General insurance concepts

General insurance concepts

Insurance coverage in America

After paying off your credit cards and building up an emergency fund, the next thing you'll want to do is check your insurance coverage.

Americans are strange when it come to insurance. Many of us are terribly underinsured in some areas and overinsured in others. And some people buy insurance that they just don't need.

Unfortunately, for the most part people's insurance coverage reflects the work of fear and their insurance agent rather than rationally applied risk assessment.

Risk assessment

Here's an example. Suppose you have a new, expensive car and an old clunker. You use the clunker for commuting while the other car sits unused for the most part. You have $100 deductibles for comp and collision on both cars because your agent said that was "standard".

You could save money over the long run by completely dropping the comp and collision on the clunker, and raising the deductible on the nicer car to $1,000. If your clunker is in an accident, you probably won't get much out of the insurance company anyway, so comp and collision isn't needed.

The nicer car would be expensive to repair, so the $1,000 deductible may be a little risky. But if you rarely drive it, it's probably an acceptable risk. If you start driving it more, you could drop the deductible to $500.

The key point here is to assess the potential risk and pay the insurance company to assume only those risks that you can't bear individually.

Think big when it comes to insurance

When it comes to insurance, you'll save money in the long run and give yourself better protection if you think big. This translates into big deductibles and broad coverage.

Let's look at the "big deductibles" part of this formula. Processing small claims costs insurance companies a lot of money. There's forms to fill out, checks to cut, and investigations to weed out fraud.

If you're like me, you don't like to fill out paperwork, and if you have a small deductible, you'll have to fill out paperwork just to file a small claim.

Insurance companies want to make a profit, and every dollar they pay out in claims reduces their profits by one dollar. So it's in their interest to pay out only what they have to and no more.

Also, with the prevalence of insurance fraud, these companies justifiably don't want to rollover and pay claims just because someone sends them a piece of paper.

Horror story of filing a claim with an insurer

I'm sure everyone has an insurance claim horror story, but here's one I got while I was earning my MBA. When I entered graduate school I needed health insurance, so I looked at the university's one-size-fits-none health insurance program.

The insurance was a bargain overall, but I didn't like the low deductible of $250. I'd have preferred to save money by having a $500 deductible. This wasn't an option, but I signed up for the insurance anyway.

I subsequently saw a doctor regarding a mild injury, and the doctor soon began billing me directly for $450 because the insurance company hadn't paid him.

To make a long story short, I eventually had to pay the doctor myself and then seek reimbursement from the insurer. I finally got the reimbursement about a year after I originally had seen the doctor, and I wasted a lot of time trying to wring a couple hundred dollars out of the insurer.

So do yourself a favor and take as high a deductible on your insurance as you can afford. This will cut your monthly premiums and allow you to save your energy for filing big claims with your insurer.

Get broad coverage with insurance

In addition to thinking in terms of big deductibles when it comes to insurance, you should also think of broad coverage. Broad coverage is best for you because it provides you with the full protection that you need, and helps you to avoid wasteful small policies.

A good example is life insurance and travel insurance. If you have dependents, you probably need life insurance that protects you 24 hours a day, 365 days a year. Insurance that just covers you for a couple of hours while you're in an airplane is a waste.

The same holds true for health insurance. If you have a good, comprehensive health insurance policy, you might be able to drop the health insurance coverage that is often seen on automobile insurance policies -- unless your state requires it.

In many cases this secondary health coverage provided by your automobile policy will pay only after your primary health insurance is exhausted, so you're paying for coverage that you may never be able to use. It's better to put your money into a good health insurance policy that covers you all the time, not just while you're driving your car.

The same thing goes for specialty insurance like cancer insurance. Look for a good health policy that covers you against all illnesses, not just a single one.