A former insurance agent shares his run-down on which insurance products to buy, consider, and skip, and most importantly why. Cheat sheet on different products, with my own comments added.
I always like hearing from specialists in an industry. They have the scoop on what gets approved and what doesn’t, where corners are usually cut and how to protect yourself, all sorts of interesting things. One of the areas I get the most questions – and one which adds up to significant dollars in your financial life – is insurance. Life insurance, home insurance, auto insurance… these are multi-hundred or multi-thousand dollar decisions each year, and a mistake in coverage could cost you down the road in a catastrophe. So I’m pleased to highlight this article that ran in Men’s Health from a former insurance salesman.
Here are a few of the most interesting points.
“Insure Yourself Against Catastrophe, Not Inconvenience”
Direct quote from our expert, and I couldn’t agree more. I’ve given similar advice to readers at the crossroads of an expensive insurance purchase.
Insurance companies make their money by pooling risk across a population and charging each individual more than the expected value they can hope to gain from the pool. The average insurance buyer is expected to lose out in the long run. Thus, you should buy insurance for only the circumstances in which the results would be catastrophic – situations in which you would be unable to afford the cost, or which would otherwise put a significant dent in your wealth that could create a hugely disruptive setback.
One implication of this is that you generally want high deductibles on things like auto collision coverage. Collision coverage is for when your vehicle collides with another object, say a tree or stop sign. The deductible is how much you have to pay out of your own pocket before your insurance coverage kicks in. If you’re asking for collision coverage with a $100 deductible (insurance pays for anything above $100 in damage), insurance companies will price in many more claims when calculating what they’ll charge you. Again, they set this rate explicitly for their pool of customers so that you pay more in on average than you take back out in the form of claims. You would do better to consider a higher deductible, perhaps $300-$1000+.
Separate from the issue of what deductible to set is how much coverage you will get: what the maximum payout will be from your insurance company for a claim. When it comes to potentially catastrophic problems, you want a lot of coverage. For example, bodily injury. If you hit somebody and they sue you for hundreds of thousands in medical bills, you will wish you had opted for higher coverage, which actually does not cost that much more.
Reality Is Your Guide On What To Skip
Our expert gives credit insurance, mortgage insurance, trip health insurance, cancer insurance, and wedding insurance the axe. How likely is a problem to occur, and would it be catastrophic or just inconvenient, as discussed above? This salesman likens the purchase of such products to trivial inconveniences. “I mean, would you buy no-trout insurance before you go fishing? How about no-fat-middle-seat-passenger insurance? Or no-cute-women-in-my-local-bar coverage?” he asks. I’m not sure I would go so far as that, but I understand the point he’s trying to make.
I would generally add travel insurance in this bucket, except for very specific, expensive trips. I’ve had too many friends and family buy coverage and cancel a trip only to find out the reason for their cancellation wasn’t in fact covered by the policy. Generally travel insurance will only kick in if you, the trip taker, have a medical emergency that necessitates the cancellation of the trip. Your kid gets sick and you can’t take the trip? Work obligations? Concerned about a safety warning but that warning hasn’t reached a specific level? Tough luck.
Cheat Sheet: Buy, Consider, Skip
The article provides this cheat sheet on how to approach all the products on the market. I’ve added my own comments brackets.
- Health If you purchase from a health insurance exchange, pay the extra 8 percent premium for “open access,” which allows you to see specialists without a referral, says Jack Hungelmann, author of Insurance for Dummies.
JP: Agree. Medical expenses can be catastrophic. If you’re paying out of pocket and don’t get subsidies, I generally favor high-deductible plans. You will get access to a tax-deductible HSA].
- Term Life Go for a 20-year plan when you have kids, says John Ryan, C.F.P., a Denver-area advisor.
JP: This is case by base in my book, though for most families the death of an income-earner would indeed be catastrophic. I elaborate more on the scenarios here. As a retiree who doesn’t go to work to earn an income, life insurance is unnecessary for my family.
- Disability You can save 40 percent if you’re willing to wait 90 days before benefits kick in, says Hungelmann, and another 30 by limiting payouts to five years. Buy a policy that prorates your benefit if you’re partially disabled.
JP: The logic around life insurance applies here. If losing an income-earning partner is highly disruptive, this may be worthwhile. Many employers already pay for some version of this. As a retiree, disability is not really something I need to take out for myself on behalf of my family.
