Photo (cc) by David Hilowitz
Think about all the money you spend insuring your house, car, health, and life. If you’re like most people, it’s thousands of dollars. Now think about how much time you spend making sure you’re getting the biggest bang for your buck. If you’re like most people, it’s measured in minutes.
There’s probably no other area of most people’s financial lives where less attention is paid in relation to money spent. Maybe it’s time to learn something about insurance: especially how to pay as little as possible.
Here’s a video story that I 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 seen some general principles, let’s add some detail and turn them into the five golden rules of insurance.
Golden Rule No. 1: Don’t buy more than you need
The insurance industry wants you to insure against financial inconvenience, rather than financial catastrophe. The problem? If you buy enough insurance so you’ll never lose a dime, you might be paying so much you won’t have a dime to lose.
If you want to pay less for insurance, the first thing to do is assume more risk yourself. That means having a deductible as high as you can comfortably afford, and even doing without insurance where it makes sense.
Call your existing insurance company and ask them what would happen to your premiums if you raised your car, home, or health deductibles. Then use our insurance search and call another company and see what they say. If your deductibles are low now, you’ll probably find that you can save at least 10 percent by raising them.
The deductibles on my home and car policies are $1,000 – $5,000 on my health insurance. Being forced to pay the first $1,000 of damage to my stuff and $5,000 for my health is unpleasant, but it’s not going to send me to McDonald’s for a second job. Insuring for catastrophe, rather than inconvenience, makes my insurance more affordable.
Does that mean you should do the same thing? That depends on you. If you’d rather trade the additional premium for additional peace of mind, that’s your decision. But at least make it an informed one.
Golden Rule No. 2: The person who’s selling you insurance isn’t your friend
When you buy a house, car, dress, or virtually anything else, the more you spend, the more the salesperson and their employer makes. This is also true of insurance.
It makes no sense to base your insurance-buying decisions on the advice of a person who directly benefits from its sale. Unfortunately, this is precisely what most people do when they call an insurance agent and ask them what kind and how much insurance to buy.
This can also be true online when you go to an insurance company’s website and use an insurance “calculator” to determine how much insurance you “need.” Because as far as a salesperson or company is concerned, the amount you “need” is enough to protect against inconvenience, not catastrophe.
How do you really know what kind of and how much insurance you need? By understanding it. Which leads us to…
Golden Rule No. 3: Learn what you’re paying for
Pull out one of your current insurance policies 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 the big picture, it will make comparison shopping a snap.
I use Microsoft Excel to create spreadsheets for the various policies I have, but you can use anything from Google Docs to a simple piece of paper – anything that will allow you to write stuff down and keep it straight.
As a simple example, here’s a car insurance spreadsheet from a car I used to own, a 1982 Mercedes…
|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.|
Where did these notes come from? I called the toll-free number on my insurance policy and sat on the phone with some hapless customer service representative and asked. I simply went over each and every line of my insurance bill until I understood it.
By the way, you may have noticed that the policy above doesn’t say anything about an expensive part of any car insurance policy: comprehensive and collision.
That’s the part of the policy that pays for damage to my car that’s my fault. The reason it’s missing is because I didn’t have any on this car. There’s a rule of thumb that suggests that if comp and collision premiums exceed 10 percent of a car’s value, you should consider assuming the risk yourself and dropping that coverage. This car was only worth about 3 grand, and the premiums for comp and collision were more than 10 percent of that, so I dropped it.
I’m not suggesting you make the same decision, but this does provide evidence that sometimes less is more. Driving a cheap car and assuming a little additional risk allowed me to save several hundred dollars a year.
On the other side of the coin, note that I didn’t have very much liability insurance: $100,000 per person, $300,000 per accident. I have more than that now, because I have a higher net worth. Liability insurance: not a place to scrimp!
Golden Rule No. 4: Never stop shopping
If you have any semblance of a life, you have things you’d rather do than shop for insurance – a fact not lost on your insurance company. So they’ll raise your rates, hoping you’ll simply send in a bigger check rather than shopping for a better deal. Hopefully, they’re wrong.
A few years ago I did a TV news story on health insurance and needed some video of online shopping. So while my camera guy set up, I went to our insurance search. Result? I found identical insurance for 40 percent less than I was paying – from the company I was with!
That’s right, my health insurance company had raised my rates annually for so many years that they were actually selling new customers identical insurance for nearly $4,000 less per year than they were charging me.
Here’s what I’ve done ever since: I shop my insurance every other year. One year I’ll shop insurance for stuff – home and car – and the next for my body – health and life. (These days, however, I no longer have life insurance. That’s because I have no dependents that need my income to survive. So life is another area in which I’m self-insured.)
While changing insurance companies is a bit of pain, shopping is simple. I just go to our insurance search, get a quote, make sure what I’m paying is still competitive, then get on with my day. No big deal.
Golden Rule No. 5: Avoid gimmick insurance
Credit life is a type of insurance tied to a specific debt. For example, it will pay off your mortgage, car loan, or credit cards if you should die. Term life insurance is typically a less expensive and more comprehensive way to do the same thing.
Specific disease insurance, as the name implies, is health insurance tied to a specific illness, like cancer. A comprehensive health policy is typically a better idea.
Whole life insurance combines a life insurance policy with a savings account. For most people, buying a less-expensive term life insurance policy and investing the difference makes more financial sense.
These types of policies typically carry high commissions for insurance salespeople, so they’re often sold using high-pressure tactics. Avoid being steered into something you don’t need by understanding what you do need.
Knowledge is the best policy
I can’t begin to cover every nuance of every type of insurance policy in this article – that’s for a book. And I’m not suggesting that you adopt my minimalist approach to insurance: develop your own approach. But try to learn more about the insurance you’re paying for by asking questions and doing a little research on sites like this one and others.
Most people spend more time trying to save a buck or two on groceries than they do shopping for something that could save them hundreds. Don’t be one of those people. Create a few spreadsheets, ask some questions, take some notes, understand what you’re paying for, don’t buy what you don’t need, and shop your coverage early and often.