“Consumers’ primary experience with insurance is being forced to contemplate unpleasant circumstances,” said Zach Finn, professor and director of the Davey Risk Management and Insurance Program at Butler University. “They will derive no value from the product unless tragedy befalls them. Seriously, who wants to be a party to that transaction?”
Fortunately, you don’t have to be an expert to make better decisions about your insurance. Understanding these four tips can go a long way toward getting you the protection you need.
1. You probably need more and less insurance
According to Finn, “Insurance is meant to cover exposures that will ruin your life and not your year.”
Adds Terri Vaughan, interim dean of Drake University’s College of Business and Public Administration, “Most consumers have deductibles and liability limits that are far too low.”
What does this mean for you? Forget about having to cut back on presents over the holidays — worry about having to raid your kids’ college funds. An expensive car repair won’t hurt you in the long term, but being sued might.
If you can afford a low deductible and a high liability limit, that’s great. Otherwise, opt for a higher deductible and protect yourself against last-minute expenses with an emergency fund instead.
“Higher deductibles yield guaranteed savings in premium with only the potential for higher costs,” point out Kristopher Presler and Herschel Day, professors of actuarial science at the University of Wisconsin-Eau Claire.
Then use the savings in your monthly premium to buy more liability coverage. The amount you carry should equal your net worth.
“Raising your auto physical damage and homeowner’s insurance deductibles to $2,500 should net you roughly $250 in savings per year, depending on where they were to begin with. Oddly enough, $250 should be enough to buy a $1 million umbrella policy,” recommends Finn. This will protect you from liability judgments above and beyond your auto and home policies’ typical limits.
2. Your insurance needs change over time
Unfortunately, no one insurance plan will fit you for the rest of your life. The amount and types of coverage you need often change from year to year, or even more often.
Some of your assets – like your home – will probably need more protection over the years, as rebuilding costs rise and you make improvements. Other assets will need less protection as they age. “Limits and coverages should be reviewed annually, especially with a depreciating asset such as an automobile,” Presler and Day said.
“Many people buy collision and comprehensive insurance when they shouldn’t,” suggests Vaughan. These add-ons are often worthwhile in a new car, but not for a 4- or 5-year-old vehicle. Your liability limits should remain the same.
And while you’re revisiting your coverage, get quotes from a few insurers. “Shopping for insurance often provides short-term savings,” Presler and Day said.
3. Your insurer always has surprises in store
Every year, companies alter their policies, adding exclusions, and new coverage options and discounts. When you reassess your coverage, ask your agent to explain any new developments. Some of these changes may save – or cost – you money.
To Vaughan, the most interesting new trend in insurance – especially auto insurance – is the increasing granularity of premiums.
“Companies are starting to use telematics, where some electronic device records where and when you are driving,” Vaughan says. “It is possible to even look at how you drive. How do you brake at a stop sign? How quickly do you turn corners or accelerate?”
What does this mean for consumers? “Driving well is going to be increasingly important. Good drivers will pay less, and bad drivers will pay more,” Vaughan says.
4. There’s a right time to get covered
Whether you’re shopping for flood insurance, earthquake coverage, life insurance or other policies, be proactive. It sounds obvious, but the right time to buy a policy is before you have a problem, not after you’ve already suffered a loss or disqualifying event.
Take life insurance, for example. “The time to buy a nice whole life insurance policy that can build a reasonable cash value is right after school, when the cost is low and insurability is all but certain. Consumers who wait for kids to buy life coverage may find that they have since become uninsurable,” Finn says.
While some may decide to purchase a term policy or wait a few years after graduating, it’s best to be proactive about any insurance you may need. See an agent you trust to discuss your coverage options, risks and financial situation.
The bottom line
When it comes to insurance, the most important thing you can do is stay informed — and keep your agent in the loop. Let him or her know about any changes to your assets and stay up-to-date on the policies you have, as well as any you may need. It will take time, but if you ever have to make a claim, you won’t have to wonder if you’re covered.