Insurance basics: How to save on insurance

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

Save on insurance!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.
Tip: To increase the odds of a satisfactory settlement when you do file a claim, be sure to document your losses well. And it is perfectly acceptable — good even! — to negotiate if you think the insurance company's settlement offer isn't fair (and their first offer almost never is fair). Be persistent.
  • 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.

More about...Insurance

Become A Money Boss And Join 15,000 Others

Subscribe to the GRS Insider (FREE) and we’ll give you a copy of the Money Boss Manifesto (also FREE)

Yes! Sign up and get your free gift
Become A Money Boss And Join 15,000 Others
guest
34 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
AC
AC
9 years ago

Great article. When I got my house I switched my coverage under one provider and saved huge on both my house and car. It’s probably the best way to save out there on insurance. It’s also important to keep the deductibles high, because you are just throwing away money that would have otherwise been in a savings account.

About duplicating coverage, I read somewhere that PIP isn’t necessary if you already have health insurance and those uninsured motorist coverages are not worth the premium hikes after a claim either.

Starshard0
Starshard0
9 years ago

My friends thought I was crazy when I went with the highest deductible on my car insurance. I guess they don’t realize I’ll more than make up for it in fewer premiums and I’m pretty sure I can afford the $1000 if something crazy happens.

Gail
Gail
9 years ago

“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.”

In this case, you might well be better off just paying the whole $400 yourself, as the increase in your insurance premiums over the next few years (due to loss of no-claims bonus) will probably be more that the $150 you’ll get from the insurance company – it’s worth weighing this up before making a claim.

Sam
Sam
9 years ago

Its important to shop around for the best rate, but too many applications for insurance could raise a red flag in your Medical Information Bureau Inc. (MIB) report. Specifically, the “MIB Insurance Activity Index – Identifies Frequent Shoppers” and enables insurance companies to “track the number of times an MIB check was made on their applications during the previous 2 years.” Just as financial companies rely on “credit reports” to establish credit for customers, insurance companies utilize “medical report” files to assess the health, determine the insurability, and set the price for insurance applicants and policyholders. Few consumers realize that… Read more »

quinsy
quinsy
9 years ago

The sentence about the $50 deductible is confusing. At first glance I thought “why would that make sense, if you have a $50 deductible, then even if the car repair costs $10,000, you still only pay $50. So the insurance company is the one who ends up paying a lot!” Then I realized what you might mean is that it would take an expensive insurance policy to cover you enough so that you only have a $50 deductible, most car insurance deductibles are significantly higher than that. Given that this is an introductory article, I think it would be good… Read more »

Nicole
Nicole
9 years ago

All good advice.

SF_UK
SF_UK
9 years ago

Another couple of tips – do not Ever Ever lie or bend the truth when applying for insurance – you will just invalidate any claim and be throwing your money away. If you don’t know an answer, tell them so. If you’re offered a policy “excluding x”, think very hard about whether to accept. This is typically where you have some sort of high risk, and to give you a low premium, you’ll be offered cover for everything except that risk. Example 1: my student contents insurance excludes my bike. I live in a town with high levels of cycle… Read more »

Pamela
Pamela
9 years ago

You’re right that you need to document your losses carefully. But many people don’t try to collect docs until they have a loss.

Spring housecleaning or moving are good times to start an inventory of your belongings. Pictures or a computer database will help you document your loss.

And you should especially document things that are unusual (to an insurance company), like a valuable comic book collection.

Sarah
Sarah
9 years ago

I was also confused about the $50 deductible comment until I realized what you meant later. It seems like insurance is a game you can never win. I have a $1000 deductible on my car and I’ve been in 3 wrecks in the last 5 years that all did $1000-$1200 worth of damage. So my insurance did me no good whatsoever. Meanwhile I recently had my apartment burglarized and a lot of expensive but obsolete camera equipment that my parents bought in the 70s was stolen. Even after the deductible I ended up with a whole lot of cash for… Read more »

Scott
Scott
9 years ago

A question for you frugal GRSers out there that are driving older cars. My car turns 10 this year and Blue Books for about $2200. I was considering dropping my full coverage collision policy in favor of a PL/PD type of policy.

The logic is that I could probably just pull the $2200 out of my emergency fund and buy an equivilant car in the event that I was totalled out in an accident.

