First, yes buying insurance is important. Nobody likes to think about things going wrong. But as Mike Tyson famously said: “everybody has a plan before getting punched in the face.” The real question in life isn’t whether things will ever go wrong, but what will happen when things inevitably do. Buying insurance is one of those facts of life, like parking tickets, or library late fees. You don’t want to have to pay for them, but they’re the cost of doing business.
Some types of insurance you can’t avoid paying for: like mandated health coverage or car insurance, while others are technically optional. But let’s dispel with the idea that you can do without any of it. Buying Insurance not only provides financial stability at exactly the time in life where that stability is most important, but it also frees up emotional bandwidth for other, more important things than money.
Usually when insurance kicks in, it’s at a moment when the financial consequences of not having it would be the absolute worst: disability insurance when you find out you’re sick (and thus cannot work), or collision insurance when you find your car has been crushed by a street cleaner. While it’s easy to grouse about the extra few hundred dollars a year you could have in your pocket without it, take it from somebody who has experienced both of the above scenarios: buying insurance makes life bearable at least, and most importantly, it keeps you going when your options are limited.
Don’t think of insurance as gambling, because in one important respect, it’s the opposite. Every day you walk around without disability insurance, for example, is a gamble that you won’t be disabled. Every mile you drive in a car that’s not insured is a gamble that nothing will go wrong. Smart financial planning removes question marks wherever possible. Sure, buying insurance is going to eat up a meaningful amount of the money you’d like to save, either for retirement or a good time, but some risks aren’t worth living with. Especially not when buying insurance is all too affordable.
However, navigating the insurance landscape can be overwhelming. These rules will help you make informed decisions about buying insurance, ensure adequate coverage, and optimize your insurance portfolio.
1. Rule of Thumb: Plan for at Least 5 Years Ahead
It’s a good idea when you’re looking at an insurance policy to consider what your life is likely to be like 5 years from now. Many forms of insurance reward pre-planning, because though rates rise year to year, policies that were negotiated in previous years tend to stay the same.
A good example is life insurance. Usually when you’re purchasing life insurance, you’re asked to consider all your major costs and liabilities in life: debts, mortgages, property value, and investments, and come up with a number you think would cover your family’s expenses if something should happen to you. Many life insurance policies are bundled with disability insurance, which is handy, since the calculations are similar.
By planning at least 5 years ahead, you can project how much your needs are likely to grow over the life of the insurance contract. Your bills may be less today, but if you’re planning to get married, have children, or buy a house in the next 5 years, you’re going to have to go back over your current policy and potentially add coverage.
Doing that after the fact tends to cost more than getting it done at the beginning. If you’ve planned for an increase in your need (or alternatively, planned to reduce your future expenses), you’ll probably find that 5 years later, you’re still carrying the appropriate amount of insurance. And since re-negotiating these policies tends to involve an increase in premiums or a decrease in benefits (as you get older and inflation increases), you’ll be better off if you’ve planned ahead.
As brokers tend to say: “the best time to start planning was 5 years ago.” But the second best time is now, and by planning 5 years ahead, you’ll soon find that you’re in a much better position to face whatever comes.
2. Rule of Thumb: Actually Read The Policy
I know. Ick. Reading.
But it’s important. Understanding what your insurance does and doesn’t cover can save you a heap of trouble and expense later. It can also ensure that you get the right coverage the first time. Many people purchase insurance through brokers, and this is a good way of getting a professional opinion on the quality of an insurance policy, and knowing how its coverage fits your life and lifestyle. But nothing substitutes for actually reading the fine print on your policy.
So break out your reading glasses.
3. Rule of Thumb: Get 3 Quotes
Most insurance brokers will come prepared with at least two quotes on most types of insurance. You can also prepare by researching industry standard rates before seeking a quote. This will help you not only understand pricing, but benefits of a policy as well. Anything covered by all the policies you look at should be seen as standard. Anything only covered by one or two quotes may be “extra.” Understanding what’s what helps you evaluate your own needs.
Remember, although the lowest quote is not always the best option, it’s in your interest to know what kind of coverage is being offered, and for how much. If you don’t ask for multiple quotes, you won’t know where your policy fits in, in terms of coverage or expense.
4. Rule of Thumb: Personal Recommendations First
There’s simply no better way of judging an insurance provider, a policy, or a broker, than personal recommendations from your family, friends, or colleagues.
You’ll know if you’ve ever referred someone to a broker or dealer, that how that person is treated reflects on you and your reputation amongst your own friends. Insurance brokers know this better than most. That’s why the best ones thrive on references. If a dealer or broker gets most of their business from personal referrals, you can be confident they’re strong in terms of customer service.
Not only are referred customers by and large treated better, as the other party has an interest in dealing fairly and openly with people who have been referred to them, but they also tend to get better prices and faster service, as the insurer or broker has an interest in rewarding the person who has recommended them by providing an above-and-beyond experience for those referred. In addition, going to someone who’s been personally referred will increase the likelihood that you, in turn, will have someone to recommend to others. This rewards good actors and discourages hustlers and scammers from entering the market, making everyone’s lives easier and happier too.
5. Rule of Thumb: Minimize Deductibles
Deductibles are the amount you must pay out-of-pocket before insurance coverage kicks in. Opting for higher deductibles can help lower premiums, but ensure that the deductible amount is manageable for you in the event of a claim.
