Photo (cc) by OpenSkyMedia
Insuring your car, home, health and life. Important? You bet. Expensive? Extremely.
I once read that insurance premiums can consume nearly 8% of your expendable cash. Which means there’s probably no other area of your financial life where you know less and spend more. If you’re going to spend that kind of money, learn something about it: especially how to get the biggest bang for your buck.
Here’s a story that I recently did on insurance savings: it’s only 90 seconds long. Check it out, then meet me on the other side for more.
Now that you’ve got a few general principles, let’s get into a little more detail. I wrote a book a few years back called Money Made Simple. It explains pretty much everything you ever wanted to know about most facets of finances, including insurance. And since I’d rather go play outside than retype what I’ve already typed once, I’m going to post excerpts of it here and add more over the next few days. It’s pretty long, so grab a soda, sit back and relax.
From the insurance chapter of Money Made Simple:
Here’s the thing with insurance: if you buy enough to insulate yourself from financial inconvenience rather than financial calamity, you’ll create a financial calamity trying to pay for all your insurance. Which is the only financial calamity left in the United States that can’t be insured against. I’m sure they’re working on it.
When you start keeping track of your expenses, one of the first things you’ll notice is the amount of money you’re spending on the plethora of policies designed to keep you from the poorhouse in the event of accident, illness or injury. If you find that about eight percent of all the money you get your hands on is being handed to an insurance company, congratulations; you’re an average American.
What doesn’t make sense is basing your insurance-buying decisions on the advice from a person who directly benefits from its sale. And yet that’s precisely what you do when you call an insurance agent and ask them what kind and how much insurance to buy. Stop doing that to the extent possible by learning the minimum necessary to understand what you’re buying, then buying the minimum necessary to stave off catastrophe, not inconvenience.
Let’s take each category of insurance one at a time. As we do this, I’ll tell you a few things to look for and tell you how to organize and shop for each. But before we do this, you need to understand the logic that underlies my minimizing my insurance purchases. It’s simply that insurance is not only a boring thing to buy…it’s also not a great use of money.
Slot machines typically pay out from 80 to 90 cents of every dollar they take in. But with some types of insurance, like credit life, insurance companies sometimes pay out less than 50 cents for every dollar they take in. Granted, there are more expenses associated with maintaining insurance policies than slot machines. But the point remains that buying more insurance than you absolutely need will divert money from better spots, which doesn’t include slot machines but does include your savings.
This is not to say that you should abandon insurance entirely; in many situations you definitely do need insurance. But never a penny more than what it will take to fend off catastrophe, not inconvenience.
Let’s start our view of insurance with a look at the automotive variety.
If you’ve organized your finances and have everything on your computer, you know how much you’re spending on car insurance. Now it’s time to create a spreadsheet so you can see what you’re paying for. Pull out your car policy and write down the pertinent information: what’s covered, deductibles, phone numbers, policy due dates, etc. Having this information in one place will not only give you a glimpse at the big picture, it will make shopping for better rates a snap. It will also make you feel in control. As I said in the chapter on organization, I use Microsoft Excel for my insurance spreadsheets, but you can use just about any program that will allow you to write stuff down and keep it straight.
As an example, here’s my spreadsheet for the car I drive:
|Policy Number||XXX XX XX|
|Dates Due||10/1, 4/1|
|Liability (Part A)|
|Injury Each Person||$100,000||Maximum payment to each person I maim or kill.|
|Injury Each Accident||$300,000||$256||Maximum payment for each accident. 300/500 Injury: add $123.|
|Property Each Accident||$50,000||$120||Maximum payment for property I destroy. 100 Property: add $8 yr.|
|Personal Injury (Part B)||$10,000||$92||$2,000 Deductible No loss of work coverage. Required. 10K is all that’s offered in FL.|
|Uninsured Motorist (Part C)|
|Bodily Injury Each Person||$100,000||As above, but if some uninsured fool does the damage. This covers anyone in my vehicle.|
|Bodily Injury Each Accident||300,000||$188||You can’t get Property for UM. This can be raised, lowered, rejected.|
Before we look at what’s here, let’s look at what’s not. Notice that’s there’s no comprehensive or collision coverage on my car. Comprehensive and collision, a very expensive portion of any car insurance policy, is what would pay for damage to my car if I screw up and my car is injured as a result. It also would pay if my car gets stolen, vandalized or otherwise damaged. Why is this important coverage missing from my spreadsheet? Because I don’t have any.
