a higher-risk category, raising future premiums.
• Dropping coverage to save money can leave you uninsured when you need it most.
• Choosing the cheapest policy may mean accepting higher deductibles or coverage gaps that lead to denied claims later.

As Susman often emphasizes, “Insurance isn’t a savings plan. It’s a shield.”

But What About Life Insurance? Isn’t That an Investment?

This is where the confusion deepens. Some life insurance products—like whole life or universal life—do have savings or investment components. They accumulate cash value over time, which can be borrowed against or cashed out.

However, most people carry term life insurance, which is pure protection. It’s like renting coverage—you pay for a specific period, and if you outlive the term, the policy simply expires.

Even with cash-value life insurance, the primary function remains protection. The “savings” portion is secondary, often less efficient than traditional investments like retirement accounts or mutual funds.

As Susman explains, “If your goal is to save money, go to a bank. If your goal is to protect your family, buy insurance. They’re different tools for different jobs.”

How This Misconception Affects the Market

When too many people treat insurance as a savings plan or a refund system, it creates ripple effects across the entire market. Frequent claims for minor losses increase overall costs, forcing insurers to raise rates for everyone.

This behavior can also distort public perception. People start viewing insurers as “greedy corporations that take your money and never pay out,” when in reality, most legitimate claims are paid—just not for every inconvenience or maintenance issue.

Susman often points out that “insurance isn’t designed for the predictable—it’s designed for the catastrophic.” Home maintenance, car repairs, and gradual wear and tear aren’t covered because they’re part of normal ownership costs, not unforeseen losses.

Reframing the Way We Think About Premiums

To build a healthier relationship with insurance, consumers should stop asking, “What am I getting for my premium?” and start asking, “What risk am I transferring for my premium?”

That shift changes the entire mindset from entitlement to empowerment. You’re not buying a refund—you’re buying resilience.

Think of your premium like the cost of living safely in a risky world. You’re paying to ensure that one bad day doesn’t ruin everything you’ve worked for.

The Real Return: Financial Stability

Ironically, the less you use your insurance, the better it’s working. Every year you go without filing a claim means you’ve avoided a loss—a win both financially and emotionally.

The “return” on your insurance isn’t measured in checks—it’s measured in security, stability, and recovery potential.

It’s the knowledge that if your home burns down, your car is stolen, or you’re sued after an accident, your financial future remains intact.

That’s a return no savings account can match.

Final Thoughts: Respect the Difference

At the end of the day, Karl Susman’s message is simple but profound:

“Your insurance policy is not a savings account. Your insurance policy is an insurance policy.”

You buy insurance not to make money—but to avoid losing it. It’s a safeguard against the unpredictable, not a deposit for the predictable.

And when we start to see it that way, frustration turns into understanding, and fear turns into confidence. Because in a world where risk is unavoidable, the real investment is peace of mind.