How to Avoid Three Common Insurance Mistakes

There’s no reason to make these insurance mistakes. Insurance is one of those areas where even financially bright people often make poor decisions.


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  • Mistakes:

MISTAKE #1. Carrying a low deductible on your auto insurance.

This is in the face of what the term “insurance” is all about. Insurance is also a means of transferring risk. You should only transfer risk that you cannot easily afford to pay. Also low deductibles on auto and homeowner’s insurance can cost you hundreds of dollars in wasted money and premiums every year.

The more prudent strategy would be to save those premium dollars.

Having higher deductibles. Put that in savings if you ever have a claim. Example, so do you have a $500 deductible for your auto insurance policy? Would you file a claim if you had a $400 fender bender in the parking lot? Probably not. 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?  Look into having the $1,000 deductible or higher and bank the premium savings. Also –  How I Saved Big $ on my Home Insurance

MISTAKE #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. Set aside the premium savings in your own account.  Sense for healthy families the probability of having a bad claim year, and all in any one year is very low. Guess what, if you overpay the insurance company in those low claim years, they don’t give you any of your money back.  Rather may I suggest choosing a higher deductible plan and  saving the premium difference. In my family’s case, due to my high deductible plan. It saves me about $6,000 per year in premium, compared to a low deductible plan. As a result going from a $500 deductible to a $10,000 deductible and saved about $500 per month. Setting aside that $6,000 per year in annual premium savings in my own health savings account, and where it is available if we ever need it.

I use HSA Bank for this as they are also connected with TD Ameritrade which allows me to invest the money in that account.

MISTAKE #3. Not owning permanent life insurance.

For people who want to leave money to their spouse or children, they have made a mistake by not owning permanent life insurance.  Sense permanent life insurance is the most efficient (leveraged and tax-free) asset to transfer to others at death.  Unlike other insurance, we all will have a life insurance claim. If we can afford it we should make sure the insurance company is on the hook to pay out the claim.

Most Americans ($55k median family income) are best served with inexpensive temporary (term) life insurance.

This is to replace their income. If they were to die with dependents and needing life insurance death benefit to further generate an income stream, and those that have the means. Term insurance is usually a waste of money. Only about 2% of term policies are ever claimed. This is by policy design and as term premiums rise dramatically as the insured gets older. By the time people are ready to retire, they usually drop their term life policy, because it is so expensive they can’t afford it. Since a very tiny of percentage of people die young, most likely the term life policy issuing company usually doesn’t have to pay out a claim and keeps your money.

For people who can afford it, I recommend they do what I do and own life insurance for their dependent needs. Then through retirement using it as the best asset to transfer to their beneficiaries.

In addition. I prefer to have retirees spend their savings and leave their life insurance to their heirs. In a perfect world, retirees would have fun spending all their investment assets during their retirement. In turn leaving their heirs with an income and tax-free life insurance death benefit.

 

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