I’m often amazed at how much people inadvertently overpay for their insurance. In a way, it’s not too surprising since most insurance is complicated and figuring out how to get appropriate coverage at a fair price can be like solving the Rubik’s Cube puzzle. But if you get it right, you can save literally thousands of dollars per year…money that could go towards funding your retirement or an education for a child. Here are some of the most common errors we see people make:
Life Insurance
- Buying expensive cash value insurance when what you need is basic term insurance. The premiums for cash value policies are typically three to four times that of a term policy for the same death benefit. We had a case where a new client was not fully funding his company 401k plan which his employer matched dollar-for -dollar. When asked why, he said, “I can’t afford it.” We had him drop the cash value policy in favor of a larger term policy; freed up some cash to pay off credit card bills; and fully funded his 401k to capture 100% of the company matching contribution. As a result, his projected retirement results were significantly improved.
- Not re-writing a term policy when your facts have changed. We had a client who was paying a premium as a smoker. Under the contract, if you quit smoking for two years, you can amend the policy to a non-smoker status. When he became a client he hadn’t smoked for five-plus years so we applied for and had the policy revised to non-smoker which cut his premium by about one-half. The savings over the life of the policy was in the thousands of dollars.
- Keeping life insurance when it’s no longer needed. Take a moment to stop and think if the life insurance that you bought years ago is still necessary.
Annuities
- We almost never find a case where an annuity is a recommended solution for a client. They are typically high commission products sold by insurance salespeople. To pay the commissions, insurance companies load the policies with up-front and ongoing expense charges which often make them a poor investment choice. If you own an annuity with a ‘surrender charge’, you probably own one of these products. Take a close look at your alternative options, particularly if the annuity is held inside an IRA.
Homeowners Insurance
- Often, in reviewing homeowners and auto insurance, we’ll find the client has relatively low deductibles. On average, homeowners submit a claim only about once every twenty years. We’ve found that by raising the deductible from say $500 to $1,000 or $2,500, your break-even is three to four years…meaning, unless you have a claim once every three to four years, you’re better off with the higher deductible. And if you do submit claims often, your insurance company will likely raise your premiums or cancel your coverage.
- Do you have an alarm system for your home? If so, you may qualify for a loss prevention credit. A spotless driver record could also qualify you for lower rates…if not with your current company, another carrier.
- In many cases, you can cut premiums by having your homeowners and auto with the same carrier.
Disability Income Insurance
- We work with lots of professionals who have purchased personal disability income insurance policies. In many cases, their premiums can be cut by two-thirds or more if they instead purchase group coverage through their professional association. Agents claim that the private insurance is ‘better’. Right now we are fighting a case where a well-known, well-respected big-name insurer is rejecting a disability claim that should have been covered. In fact, another big-name insurer is fully paying this client under the same claim. My preference: go for lower premiums.
These are just a few of the more glaring examples where we find people are paying more than they should for coverage. To solve this puzzle, how to get appropriate coverage for a competitive premium, your best bet is to have an independent third-party financial advisor perform a thorough review.