When it comes to my mistakes with my car, I’m self-insured. How can I take this seemingly foolish risk? Because my car is a 1982, and despite the fact that it’s solid, dependable, cool to drive, leather-lined and equipped with a great sound system, it’s only worth about three grand. (Stacy’s note: I wrote this book in 2004: I’ve since replaced this car with one that’s only 10 years old instead of 20.)
So worst case scenario I’m out three grand to replace it. And that’s a risk I’m willing to take because comp and collision coverage would add hundreds to my bill every year. In other words, the cost/benefit isn’t there. One rule of thumb when it comes to comp and collision states that if your premiums exceed 10% of the value of the car, consider dropping the coverage. I considered. I dropped.
Had I taken the path of the vast majority of my peers, I would have spent 25 or 30 grand on a car. Then I wouldn’t have been able to make this decision because self-insuring a car that expensive would have been too risky. And if I had to borrow to buy my expensive car, I’d have to have comp and collision because my lender would make me.
See how sometimes less is more? Less car to insure, less time spent shopping coverage, less time spent working to pay for insurance, more time to watch Law and Order reruns. Even so, if I did choose to have comp and collision, I’d certainly have as high a deductible as I could afford: at least $1,000. That’s what I mean about covering against catastrophe instead of inconvenience. While losing a grand wouldn’t be a pleasant experience, it wouldn’t send me to McDonald’s for a second job either.
It’s never ceased to amaze me that so many people have $250 or $500 deductibles on their various insurance policies, yet would never think of filing a claim for less than a grand because they’d be justifiably afraid of a rate hike. This is the epitome of nuts, because you’re paying premiums that insure against financial inconvenience, but acting in a way that only insures against financial catastrophe. If you’re willing to lose $1,000 if you screw up, then raise your deductible and save 10 to 20% on your bill.
One more note regarding comprehensive before we move on. If you’re in a situation similar to mine…that is, you self-insure your own car and do away with comprehensive and collision, don’t forget this when you rent a car. Because if you don’t have comp and collision on your car at home, you won’t have it on cars you rent either. That means if you’re not given this coverage free as a perk on a credit card (call to make sure) you may have to voluntarily submit to one of the greatest rip-offs of the modern age: buying car insurance at a rental-car counter. If you don’t get it and total your rental, you could be on the hook for a much more expensive car than you’re used to self-insuring at home.
Ok, let’s look at the rest of my spreadsheet. The liability portion of my policy is coverage for damage I do to other people and their stuff. This is required by state law, and would otherwise be required by common sense anyway. As you can see, I can screw up to the tune of $100,000 per person and $300,000 per event, with a 50-grand limit on property. For my personal situation, this is probably not enough for a couple of reasons. First, I live in an area where a lot of people drive cars that are worth more than 50 grand. Second, depending on the day of the week and what the stock market is doing, I’m worth more than $300,000. So I could be assuming the risk that I’ll have to part with a lot of money if I screw up. Not good.
Here’s where I needed to see how much additional liability would cost, then plug it into the cost/benefit equation and decide what to do. I learned that the next level of coverage for injuring other people is 300/500, meaning $300,000 per person, $500,000 per accident. Should I choose to go this route, my note indicates that would add $123 per year to my bill. The next level of property coverage is $100,000. My note says I could increase my coverage in that category for only eight dollars per year.