Any thoughts out there on when to make the move to PL/PL (if ever)?

Melanie
Melanie
9 years ago

“When you suffer an insured loss, you file a claim and the company pays you a benefit.”

If only health insurance really worked that way!

Christina Crowe
Christina Crowe
9 years ago

I found this article very interesting. The comments are also pretty helpful. This is definitely something to think about when shopping around for insurance.

It all makes more sense why some people would purchase higher insurance than others. Thanks for clearing it up. I’m looking forward to your article on auto insurance.

Brenton
Brenton
9 years ago

@10 – “If only health insurance really worked that way!”

The problem is that health insurance is not really insurance. You are not just insuring yourself against catastrophic illness or injury, you expect routine medical care to be covered too. So everyone ends up paying ridiculous premiums for those people who go to the hospital/urgent care/primary care 2 or 3 times a month(or more). Health “insurance” has become this reditribution of medical costs, instead of just risk, spread out across the entire population. Its not insurance anymore, its just another form of welfare.

Scott
Scott
9 years ago

A question for all of the frugal GSRers out there that drive an older car that is paid off. When do you make the change from a full comprehensive/collision policy to just a PL/PD policy?

My car is about 10 years old and worth about $2200. It seems that if I get into an accident I can afford to purchase a $2200 car in cash, so I am considering PL/PD. Thoughs?

Free Debt Help
Free Debt Help
9 years ago

I really like the idea of increasing your self-insure pot and increasing your deductibles. When you run the numbers its interesting to see how much extra we pay in premiums for a lower deductible when we could just save up those extra costs in premiums for a rainy day. Great article. More people need to be giving out this advice.

eileen
eileen
9 years ago

Great point about not filing claims for every little thing.

Also, here’s a great Insurance resource:
http://www.commoncraft.com/insurance-video

Comboman
Comboman
9 years ago

“File Fewer Claims” and “Raise Your Deductible” should be done together (they should probably be combined in the same heading). If you are not going to file a claim for small amounts then raise your deductible to the smallest amount you would actually make a claim for, otherwise you’re just wasting money by paying for coverage you wont use.

Jonathan
Jonathan
9 years ago

@Scott – There was a rule of thumb that said if the comp & collision costs were more than 10% of the value of the vehicle to drop comp & collision.

Techbud
Techbud
9 years ago

A few years ago my home was broken into and because I never read the fine print a lot of what was lost was not covered or only a small $ amount was. I learned the hard way. Of a $10,000 loss I was cover for $2500. Always read your policy and check it every few years.

Craig
Craig
9 years ago

I added an additional insurance plan for renters insurance and it actually slightly decreased my car insurance.

GBR Briana
GBR Briana
9 years ago

It’s ridiculous how many people just go for the first insurance that knocks on their door; they don’t shop around and end up losing a ton of money in the long run. And the number of people who don’t take care of the things they insure. Insurance is in case something happens; why would people intentionally put their things in jeopardy? It happens though

Jenelle
Jenelle
9 years ago

This article is very timely! I’m in the process of shopping for life insurance for my husband. But I have to admit, I am very confused. I am getting a huge range of premiums, from $60/mo to $120/mo. How do I know who to go with? Do I just pick the cheepest rate? One agent was talking about how their rating is higher and I should only go with an A rated company. How can I check their rating on my own?

quinsy
quinsy
9 years ago

Jenelle, you probably want to compare the features of each policy to each other. It’s not all about the premium. How much coverage do you want, and how much do these policies offer? What are the rules for how/under what circumstances the money gets paid out? I would imagine that the cheapest one would be pretty decent for me, because I don’t really expect to have any funeral expenses, my family knows that they can throw me in the old pine box and toast me with Coca cola and I’m not going to care. But I don’t have any kids,… Read more »

Andrew
Andrew
9 years ago

I usually ask for the highest deductibles possible on my homeowners, rental properties and auto insurance as I do not plan on putting in a claim unless a roof blows off or I am involved in a major auto collision. Insurance is for a catastrophic event that I am unable to cover out of pocket to restore my property to its former condition. I also recheck my rates when policies are due with several insurance brokers via email to make sure I am getting the best rates. This can and has saved me hundreds of dollars every year. If you… Read more »

BK
BK
9 years ago

@Sam — Regarding the MIB, they track applications submitted, not quotes obtained. If you’ve applied for (meaning completed an application, paid initial premium, undergone medical underwriting, etc) a dozen different life insurance policies over the last two years, that’s almost a sign of something. Also, I’m not exactly sure why everyone seems to think whole life is always a bad deal. With a good company paying dividends, it can be a good financial tool. Looking at the entire premium paid and the increase of cash value, my policy earned 6.7% last year. If you looked at an annual renewable term… Read more »

Rob Ward
Rob Ward
9 years ago

This is very timely for me as well as my auto insurance renews this week…I’m down to the wire comparing rates!

