Eight Rules for Buying Insurance of Any Kind
By following the eight rules explained here, you can save money,
and just as important, you can save yourself from making serious
mistakes when you shop for and acquire insurance policies.
Rule 1: Buy Insurance Only for Financial Risks You Can't
Afford to Bear on Your Own
The purpose of insurance is to cover catastrophes that would
devastate you or your family. Don't treat insurance as a chance
to cover all your losses no matter how small or insignificant,
because if you do you'll fritter away money on insurance you
really don't need. For example, if your house caught fire and
burned down, you would be glad you had homeowner's insurance.
Homeowner's insurance is worth having, because you likely
can't--and you certainly don't want to--cover the cost of
rebuilding a house. On the other hand, insuring an old clunker
is a waste of money if the car is only worth $800. You would be
throwing away money for something you could cover yourself if
you had to.
Rule 2: Buy from Insurers Rated A or Better by A.M. Best
Insurance companies go bust, they are bought and sold, and they
suffer the same economic travails that all companies do. Between
1989 and 1993, 143 insurance companies declared bankruptcy. You
want to pick a reliable company with a good track record.
A.M. Best is an insurance company monitoring service that rates
insurance companies on reliability. Look for insurers rated A or
better by A.M. Best, and periodically check to see whether your
insurer is maintaining its high rating. If your insurer goes
down a notch, consider finding a new insurance company. You can
probably get A.M. Best's directory of insurance companies at
your local public library, and you can find A.M. Best on the Web
at www.ambest.com.
Rule 3: Shop Around
There are many, many, many kinds of insurance policies, and
insurers don't advertise by price. You need to do some legwork
to match your needs with the cheapest possible policy. Talk to
at least two brokers to start with. Look for no-load insurance
companies--companies that sell policies directly to the public
without a broker taking a commission--since they usually offer
cheaper prices.
Rule 4: Never Lie on a Policy Application
If you fib and get caught, the company can cancel your policy.
If you lie on an application for life insurance and die during
the first three years you hold the policy, the company will
cancel your policy, and your beneficiaries will receive nothing.
Health, life, and disability insurers run background checks on
applicants through the Medical Information Bureau, so you can
get caught lying. The medical examination you take for life
insurance can also turn up a lie. For example, if you smoked
tobacco in the previous year, it will come up in the test.
Rule 5: Don't Buy Specific-Risk Policies--Buy General
Policies Instead
When it comes to insurance, you want the broadest coverage you
can get. Buying insurance against cancer or an uninsured
motorist defeats the purpose of having an insurance policy. If
you have ulcers, your cancer insurance will not help you. Get
comprehensive medical coverage instead.
Uninsured motorist insurance is supposed to protect you if you
get hit by someone who doesn't have car insurance or doesn't
have adequate car insurance. But, in my opinion, you don't need
it if you have adequate car insurance yourself, as well as
health, disability, and life insurance. I should point out that
some attorneys advise you to carry uninsured motorist insurance
because, by doing so, you may be able to recover damages for
"pain and suffering."
Rule 6: Never Cancel One Policy until You Have a Replacement
Policy in Place
If you cancel a policy without getting a replacement, you will
be uninsured for however long it takes to get a new policy. And
if disaster strikes during this period, you could be financially
devastated. This rule goes for everyone, but especially for
people getting on in years, since older folks sometimes have
trouble getting health and life insurance.
Rule 7: Get a High Deductible
You save money by having insurance policies with high
deductibles. The premium for high-deductible policies is always
lower. Not only that, but you save yourself all the trouble of
filing a claim and needing to haggle with insurance company
representatives if you have a high deductible and you don't need
to make as many claims.
People who buy low-deductible policies usually do so because
they want to be covered under all circumstances. But the cost,
for example, of a $400 fender-bender is usually worth paying out
of your own pocket when compared to the overall cost of being
insured for $400 accidents. Statistics show that most people
have a fender-bender once every ten years. The $400 hurts to
pay, but the cost of insuring yourself for such accidents over a
ten-year period comes to far more than $400.
One other thing: If you have a low deductible, you will make
more claims. That means you become an expensive headache for the
insurance company. That means your rates will go up, and you
don't want that to happen.
Rule 8: Use the Money You Save on Insurance Payments to Beef
Up Your Rainy Day Account
While you can save money on your insurance premiums by following
the rules mentioned earlier, it's probably a big mistake to use
that money for, say, a trip to Hawaii. Instead, use any savings
to build a nice-sized rainy day fund that you can draw on to pay
deductibles. A big enough rainy day fund can cover both periods
of unemployment and your insurance deductibles.