The next part of my policy is Personal Injury Protection. This is insurance that covers me and my passengers if we’re hurt in an accident. This coverage is required where I live, but I’m only buying $10,000 worth and I’ve got a $2,000 deductible. Sound crazy? Well, keep in mind that no matter how I’m injured; plane, train or automobile, I’ve got medical insurance that will pay for my reassembly. I don’t carry passengers often, but those I do carry also tend to have health insurance. If the accident is my fault, my passengers will be covered by my liability and/or their health insurance. And as I said, I’ll be covered by my own health insurance. If the accident isn’t my fault, all of us will be covered by the other driver’s liability insurance and/or our health insurance. If the other driver doesn’t have insurance, then my uninsured motorist coverage will pay the medical bills for all of us.
The last thing on my policy is uninsured motorist coverage. As the name implies, uninsured motorist coverage pays for the damage caused by people careening around without liability insurance. Uninsured motorist coverage is not required in my state, but it may make sense to have because in addition to all the fancy cars I see around here, there are also many that appear to be held together with baling wire. It wouldn’t be a shock to learn that a driver with a plastic bag for a rear window neglected to pay their insurance bill.
In any case, unless I specify otherwise in writing, my insurer will provide this coverage in the same amount as my liability. What they don’t offer, however, is uninsured motorist coverage for property. So if an uninsured motorist totals my car, there won’t be any insurance to pay for it. (If I had comp and collision, that would pay, but as I’ve said, I don’t.) Therefore, when it comes to my car, the only justice I’ll receive in an accident with an uninsured motorist is from the pistol I keep in my glove compartment.
Now we’ve gone over my insurance bill for one of my two cars. While I’m sure you found it riveting, much of it will be meaningless to you unless you drive a car like mine, have the same driving record I have and live where I live. So what was the point of explaining it to you? So you’d see how I manage my car insurance and how you should.
Perhaps you think that I knew all this stuff about liability, collision, personal injury protection and uninsured motorist coverage because I’m a money expert. Wrong. I know this stuff because I called the toll-free number on my insurance policy, sat on the phone with some hapless customer service representative until I understood what I was paying for, and made notes. I went over each and every line of my insurance bill and made them explain it to me, over and over again until I understood it. Then, just to make sure, I repeated back what I thought I’d understood until my explanation matched theirs. When they didn’t know something (like why Personal Injury Protection coverage costs so much) I kept questioning them until they were forced to acknowledge their ignorance. Then, when I was sure I totally understood everything, I put them on hold while I made the notes you see on my spreadsheet. (While dealing with insurance is boring, making my insurance company wait was one of the most satisfying things I’ve ever done.)
Before you pick up the phone to do this, however, be aware of a couple of potential flies in the ointment. First, when you ask questions about your policy, your customer service representative will attempt to refer you back to your policy for answers. While you should have your policy at hand for ready reference, and verify what you’re told by finding it in your policy, your policy is a place to form questions, not answer them. It’s about as understandable as the income tax code. So be prepared for this blatant attempt at a brush-off and refuse to fall for it. If my insurance company wanted me to be able to find answers to my questions by looking at my policies, they should have written them in plain English.
In addition, don’t be surprised if the customer service representative you deal with gives you the wrong answer. They’re used to people calling with questions about where to send their check, not asking what the heck they’re paying for. So while you’re on the phone with the representative, look in your actual policy and make sure what you think you’re reading matches what you think they’re saying. If it doesn’t, challenge them. I’ve found their explanations to be incorrect about a third of the time.
Once I’d understood everything about this policy, including how much I’d spend to increase coverages and how much I’d save to reduce them, I was in the position of being able to decide how to customize my policy to meet my personal needs. For example, I could increase my liability so I’d be better protected in the event I messed up. And I could find the money to do that by dropping uninsured motorist coverage if I so desired. Why would I drop uninsured motorist? Remember that if I’m injured in an accident caused by an uninsured motorist, I won’t be left lying on the pavement because I have health insurance. And since uninsured motorist isn’t going to pay for damage to my car anyway, why do I have it?
As of the moment I cut and pasted this spreadsheet into this book, I hadn’t yet decided what to do. But I may decide to drop this coverage, increase my liability to $300,000 per person/ $500,000 per accident/$100,000 for property and still save $57 every year. (Dropping uninsured motorist saves me $188 per year. The additional liability for people costs $123, and for property, $8. $188 minus $123 minus $8 = $57.)