In practice, deductibles are the “bread and butter” of most low-cost insurance plans. Not only do many plans have excessively high deductibles, but the effect of high-deductible plans is to continually push the prices of care higher. This is because prices that have to be negotiated between providers and insurers, such as the cost of an MRI or of a particular expensive surgery, tend to be more reasonable than services that are negotiated directly between the buyer and provider. Individual patients can’t collectively negotiate, while insurance companies have much more leverage to dictate acceptable pricing. As a result, elective or under-deductible costs tend to be much higher than they ought to be, all else being equal.
At the end of the day, deductibles are there to discourage buying insurance. Yet high-deductible insurance is surprisingly common, as people are enticed by deceptively low seeming rates. The lower your deductible is, the more likely you are to use your insurance, and the more likely you are to use your insurance, should the need arise, the better. People with high deductible medical insurance, for example, have been shown to receive worse care and to avoid medical treatment, even when it’s most needed. The story is the same with homeowners or car insurance. High deductible plans tend to be used less, and financially and practically, that tends to be bad news for consumers.
6. Rule of Thumb: Bundle Policies
Consider bundling multiple insurance policies with the same provider. Bundling often leads to discounts and simplified management of policies. Because insurers tend to have lower overall costs when insurance contracts are bundled together, this can translate to lower premiums and better service for you.
However, make sure to evaluate the individual policies within the bundle to ensure they meet your needs. A good way of getting excellent bundled policies is by working with an insurance broker who has good relationships with insurance providers.
Reassess At Important Milestones
Regularly review your insurance policies to ensure they still align with your changing needs. Life events such as marriage, the birth of a child, or changes in assets may necessitate adjustments to your coverage. Anytime something big happens in your life, it’s worth sitting down with your loved ones, and reassessing your insurance needs.
The good news is that insurers know this, and if you work with a broker, they will tend to keep track of things like this for you. Brokers knows that you’ll be looking at your insurance needs at certain times in life, such as when your children reach adulthood, or when your mortgage term expires. By working directly with a broker who’s familiar with your life and the major events in your life, you can relieve some of this burden on yourself.
7. Rule of Thumb: Go With a Big Name
There are always plenty of challenger brands trying to break into insurance and financial services. But ultimately, the single quality of an insurer that’s most important is stability. You want a name that’s going to remain the same year in and year out. A company that won’t be sold or taken over, and where your policy, your broker, and your customer service rep isn’t going to change every 18 months.
Evaluate the financial stability and reputation of the insurance company before making a purchase. Ratings from independent agencies such as Standard & Poor’s, Moody’s, or A.M. Best can provide insights into an insurer’s financial health and ability to fulfill claims. The biggest, oldest insurers tend to be the most conservative, and these are the names you should stick with for anything critical.
8. Rule of Thumb: Understand Exclusions
Pay close attention to policy exclusions, which are specific circumstances or events that are not covered by your insurance. Understanding exclusions helps you manage expectations and avoid surprises when making a claim.
Many of us skip past these details in our policies, assuming it’s all standard stuff that we don’t need to consider. But your specific needs may be different from most people, and there’s every likelihood that one policy will cover an issue you are worried about, while another won’t. These details can be surprisingly varied depending on the insurer and the plan, so pay attention to them.
9. Rule of Thumb: Customer Reviews Matter
First of all, every major insurer will have negative reviews, along with the positive ones. That’s part of doing business. People who have had to deal with their insurance company are generally in emotional distress at the time, and hearing things they don’t want to hear, like that something isn’t covered, or that a policy has expired, are unpleasant, and can lead to backlash online.
One star reviews can usually safely be excluded, but pay attention to the middling reviews, as well as the overall gist of most reviews, good and bad. The customers that are most likely to give you information you need are the ones who are only somewhat satisfied or dissatisfied. These in-between reviews tend to include mixed experiences, such as “good coverage, bad customer service,” or “slow to pay.” That’s critical information when choosing your insurer, so pay attention to the qualities that are being mentioned in these middling reviews, and take note.
Brokers Know Best
Insurance brokers tend to get a bad reputation in popular culture, which can be a shame, since some of them are among the most valuable professionals involved in your day to day life.
The job of a good insurance broker is not just to get you to buying insurance. Some brokers are indeed like this, but they don’t tend to do that well over the long term, compared to those who give steady, trustable advice over many years, and build a practice based on personal recommendations from satisfied clients. A good broker is one who pays attention to what your needs are, and never pushes you to get the cheapest or the most expensive coverage, but rather explains to you the positives and negatives of every option, and guides you to pick the coverage that works best for you.
A good broker is also an ethical broker. Your broker should always be open about their own financial incentives and interests. If they earn a commission from selling you something (and they virtually always do), they should be open about this, and make it clear which of the options they’re offering is the best option for them (the one that offers the best commission). If your broker can explain to you what their incentives are, and give you a clear explanation of why their recommendations are not just based on those incentives alone, you’re more likely to have a good working relationship with that person over a long period.
A good broker should not want to maximize their own short term gain. Instead, they should want to build up a list of clients who are happy with their work, and are likely to recommend them. This should mean being willing to make recommendations not based on their own short term financial interests. If you ever wonder about your broker’s recommendations, you can ask them about this, and they should be able to give a straight answer. If they can’t, look elsewhere. You deserve to work with someone who makes you comfortable, takes your concerns seriously, and gives you the information you need to make the right choices every time.
Disclaimer: The content of this article is for information and educational purposes only. Not financial advice. BudgetBakers is a provider of personal finance management software. This article has not been sponsored, provided by, or offered in exchange for any financial services provider, and is the sole intellectual property of BudgetBakers.