When used properly, insurance can be a great bargain. It provides you with a partner to shoulder financial risks too great to cover yourself. That is not only prudent but can bring greater peace of mind. For example, if you drive a car there is a tiny chance you might run down a successful entrepreneur with a family to support. The possibility of being liable for replacing that business owner’s income for many years is far beyond most people’s means. You buy automobile liability protection so that the insurance company will take care of that risk. While both you and the insurance company wish such bad things would never happen, they occasionally do.
On the other hand, insurance is expensive. Premiums need to cover not only the possibility of the “bad event” but also the insurance company’s overhead and profit. The rule of thumb is to only buy insurance you truly need. Try hard never to buy more coverage than required. Here’s how to keep more of your insurance money in your own pocket:
Be your own insurer. Many of life’s smaller mishaps, painful though they may be, will not crush you financially. In these cases, it is often wisest to self-insure — which is another way of saying prepare to pay the cost yourself. Some examples of self-insuring are 1) declining extended warranties; 2) ignoring sales pitches for funeral insurance — better to save a few hundred a year for this; and 3) not buying trip-cancellation policies. In each of these examples, the problem can be addressed for between several hundred and a few thousand dollars. You’ll come out ahead in the long run if you can handle risks of this size without help from an insurer.
Increase your deductibles. Most insurance splits the risk between you and the insurance company by making you pay the first part of the damages, such as the first $500 of repairs following an auto accident. Consider upping the size of the deductible so that you would pay the first $1,000 or even more. In exchange, the premium for your insurance will be lower year after year.
Don’t insure against alien invasions. In an episode of the cartoon series Family Guy, a buffoonish character is sold a policy for volcano insurance. It’s a funny bit since he lives nowhere near a volcano, but insurers frequently offer us policies only slightly less ridiculous. Yes, all kinds of bad things can happen. You are well advised, though, to avoid getting into a long-shot bet with an insurer where the odds are strongly in their favor. You really don’t need specific coverage for just tornadoes, or cancer, or plane crashes. Rather, make sure that you have the broad coverage a prudent person would carry and leave it at that. For example, if you have solid healthcare coverage, you needn’t add special protection for injuries incurred only while traveling or for a specific disease or condition. Remember that the insurance company knows a lot more than you do. Their actuaries have data showing just how likely it is that they will have to pay out on your insurance, and they make sure to take the better side of the bet. Over time, they will win. (You, on the other hand, only win if the unexpected happens.)
Life insurance for the main breadwinner of a young family? Absolutely. Auto insurance? Yes. Health insurance? Certainly. But, wherever you can, take the better side of the bet yourself. Keep the premiums you would have paid in extra insurance, and invest them. You will end up with a great deal more money at the end of the day.
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