In addition to being able to make my coverage match my needs, having the facts at hand also allows me to shop this policy easily and virtually instantly. Let’s go through that exercise together. First, through the magic of computers, I add a few columns to my spreadsheet to accommodate quotes from other companies:
|Liability (Part A)
Injury Each Person
Injury Each Accident
Property Each Accident
|Personal Injury (Part B)||$10,000||$92||$263||$222|
|Uninsured Motorist (Part C)
Injury Each Person
Injury Each Accident
The first three companies were chosen for me by an insurance shopping website, quotesmith.com. (Stacy’s note: this is now insure.com) After shopping my policy they then presented what were presumably the three lowest priced policies, which are the first three listed on my spreadsheet: Esurance, Liberty Mutual and Hartford.
In order to shop my policy online, I had to input a lot of information, but pretty much everything I needed I had either in my head or on my spreadsheet. Inputting the required information took exactly 10 minutes and 42 seconds. Coincidentally, the approximate amount of time spent in commercial breaks during your typical half-hour sitcom.
About 30 seconds after submitting my info, I got back the results you see on my spreadsheet. Hartford was cheapest of the three at $787 per year, and Liberty Mutual was most at $863. Which means none was as low as what I’m already paying. The prices weren’t broken down for me by category: I only got the total. But that’s fine, because that’s all I’m really interested in anyway. Had prices been low enough to entice me to switch companies, I’d have called the companies and had them reveal details.
I could have stopped here, because all I was really trying to determine was that my current insurer is not ripping me off, and these results would indicate that they’re not. But I went on to get quotes from Geico and Progressive just to make sure. I chose Geico because they have historically been a low-cost insurer. Plus, their commercials feature a reptile and I like the idea of supporting companies that are at least willing to acknowledge that they’re cold-blooded. I chose Progressive because they insure my Harley, and do it at a much lower price than my current insurer would. Plus, their TV ads claim that they have the best online service, and that if they can’t provide me with the best quote, they’ll cheerfully furnish the names of companies who will.
It took seven minutes and 31 seconds to input the information necessary to get an online quote from Geico. Apparently lizards aren’t the only thing cold-blooded at Geico, however, because their quote was a chilling $1,100 a year. And look how much they’re charging for that $8,000 worth of personal injury protection…$263 a year! And I thought my current company’s $92 was a rip.
Progressive’s website got me a quote in seven minutes and 15 seconds. Alas, however, this company too was comically out of the ballpark: nearly $1,200 a year. In addition, despite what they promise in their commercials, they also didn’t furnish me with quotes from other competing companies. Their explanation for this was that my car is too old. What that has to do with anything will have to remain a mystery, however, because I wasn’t interested enough to call and challenge them on it.
Ok, now that we’ve shopped my car policy together, what have we learned? We’ve learned how to organize insurance so that we can quickly understand what we have, what we need and how to find competing prices. We’ve learned that we can visit with seven insurance companies (five through qutoesmith, plus Geico and Progressive) online in about twenty-five minutes total. And most pertinent, at least to me: we’ve learned that while it may appear I’m paying too much to insure my 1982 Mercedes, I’m actually getting a relatively good deal. This makes me feel like I have both hands on the wheel.
Just for the record, you may think based on my high rates that I have a horrible driving history. Not so. My driving record is spotless. But as anyone who lives in South Florida can attest, this is one of the most expensive spots on the planet to insure a car. Probably because actively participating in accidents is a curiously popular pastime here.
So here’s the bottom line when it comes to being better organized and better prepared to shop your car insurance: Create a spreadsheet, make some notes, shop some prices and you’re done for a year or two. If you want to read more and/or understand various types of insurance, you don’t need to go to a bookstore. Just go to the Insurance Information Institute’s web site. This organization is supported by the insurance industry, so it is perhaps not entirely objective. However, they do provide decent information when it comes to the basics.