You are likely paying for several kinds of insurance- car, life, house, renters, health etc. Insurance makes us feel secure and protected from life’s ‘eventualities’. We hope that when the crap hits the fan, insurance keeps it from hitting us too. Unfortunately insurance also costs us quite a bit too. If you add up all the premiums you’re paying, insurance is probably one of the largest items on your budget.
Always remember that insurance companies exist to make money. Do they provide a valuable service? Absolutely! They protect our finances from utter destruction in unlikely events. But they’ve got the statistics worked out so that they collect more in premiums than in payouts. And there’s nothing wrong with that- businesses exist to make a profit.
With that in mind however, the more you “self-insure,” the more you will save. If you can cut back on some of your insurance and re-direct the savings in premiums to your emergency fund, I can almost guarantee that you’ll come out ahead. You might want to make small cuts over time, ensuring your emergency fund covers the gap in insurance. Work towards self-insuring anything that you are able to cover out of pocket or would be able to temporarily (or permanently) live without.
Raising deductibles is an easy way to pare back your coverage without exposing yourself to too much risk. If you’ve got comprehensive insurance on your car, get a quote raising your deductible by $500 dollars. Consider how often your car gets significant damaged. Using the quote, figure out how fast the premium savings will add up to $500. Use the same principle on your house insurance. Insurable events rarely happen to houses, so you can probably afford to bump your deductible up by $500 or $1000. And although health insurance is a different beast than other insurances, opting for a High Deductible Health Plan will almost certainly save you money in the long run. Again, as you emergency fund grows, so will your ability to personally cover life events, and your need for insurance will shrink.
Eliminating Insurance Products
As you grow your ability to cover emergencies, some insurance products will become un-necessary. Remember that you don’t need insurance for anything you can afford to replace or live without. For example, we never had renters insurance while I was renting. Renters insurance covers your belongings from theft or damage. Most of our belongings we could live without. Those that we couldn’t, we would be able to afford to replace.
Comprehensive car insurance is another product that can often be eliminated (where permitted by law). As a reminder, comprehensive insurance covers your car, liability insurance covers damage that your car does to other people’s property. The amount of damage that can be done to your car is limited by the value of your car. So if you can afford to have your car totalled, skip the comprehensive insurance. And in most cases, the damage to your car will be less than total value.
How Life Insurance Fits In
Life insurance is the toughest product to analyze. Not only is life insurance structured differently than most insurance, it is also bundled with emotion. Insurance agents know this and many use your emotion to oversell you. In The One-Page Financial Plan, Carl Richards points out that a huge life insurance payout isn’t going to take away the grief of losing a loved one. For a moment, try to remove emotion from the picture and think about what you will need if you or your spouse do pass away.
If you don’t have kids, you probably don’t need much life insurance at all. Barring any special circumstances, if your loved one were to pass, you would still be able to support yourself. You might need to downsize to a smaller home, but overall, your expenses will go down with the drop in income.
For families with kids, insurance may be necessary, but probably less so than you think. Insurance agents often will suggest multi-million dollar policies, since such a large amount is what it would take to replace one spouse’s income. However, remember that those million dollar policies come with much higher premiums. To keep those premiums down, you only want insurance to cover your needs. You might decide that just taking out enough insurance to pay off your house is enough. Eliminating the mortgage payment would go a long way in enabling you to support a family on a single income.
Whole or Term Life Insurance
If you decide that you do need life insurance, you’ll be confronted with a choice between whole life and term life insurance. Term life insurance covers you for a specific period- typically 10, 15 or 30 years. Since you probably only need insurance for when you have kids that are dependent on you, term insurance is all you need. Pick the one with the shortest term that will cover you while your kids are still in the house.
One thing you almost definitely don’t need is whole life insurance. Since you are guaranteed to die during the term of whole life insurance, the premiums will be much higher. And remember that you won’t need the payout after your dependents are out of the house. Some insurance agents like to push whole life insurance telling you that it doubles as an investment plan. If you’re using it as an investment plan, you’ll see better returns with mutual funds. That’s where the insurance company sticks it after they take their insurance. The real reason agents like to push whole life coverage is because it gives them a higher commission.
Once you’ve decided how much coverage you actually need, shop around. Different companies will quote you a wide variety of premiums for the same product. Even if you’re already with an insurance company, shop around. Unfortunately, most insurance companies don’t reward you for customer loyalty. They say they do. Most offer discounts for having kept your insurance with them for a while. However, the final premium they offer to new customers is still usually lower than to an identical returning customer. It seems clear that most insurance companies prioritize new customers over customer retention.
To make sure you’re not being ‘milked’ by your insurance company, quote around every 2-4 years or so. Getting quotes doesn’t cost you anything and doesn’t obligate you to buy anything. A good independent insurance agent will do a lot of this legwork for you. Independent insurance agents are the ones who sell insurance from multiple companies. Every year, they should run quotes for all the insurance companies they sell through. But also periodically do your own homework. Sometimes you’ll turn up better rates than the insurance agent, either because they aren’t casting a wide net or because their personal commissions are too high.
Term life insurance is the one exception to the shopping around rule. Obviously, shop around before buying life insurance, but once you are locked in, you probably won’t find a better rate after a few years. Term life insurance locks in your rate for 15 years, and while you are free to leave the policy whenever you want, new rates will always go up as you age, since your likelihood of dying also goes up.
Often you will save money by bundling insurance products, but not always. You may find that buying different products through different companies ends up being cheaper. Of course, this is also less convenient, so you make the call.