How To Buy Insurance Without Wasting Money

Insurance is exceedingly easy to ignore, because it requires one to grapple with terrors few people enjoy contemplating: personal injury, death, and other misfortunes, large and small. As a result, policies are often not read carefully and coverage bought primarily to make the unpleasant transactional experience of shopping for it stop. This, in and of itself, has costs; insurance only functions if bought ahead of time, and the most inopportune moment to discover a coverage was not in place is when it is discovered that it is needed.

Insurance is primarily for covering catastrophes, rather than small inconveniences, which explains why the former have coverage while the latter do not; it derives its value from being coverage for events that are both rare and have substantial impact to one’s finances. Disability insurance is for covering one’s income capacity as it is often the most valuable asset an individual possesses, and the Social Security Administration estimates that of the twenty-somethings alive and working today, one in four is statistically likely to become disabled before retirement age, while most do not have any form of long-term private disability coverage. Similarly, life insurance serves to offset the loss of one’s income as well as the psychological trauma of someone’s death, particularly for dependents, while health insurance covers medical costs that spiral out of control, sometimes reaching six figures or more, with comparable risks for liability insurance that comes due to negligence as well as the ability to sue that a business owner or the individual may have. Catastrophic risk insurance is valuable because those financial repercussions are severe enough to justify the substantial coverage.

Insurance for small, frequent claims is usually not a worthwhile investment because it is designed to ensure that the company offering the coverage will profit from the experience. Actuaries design insurance packages and set their prices so that, across all participants, the company recovers the amount the policyholders have paid in excess of claims. As a result, policies covering frequent and small claims almost surely end up costing significantly more than just paying for them outright, while the ability to claim more small losses may lead to increased premiums over time or an outright cancellation of the policy. One way to resolve this is to ask for a higher deductible, an amount one has to pay before the insurance coverage kicks in, which usually results in lower premiums. The combined effect of these two factors, a higher deductible and lower premium, should be enough to negate the increased risk of having to pay for small losses oneself.

However, higher deductibles have their own caveat, in that they should be set at the level that barely qualifies as reasonable, given one’s personal circumstances, because at that point, the primary reason for having insurance coverage is to mitigate large losses that are worth far more than the deductible and any additional premium, and at the point of such loss, the deductible becomes a relatively small inconvenience.

Most of the inexpensive or narrow insurance coverage that appears at point of sale is usually not worth buying, because the companies that sell it are primarily interested in their profit from these sales. Academic studies on extended warranties, which examine tens of thousands of purchases and analyze the cost, terms, and conditions of each, repeatedly demonstrate that extended warranty products are often priced at 24 percent or more of the cost of the goods purchased, while the failure rate of the goods with extended warranties was in single digits, meaning the profits for such products are anywhere from 15 to 2 times the costs for claims. Extended warranties are usually between 31 and 68 percent of net profits for electronics retailers who sell them, which is significantly disproportionate to losses covered. Home warranties, individual dental coverage, credit life insurance, hospital cash plans, shipping insurance, and phone insurance are similarly designed to sell unnecessary coverage at a decent price and profit.

Frequently, the risk that one insures against is not worth separate coverage when there is already broad insurance available against events that include the risk. Flight insurance and cancer-specific policies are not nearly as valuable as they appear, when one takes into consideration the possibility of other, more common events with comparable outcomes. Thus, life insurance, for example, generally pays out regardless of the manner in which the insured dies; comprehensive insurance coverage applies to all illnesses and not just a specific diagnosis; and similarly, umbrella liability coverage is far broader in scope and serves best as an additional layer of protection over one’s primary home and auto liability insurance.

The latter makes for a particularly compelling example, because most home and auto liability insurance only offer between $300,000 to $500,000 in coverage, but a serious accident, a claim from a business or an injury or lawsuit against oneself could exceed it with ease. An umbrella liability policy covers losses above the coverage limit of one’s primary insurance and typically costs between $300 to $500 for an additional $1 million in coverage, with an additional $75 to $150 for each additional million in coverage. It is an inexpensive way to protect oneself from large losses, particularly when one does not have coverage over even more expensive assets or income, which is the case for many individuals.

Many of the most significant threats to one’s finances and physical well-being are outside the capabilities of insurance to mitigate. The risks that most personal insurance underprices or entirely ignores are lifestyle-related; smoking, unhealthy eating patterns, lack of exercise, and reckless driving significantly amplify the chances of an individual dying prematurely or suffering from a debilitating illness. Addressing the behaviors that heighten the risks is often a more effective course of action to reduce the likelihood of a claim being necessary. Even then, personal insurance policies often fail in their stated purposes, as the coverage against rare events is usually significantly more limited than the dangers one is statistically likely to encounter, and those events are frequently entirely beyond individual control.

Liability coverage, for example, is often separate and must be purchased in addition to standard home and auto policies for floods, earthquakes, and other large-scale disasters that are not considered within the regular homeowners policy. More importantly, being prepared, as much as financially feasible, for actual events that may take place, rather than the financial costs associated with them, is vital; having a plan, supplies, and being able to communicate safely and survive if such event takes place is far more important than having insurance coverage to help one recover from it.

Rates for similar policies are usually set differently based on who sells them, so shopping around before making a purchase and never buying from one seller exclusively is vital. Coverage bought through one’s employer or professional organization often appears cheaper because the risk is lower for the insurer, as a larger and more diverse group is pooled together to estimate losses, but it is not always better, especially when it comes to life insurance, and it is crucial to compare it to policies one can buy directly. Additionally, buying insurance products directly from companies that sell them without agents reduces expenses due to commissions that agents receive, which are frequently embedded in the premium.

Claims issues are virtually inevitable at some point, and when they emerge, patience and persistence are key in resolving them. Insurance contracts are inherently complicated, and as a result, claims are denied, accepted at a lower value than stipulated, or delayed to an unreasonable degree. The primary course of action is to learn why one’s claim was denied, as different insurers take different approaches to assessing risk, and if another provider has more favorable terms, switching to them can be worthwhile. Keeping thorough records and not accepting the first settlement offer are also useful steps, and if the problem persists, one should continue to escalate the issue, either to another division of the same company, state insurance regulator, or an independent organization specializing in insurance law. The potential financial benefits greatly outweigh the time and effort required for the process.

This article is for general educational purposes and isn't personalized insurance, financial, or legal advice. Coverage needs, costs, and regulations vary by individual circumstance and location; consult a licensed insurance professional or financial advisor about your specific situation.