- Auto Set your liability limits high enough to cover your assets, says Patricia Harman, editor of Claims, a magazine for insurance pros. Most insurers will settle within the coverage limits of your policy.
JP: I’m not sure I would say ‘all your assets’. I would say get coverage at the lower of your total assets, or the max the liability is likely to be. For example, I don’t think I need bodily insurance liability that is $2+ million which is where my total assets are, because if I were to cause an accident I don’t think it will get up to that figure. I like to price out a couple of different scenarios – you can do it super quickly online and see how much a step up in coverage costs.
- Homeowners Make sure your agent doesn’t lowball the replacement value of a home in order to offer a lower premium, says Amy Bach of United Policyholders.
JP: This almost happened to me. I had to ask a few pointed questions and look up replacement value myself as the rep I was speaking to did not seem particularly knowledgeable.
- Flood Twenty percent of flood claims are filed in low-risk and moderate-risk areas, and the weather isn’t getting less crazy.
JP: Given Hurricanes Harvey and Irma, I’d give this one some serious thought.
- Umbrella Buy this if your assets exceed the liability limits of your homeowners and auto policies. If a guest at your party kills someone while driving home drunk, an umbrella policy will protect you.
JP: Have also heard several other agents speaking in a friend capacity – not selling capacity – say the same thing.
- Longevity Annuity It’s designed to protect you from outliving your money. And it’s better than a classic annuity because it has low up-front costs, says Michael Kitces, C.F.P., who advises other financial advisors. Still, it’s a gamble. If you die before payments kick in, your heirs get nothing. But if you live to enjoy a few years of payouts, you’ll earn your premiums back and then some.
JP: I don’t love this. Generally the going payout for annuities significantly lags what you will be able to generate for yourself. Keep in mind when you buy an annuity policy, the company takes all purchasers’ assets and tosses them in different market opportunities. May be useful in a few select cases, perhaps to ensure a base level of expenses. But if your assets are large enough to have a cushion to a base level of expenses, you won’t need the ‘security’ of this product. Most of us hope to achieve the latter, rendering the former unnecessary.
- Long-Term Care This protects you from the high cost of assisted care, says Ryan—in America, 13 percent of aging parents pay for help. A semiprivate room in a nursing home costs $80,000 a year.
JP: Have heard legitimate support for this and will be considering this myself. There used to be policies with unlimited coverage for your entire lifetime, but these days most policies will cover a set amount of years in long-term care before capping out. For example, after 3 years in long-term care you’re on your own. Apparently it got too expensive offering the lifetime policies. This doesn’t quite cover all the truly catastrophic scenarios. I’m still looking into this.
- Dental and Vision These plans really just offer pre-negotiated discounts in exchange for your premium payment, says Kent Anthony of First Group Insurance.
JP: Agreed. I think of these as just an arbitrage on what I think it will cost for routine work out of pocket vs with the policy. Most policies don’t cover catastrophes and surgery, but they also don’t charge you premiums for that. It basically ends up being about pre-negotiated discounts.
- Accident & Critical Illness Consider it if your employer doesn’t offer disability insurance, or if it’s beyond your personal budget.
JP: Not familiar with this. I suppose it comes under the same logic as life insurance and disability above.
- Auto Rental Your auto insurer and credit card may not pay the “loss of use” and “diminished value” provisions that some rental companies put in the fine print.
JP: I would check if your current auto policy covers your liability if you have an accident while driving a rental car. Most do. The chief benefit of an auto rental policy then becomes coverage of damage to the rental vehicle itself. I generally opt out.
- Child Life Not worth it unless your kid is the family’s breadwinner, says Bob Hunter of the Consumer Federation of America.
- Credit, Mortgage, and Trip Health Beware of any insurance that’s pushed on you as an add-on to another sale, says Hunter.
JP: This make sense to me, with the exception that if you’re doing a low down payment mortgage, you may be required to purchase PMI in order for the loan to be approved.
- Cancer Obamacare laws make it redundant with your regular health coverage, says Hungelmann.
JP: I didn’t even know this was a thing.
- Wedding If only you could insure your marriage instead.
As we wrap up 2017 and head into a new year, it may be worth giving your insurance policies a once-over. Do you have the coverage you need? Too much coverage?
Are you weighing any specific insurance purchases right now? What questions do you have about it?