Buying an insurance policy is challenging and overwhelming at times. Hundreds of companies claim to provide the same coverage, yet the costs range across the board. One term life insurance quote seems to include the same coverage as another, yet it costs 20 dollars more from month to month.
It’s a confusing industry, and some people, to their detriment, don’t ever bother to learn it. Similarly, investing in insurance is a daunting task. Insurance stocks will never double in a day, so if you’re expecting that, you’re investing in the wrong place.
However, if you’re willing to take the time to learn insurance basics and be patient enough to wait for the market to explode, you could wind up making yourself some extra cash.
Insurance Is Here to Stay
Insurance is not the oldest industry globally, but it has been formally around since 1602 when The Dutch East India Company was founded. Back then, the main goal of insurance companies was to protect people from impending risks. Things like fires and property damage were among the most popular things to insure in the past.
Since companies began selling insurance coverage, the money spent has only increased. Today, you can hold an insurance policy on everything from a bicycle to a mansion. That means there are several different ways to invest in the insurance industry. Check out these best investment books if you’re just starting out.
The illustrious history of insurance and its positive outlook for the future make it a reliable investment because we know it isn’t going anywhere. Insurance is here to stay and will be dolling out premiums for a long time to come.
Understanding Insurance Basics
First things first, you need to understand the basic ins and outs of insurance and how companies make money in order to invest in a company that will give you a profit in the long run.
Contrary to the ever so popular commercials, insurance companies are not actually on your side. They, like all businesses, are out to make money. They do so in a variety of ways, but most are at the expense of the consumer. Catastrophic loss happens, and people want to be protected from it.
Most people seek to protect themselves from auto accidents, death, fires, or floods. While these things don’t often occur, having an insurance policy provides you protection if they do. The monthly premium that you as the consumer pays to protect yourself is the primary way insurance companies turn a profit.
The way they generate a profit from that is by betting that these catastrophic losses will not happen. For example, say you don’t die until you’re 95 years old; you’ve been paying life insurance on yourself that entire time. Money has been rolling in monthly for whichever company you chose to protect your life with.
It is essential to understand how insurers make money in order to feel confident investing in them. Once you understand that 99% of their profit is thanks to consumer premiums, you can make assumptions as to which company, industry, or agency is the best to bet your money on.
Insurance Companies Do Not Sell Products
One of the most important things to remember about profits and returns is that insurers do not manufacture and sell products for profit. That’s what makes investing in insurance companies a challenge.
Take, for example, a company that builds airplanes and sells to commercials airlines. They sell the planes at a higher price than it cost them to manufacture, and the job is done. However, for insurance companies, profit isn’t in the product — it’s in the money consumers give to them in monthly premiums.
Whether a company offers small business insurance or flood insurance, they rely solely on the premium that the customer pays out. They do not offer a tangible product that can be seen as an investment.
Consider the Duration of a Policy
The amount of time a policy remains in force is considered a duration. Meaning that the shorter a policy length, the less money will be made for insurance companies.
Health insurance is one of the shortest policies a consumer can purchase. If you need it for one month, someone will insure you. While you can buy health coverage that will last years, most people don’t. That means investing in health insurance could mean a more considerable risk to reward.
Life insurance, on the other hand, can have a duration of 20-30 years in most instances. That means a policyholder pays a monthly premium for up to 360 months if it is not paid out. That is both an excellent profit for the company and a smart investment for you.
When searching for an insurance company to invest in, check out how long their average policy length is. It could give you a look into if they’re turning a large profit or a minute one.
Investigate the Ratios
In insurance, there is something called a combined ratio. If you’re looking to invest in home, life, or auto insurers, you need to understand this number.
The combined ratio compares the sum of expenses and claims paid out to the insurer’s income off consumer premiums. The lower the number, the better off the company is.
If a company has a combined ratio of 100%, it means the losses and costs to run the company exactly matched the number of insurance premiums received. That would lead to an almost zero profit margin, which means it is a company you probably don’t want to invest in.
The combined ratio of each company can tell you a lot about how the company is doing financially and give you the inside scoop to investing.
Get Out There and Take a Risk
You should now understand the basics of investing in insurance. Once you’ve got this information down, insurance investing is just like every other industry. Find the most adequately managed team, search for the industry segment you prefer, and look for the most competitive prices.
Investing in insurance companies is not going to show profit overnight. Keep in mind that you also aren’t going to miraculously become Warren Buffet overnight. Yet, insurance stocks could be a quality supplement to your retirement fund or a little extra cash to hold for a rainy day. Remember to stick to the simple investments, and be patient in your endeavors.
Investing in insurance isn’t for everyone. Take the opportunity to learn the basics of insurance companies’ tendencies and look into why they make the trillions of dollars that they do. If you play your cards right, however, you could be looking at a premium, long-term investment.
Ethan Lichtenberg writes and researches for the life insurance comparison site, QuickQuote.com. He specializes in auto and travel insurance writing and enjoys reading Poe in sunny Tarpon Springs, Florida.