@ Scott # 14 both our cars have loans so we are required to have collision. But if I were in your shoes I would definitely drop collision since you are ok with taking the money from your emergency fund. The insurance co. would probably total the car in just about any accident worth reporting to them.

ftbllmom
ftbllmom
9 years ago

I recommend being careful when making claims to your homeowners policy. Insurance companies are canceling policies in CA for any reason. I recently was robbed by my cleaning laby (of 5 yrs). I lost $25000 in jewelry and am still in the process of trying to find it between the pawn shop and the evidence room at the PD. I didn’t have additional riders on this jewelry. I have a $1500 dectuctable and am covered up to about 2K for jewelry. Is $500 worth a hit to my insurance? To make matters worse, if I want to get the jewelry… Read more »

E
E
9 years ago

Regarding not turning in small claims, if you don’t plan to make a claim then you probably shouldn’t even bring it up with your agent. In California at least, if the agent knows you’ve had a claim he is required under the insurance code to turn it in to the company, whether you want him to or not. Failure to do so is a breach of his contract with the company. There is no ‘asking his opinion’ about it. Even if nothing is paid, it counts against you as a claim filed. Also, specifically regarding auto insurance- if you can… Read more »

Daniel
Daniel
9 years ago

In comment #4 the link http://bit.ly/cuVUFE takes you to a pay medical information website. The URL and information on that website make people think it a free website. For example the free financial credit report website is:
http://www.annualcreditreport.com
The pay medical report website has a similar URL:
http://www.annualmedicalreport.com

To get your free annual medical report go directly to MIB:

http://www.mib.com/html/request_your_record.html

MIB on their own website denounces the paid website:
http://www.mib.com/html/inaccurate_portrayal_of_mib.html

Andrew
Andrew
9 years ago

Thanks for these great tips. All very easy to apply and definitely can save some great money here. I think the “filing fewer claims” is a great one, because at first, it seems counterintuitive to not try to file every possible claim to get as much money, when it can really just hurt your pocket in the end.

Irina Ross
Irina Ross
9 years ago

Great post! I followed your tips and after a serious search I choose to go with a fairly new type of an advisor. I am not wealthy but I understand the value of consulting with the people that help you build you wealth in a fair way. People’s Financial Advisor (http://www.peoplesfinancialadvisor.com) are Fee-Only certified planners and registered with the SEC. They offer a free financial assessment (everyone should at least do that) and a full financial plan for $99. The entire interaction is on-line; I had an interview on their website and after several days got a full report that… Read more »

Alexis Delille
Alexis Delille
9 years ago

When children understand how important “real food” is and where the natural ingredients of our food come from, they will increase the general population’s appreciation for preserving our natural environment and limiting toxins and polluting processes in our world. We may even trend back to the time when people stepped outside their homes to interact with family and neighbors in home and community gardens and block-party barbeques. Does anybody even remember how nice those days were?

Dan M
Dan M
9 years ago

Thanks a LOT for starting to talk about insurance. This is only the second post and already I have realized that:

a) I didn’t really have an accurate understanding of how insurance works.

and

b) My car insurance is definitely not configured to match my needs; I’m almost certainly over-paying.

My fiancée and I have just started the process of buying my first home, and I’m positive that this series will save me a lot of cash when it comes time to sort out homeowner’s insurance.

official allstate insurance website
official allstate insurance website
6 years ago

One of the main problems that overseas men and women need
to face is living with cross-edge legal issues and complicated.
Indian health insurance market has emerged as a new and lucrative growth
avenue for both existing players and new entrants. Company’s liability covers you
for your legal liability for health problem, injury, fatality condition or worried shock of any workers.

shares