Insurance is an intangible product, making it difficult to buy. Because it doesn’t seem real, many people just ignore it. At least until the DMV or your mortgage lender makes you get the minimum amount. Because it’s difficult to understand, sales people try and get away with selling a wide variety of insurance products – some valuable and some a waste of money. Just like anything you buy, you should start with your needs not what the sales person wants to sell you. It doesn’t matter whether you’re looking for health insurance, pet insurance or motorcycle insurance. The general principals are the same.
First, there are two reasons to buy insurance. The first is to handle a catastrophe – an event that would cost so much that you couldn’t possibly afford it. Having a terrible illness that requires expensive medical treatments over a long period of time falls into this category. So does being liable for a major injury to someone else.
The second reason is to even out the cost of something. An extended warranty on your car falls into this category. The absolute worst that could happen is that your car would become worthless and you would have to buy a new one. While some people would call that a catastrophe (depending upon the car, I suppose), really it’s just a financially unpredictable situation. You could have almost no repair expenses at all, or you could suddenly be faced with a large unexpected bill. If you buy insurance, you’ll have a predictable steady expense instead of the possibility of unexpected expenses.
You should always have catastrophe insurance for the risks that you could not possibly cover without insurance. The most important is health insurance. Even if you are perfectly healthy and expect to remain so, you need health insurance. People literally die from lack of health insurance. And many illnesses and all accidents are surprises.
Life insurance provides for your family in the event of your death. Again, think about the worst case scenario. If you die suddenly, what would your family do financially? Is that an acceptable or unacceptable risk?
Next is liability insurance. Do you drive? Do you do anything else that might cause harm to someone else? Maybe you don’t expect to ever hurt anyone, but you could get into a barroom brawl and someone could be hurt. You could write a blog post and get sued for libel. You could perform a repair on a car which later has a mechanical failure that causes an accident. Liability can be extremely expensive, because there is no limit to the value of the damage that you could do – accidentally – to someone else. Even if you don’t think you have enough assets to be sue worthy, you could be sued for future wages.
Next is insuring your assets. Depending on the value, you may consider this catastrophe insurance or just insurance against unexpected financial loss. If you own a house, you probably couldn’t afford to replace your house and all your belongings in the event of a fire, flood, earthquake or other disaster. If you have a mortgage, your lender will insist that you carry homeowner’s insurance. If you rent your home, you may choose to insure your belongings. For most of us, this is not catastrophe insurance, but the potential loss is large enough that you should seriously consider getting insurance.
Last are all the other types of risks that you could insure against. Some of these are part of the same insurance you have for catastrophes. For example, when choosing a health insurance, first you need to make sure that it covers the worst case scenario. Then look at how much coverage (if any) you want for routine doctor’s office visits and other benefits that you could pay for if it came to it.
There are a variety of other non catastrophic risks that you could insure against. The possibilities include pet insurance, vacation insurance, warranties on a variety of products that you own, and more. When looking at non catastrophic insurance, you are essentially trading a known (and on average, higher) regular expense for an unknown and unpredictable expense. Why is the cost of insurance higher than the average risk? Because insurance companies collect enough from you to cover the average payout, plus their profit. Still, the higher the amount of the risk, and the more unpleasant the consequences of not being able to afford it, the higher the chance that you should insure against the possible loss.
You should also consider self insurance for these non catastrophic risks. For all those things that you want to have covered, deposit some money in a separate bank account. How much? Start with the amount that the premiums would have cost if you purchased insurance. If you experience a loss, use the bank account to pay for it. If you get lucky and don’t experience a loss, you get to keep the money! It’s your reward for being disciplined enough to set the money aside each month!
What to cover
We’ve talked about the things you should protect. Now let’s turn to what you should protect against. Most homeowner’s insurance policies cover fire, but not flood or earthquake. If those are possibilities where you live, you’ll need separate policies. Do you have any risks that the average person doesn’t? Think of all the things that could cause you a financial loss and check whether they’re covered in the policies that you’re planning to buy.
Consolidating Insurance
Now that you’ve decided what needs to be covered and from what risks, you need to look at the smartest way to buy that coverage. Homeowner’s insurance covers some non vehicle related liability risks – up to a certain amount. Business insurance covers liabilities arising out of work related activities. Homeowner’s insurance usually doesn’t cover work related activities, even if the business is operated from your home.
Never buy piecemeal insurance if you can get coverage from a more comprehensive policy. For example, make sure that your car insurance covers you when driving a rental car, and then skip the insurance offered by the rental company. It almost always costs more, and you have no idea what is and isn’t covered. Another example is insurance against a specific disease. You’re better off to get a good health insurance plan and be covered regardless of what happens. If you have a lot of different things to cover, you might look into what an umbrella policy could cover for you.
Get Prices
There is a wide variety of policies and prices. Get quotes from at least three different insurance companies. Make sure they’re comparing apples to apples. If there are differences in coverage, make sure you take that into consideration. Ideally, it’s a good idea to get as many policies as possible covered by the same company. In addition to price, check out the insurance companies’ reputations with groups like the Better Business Bureau and Consumers Union.
Once you get a few quotes and see the prices, you may want to rethink what coverage is really necessary. You may need to ask the insurance companies for quotes on different things. Don’t be afraid to reduce your coverage at the lower end and raise it at the higher end. You will save a lot of money by increasing your deductible or paying for incidental expenses yourself. On the other hand, increasing coverage for very unlikely catastrophes is relatively inexpensive.
This process will take some of your time and energy. There is no one size fits all best insurance. You need to price out insurance based on your situation and preferences. When it’s done and you choose policies to execute your plan, you’ll be glad you got the right coverage at the best price. And if the worst ever happens, you’ll be even more happy that you took the time to get your insurance in order.
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