William O. Woody
Add up what you pay in insurance premiums each year – medical, auto, homeowners, life and so on. Makes you wince, doesn’t it? But there may be steps you can take to lower premium expenses. Members of the Financial Planning Association offer these ideas to help consumers reduce insurance costs.
• Don’t skimp on insurance. This probably doesn’t sound like a way to save money. But keep in mind that the purpose of insurance is to transfer to an insurance company the financial risk you can’t afford to carry yourself. Without formal insurance, you are de facto self-insuring – meaning you’ll pay out of your own pocket in the event of a financial disaster such as loss of a home or a serious illness.
For example, many renters don’t own renter’s insurance, which covers the loss of their personal property (and no, the landlord’s insurance doesn’t cover it).
Renter’s insurance is very affordable, but the news is often full of people who lose everything in an apartment fire and have no insurance.
• Buy the insurance you need. Carefully review your insurance needs with your financial adviser. Medical, auto and homeowners insurance are probably obvious. But do you have disability insurance in case you lose income due to illness or injury? Many financial planners recommend that clients buy long-term care insurance no later than in their late 50s or early 60s to cover the potentially high cost of long-term care. Also, do you have liability coverage beyond standard auto and homeowners insurance in the event that you are sued?
• Watch out for gaps. People with multiple properties in multiple states, for example, often use multiple insurance agents for their property and casualty coverage, and can easily end up with expensive duplicate coverage – or worse, no coverage at all because it was overlooked or because a policy expired. You may need riders or floaters to provide extra coverage or such things as jewelry or antiques.
• Don’t buy what you don’t need. You’ll probably need life insurance but not necessarily. Life insurance generally is for people whose death will have a significant financial impact on others – a spouse, children, dependent parents or heirs who might face a hefty estate tax bill.
You may not need it if you are young and single. And as you age, you may need coverage for only a limited time or for a smaller amount.
You also probably don’t need to spend money on insurance for specific diseases, flights, pets, loans or car rentals.
• Buy the right amount of insurance. While people sometimes by too much of a particular type of insurance, more often, they are underinsured.
A good example is with life insurance. People frequently base their decisions on premium costs, not what death benefits they need. The better approach is to first calculate how much money you will need to replace lost income necessary for your dependents. Then look at insurance options. Some people might be able to afford to buy adequate death benefits through a whole-life policy, which has an investment component. But many others would be better off spending their limited insurance dollars on term-life insurance, which has no investment component and allows you to buy more death benefit coverage for each premium dollar.
• Shop around, but don’t buy on price alone. Costs vary significantly among carriers, so carefully compare for similar coverage and features. But don’t buy on price alone. You’ll want a carrier that’s financially sound so that it’s there if you need the benefits.
• Consider multiple policies with a single carrier. Often, you can get a better deal buying multiple policies through a single carrier. But not all carriers are strong in all lines. For example, a carrier might be good for property and casualty, but not for life and health insurance. Be sure any savings that result in using a single carrier are worth it.
• Help yourself. Staying healthy, using smoke alarms in your home and having a good driving record can keep premiums down.
• Increase deductibles and avoid small claims. Choosing larger deductibles will reduce premium costs. Self-insure the amount of the deductible with an emergency fund. This also will reduce small claims, which have become a sore spot in insurance because companies are increasingly raising premiums or even dropping customers who make multiple small – and large – claims.
This article was produced by the Financial Planning Association and provided by William O. Woody of Stovall Woody Associates.
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