How to Avoid Three Common Insurance Mistakes
Insurance is one of those areas where even financially bright people often make poor decisions. I think the media is partially at fault and the resources people use for guidance might not be very helpful. Keep in mind that what is prudent for many (the median family income is about $50k) people is not necessarily prudent for those that have greater means.
1. Carrying a low deductible on any insurance – this flies in the face of what the term “insurance” is all about. Insurance is a means of transferring risk. You should only transfer the risk that you cannot easily afford to pay. Low deductibles on auto and homeowner’s insurance cost you hundreds of dollars in wasted premiums every year.
The more prudent strategy would be to save those premium dollars by having higher deductibles and use a portion of that savings if you ever have a claim. For example, with your auto insurance, would you file a claim if you had a $400 fender bender in the parking lot when you have a $250 deductible? Probably not. Why? Because you know your premiums would probably be raised if you did. What’s the point of having a low deductible if you don’t use it? How I Saved Big $ on my Home Insurance
2. Low deductible medical insurance. If you and those on your plan are healthy then it usually makes sense to take out a high deductible plan and set aside the premium savings in your own account. In my family’s case, my high deductible plan saves me about $6,000 per year in premium compared to a low deductible plan. I set aside that $6,000 per year in my own health savings account where it is available if we ever need it.
This has changed for some people that are ill and have “known” future claims or huge prescription costs. In this case, you can easily run the numbers and figure out what deductible is best, but be sure your doctors are in network. I recently had a client make this mistake with Blue Cross Blue Shield and the cheaper premium plan came with a network that did not include all of his doctor’s. Why Health Insurance is Not “Insurance”
3. For people that want to leave money to their children, they have made a mistake by not owning permanent life insurance as it is the most efficient (leveraged and tax-free) asset to transfer to others at death. Most Americans ($50k income) are best served with temporary insurance to replace their income if they were to die with dependents needing life insurance death benefit to generate an income stream. For those that have the means, term insurance is usually a waste of money as only about 2% of term policies are ever claimed. This is by policy design as term premiums rise dramatically when the insured gets older, causing them to usually drop the policy rather than pay the increasingly large premium.
I prefer to have retirees spend their savings and leave their life insurance to their heirs.
I’ve always found that clients have a tough time grasping some of these concepts until I go through the math with them.
If you have any questions about any of these concepts, please let me know as I would be gladly go over them and your specific situation.