This is the second part in a short series about insurance basics. Last week, I explained how insurance works. Next week (or possibly the week after), I will offer some tips on car insurance. Today's article offers some general insurance tips useful for most situations.
All insurance works pretty much the same way: You pay a premium (a set amount of money) to the insurance company, usually on some sort of schedule (monthly or yearly, for instance). In return, the company issues an insurance policy to you, which is a contract that gives you certain coverage, or financial protection. When you suffer an insured loss, you file a claim and the company pays you a benefit.
Consider the purpose and define your goal
Insurance is meant to protect you against catastrophes, not day-to-day annoyances. You use insurance to guard against things that aren't likely to happen, but which would cause financial hardship if they did occur.
Your goal should be to have just the right amount of insurance. If you have too much, you're wasting money.
For example, if you have a $50 deductible on your car insurance, you will probably end up paying the insurance company far more in premiums than they'll ever pay you in benefits! Or, if you're young, unmarried, and have tons of credit-card debt, life insurance usually isn't a good place to put your cash.
On the other hand, if you're a 40-year-old small-business owner and father of five, term life insurance could be an excellent way to hedge against the risk that you'll die tomorrow. Or, if you're a millionaire who likes to drive fast, increasing the limits on your automobile liability coverage could save your fortune if you get sued for the damage you cause when you plow into the back of a school bus.
How to save on insurance
The number one thing you can do to save money on insurance is to self-insure as much as possible. That is, set aside your own money to cover minor and moderate catastrophes, if possible.
To do this, try raising the deductibles on your auto and home insurance policies. Then take the difference between your old premiums and your new premiums every month and put it into an online savings account that you designate as “self-insurance.” It won't take long for you to have more than enough to cover the deductible.
You can also save money on insurance by reviewing your coverage from time to time.
To do this, follow these suggestions:
- Read your policy. As with all legal contracts, it's important that you read your policy so you know what's covered and what isn't. Pay attention to policy changes that come in the mail. If you have questions, ask. And make it a habit to review your policies every so often to be sure you understand them (and check whether anything has changed).
- Don't duplicate coverage. Know which policies provide which benefits. If you have a AAA membership, for example, you don't need towing coverage on your car insurance. And if your credit card doubles the warranties on the things you buy, don't pay for extended warranties. I try to go over my policies once a year to remind myself of my coverage. (I'm a forgetful guy!) I recommend you do the same.
- Consolidate. Get all of your insurance from one provider. Insurance companies often give a discount if you have multiple policies with them. Plus, this saves you the hassle of having to pay more than one company.
- File fewer claims. Don't nickel-and-dime your insurance company. If you file claims for every little thing, they'll raise your rates. Insurance is meant to cover unexpected large losses, not every ding your car gets from shopping carts.
- Shop around. To find better rates, harness the power of the web. Visit the National Association of Insurance Commissioners and click the “states and jurisdictions” link to find your state's insurance department. From there, you can find info about your state's insurance laws and, in some cases, get quotes. You can also get quotes from multiple insurance carriers at sites like insurance.com, insweb.com, insure.com, and even our insurance page at Get Rich Slowly.
- Buy only what you need. Insurance agents are happy to sell you more coverage than your situation calls for. Do some research before you buy. Figure out how much and what kind of insurance you need, and don't let the agent talk you into more.
- Raise your deductible. The deductible is the amount you pay on a loss before the insurance company kicks in money. For example, if your car takes $400 in damage because you drive over a curb and you have a $250 deductible, you pay the first $250 and your insurance company pays the rest. It's up to you where to set the deductible, but the lower your insurance deductible, the higher your premiums. Ask yourself how much you can afford to pay if something goes wrong; more specifically, how much is too much? Set your deductible just below “too much”.
- Take care of the things you insure. One of the best forms of insurance is routine maintenance. A well-maintained car is less likely to have an accident due to mechanical failure. If you take care of your house, it'll weather the ravages of time. And if you exercise and eat right, you'll get cheaper life and health insurance.
These tips help you save on most types of insurance. Still, not all insurance advice can be generalized; each type of insurance has its quirks. Next week, we'll look at specific ways to save on the most common type of insurance: auto insurance.
Note: Much of this material was drawn from the “Death and Taxes” chapter of my book, Your Money: The Missing Manual, which was published earlier this year by O'Reilly Media. You can download a sample chapter here.