All insurance works pretty much the same way: You pay a premium (a set amount of money) to the insurance company, usually on some sort of schedule (monthly or yearly, for instance. In return, the company issues an insurance policy to you, which is a contract that gives you certain coverage, or financial protection. When you suffer an insured loss, you file a claim and the company pays you a benefit.
Insurance is meant to protect you against catastrophes, not day-to-day annoyances. You use insurance to guard against things that aren’t likely to happen, but that would cause financial hardship if they did occur.
Your goal should be to have just the right amount of insurance. If you have too much, you’re wasting money. For example, if you have a $50 deductible on your car insurance, you’ll probably end up paying the insurance company far more in premiums than they’ll ever pay you in benefits! Or if you’re young, unmarried, and have tons of credit card debt, life insurance usually isn’t a good place to put your cash.
On the other hand, if you’re a forty-year-old small-business owner and father of five, term life insurance could be an excellent way to hedge against the risk that you’ll die tomorrow. Or if you’re a millionaire who likes to drive fast, increasing the limits on your automobile liability coverage could save you a fortune if you get sued for the damage you cause when you plow into the back of a school bus.
How to Save on Insurance
The number one thing you can do to save money on insurance is to self-insure as much as possible. That is, set aside your own money to cover minor and moderate catastrophes, if possible. Try raising the deductibles on your auto and home insurance policies. Then take the difference between your old premiums and your new premiums and put it into a “self-insurance” online savings account every month. It won’t take long for you to have more than enough to cover the deductible.
You can also save by reviewing your coverage from time to time and following these suggestions:
- Read your policy. As with all legal contracts, it’s important that you read your policy so you know what’s covered and what isn’t. Pay attention to policy changes that come in the mail. If you have questions, ask. And make it a habit to review your policies every so often to be sure you understand them (and check whether anything has changed).
- Don’t duplicate coverage. Know which policies provide which benefits. If you have a AAA membership, for example, you don’t need towing coverage on your car insurance. And if your credit card doubles the warranties on the things you buy, don’t pay for extended warranties. I try to go over my policies once a year to remind myself of my coverage. (I’m a forgetful guy!) I recommend you do the same.
- Consolidate. Get all of your insurance from one provider. Insurance companies often give a discount if you have multiple policies with them. Plus, this saves you the hassle of having to pay more than one company.
- File fewer claims. Don’t nickel-and-dime your insurance company. If you file claims for every little thing, they’ll raise your rates. Insurance is meant to cover unexpected large losses, not every ding your car gets from shopping carts.
