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’tand you certainly don’t want tocover 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 companiescompanies that sell policies directly to the public without a
broker taking a commissionsince 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 PoliciesBuy 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.
Bellevue WA certified public accountant &
author Stephen L. Nelson CPA has written more than 150 books. His bestselling
book is Quicken for Dummies, which sold more than 1,000,000 copies. His books have
sold more than 4,000,000 copies in English and have been translated into more than a
dozen other languages.
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