Most of us pay too damn much for insurance.
Let me clarify…
I’m not talking about how we shop for insurance, policy discounts we might be missing out on, or which providers we buy from (although all of those certainly can have an impact on insurance premiums). Rather, I’m talking about the level of insurance coverage that we buy.
We give insurance companies too much of our money over our lifetime. And our over-insuring pads their profits at our own expense.
Insurance coverage level needs and associated costs, in many ways, are a progressive tax on the poor and unfortunate. Remember, lower claim deductibles = higher premiums and higher claim deductibles = lower premiums. Consider:
- If you have a vehicle and little savings to cover an accident, you are more likely to need a lower deductible AND expensive collision insurance – both of which will dramatically increase your premiums.
- If you have a home and little savings to cover a large deductible, in the event of a complete loss of home you’re going to need a lower deductible, which will dramatically increase your premiums.
- If you have a family and little savings to help withstand the income loss of a deceased spouse, you’re going to need to purchase a larger life insurance payout, which will increase your premiums.
- If you’re in poor health (and lower wealth = poorer health, on average), you are more likely to need a lower deductible health plan, which will significantly increase your premiums.
In other words, the less money you have, the more you need to pay for insurance.
- If you have a car and significant savings to cover an accident, you can opt for a higher deductible and even drop collision insurance altogether, which will significantly lower your premium. And you’re less likely to make smaller claims, which would have boosted future premiums.
- If you have a home and significant savings, you can afford to boost your deductible, which will significantly decrease your premium. And again, you’re less likely to make smaller claims, which would have boosted future premiums.
- If you have a family and significant savings to help weather the income loss of a deceased spouse, you will need a lower (if any) life insurance payout, which will significantly lower your premiums.
- If you’re in excellent health (and higher wealth = better health, on average), you are more likely to opt for a higher deductible health plan, which will significantly lower your premiums.
The more money you have, the less you need to pay for insurance, because you have your own insurance policy – your savings!
BUT… most never make that shift. We continue paying extremely high premiums for way too much insurance our entire lives, even if our savings could easily cover our needs.
Why? That’s a tough one, but I think it’s a combination of:
- We don’t know any better and NOBODY talks about this.
- We get used to paying high premiums and don’t question it like we should.
- We scare easily, and are constantly bombarded by emotionally persuasive insurance industry advertising. GEICO, Progressive, AllState, and State Farm all spend well over $500 million annually in the U.S. to tell us how much in danger we are.
But mostly, I think it’s because we don’t view insurance coverage need as we should: the minimum amount of coverage needed to comfortably get through rare unfortunate catastrophic circumstances.
Last year, that insurance need epiphany pushed me to make some changes. Here is where our insurance portfolio currently stands:
- We dropped our collision coverage on our car and increased our liability coverage (resulting in a net savings of 60% per year).
- We increased the deductible on our house to the maximum level ($10,000). The only claim we would likely ever make is in the event of a total loss. This has saved us hundreds per year.
- We will not renew our 15-year term life insurance policy when it expires in a few years (we might even cancel it prior).
- We have continued with our use of a high deductible health plan (HDHP), which has resulted in a net savings of thousands of dollars versus a PPO plan.
- We added an umbrella insurance policy to increase our liability coverage.
How to Cut your Insurance Costs
With all of their fancy algorithms and actuaries, insurance companies are still making money on us, but they aren’t making nearly as much as they were a few years ago. And it’s because we now view insurance in a totally different light.
Lowering your insurance costs is a product of your mindset about how much insurance you really need.
Don’t misinterpret this philosophy as a suggestion that “everyone should get as little insurance coverage as possible” or you should get the same coverage levels as I have. For those without a savings backdrop, that makes zero sense. And even if you do have significant savings, you still want to protect yourself from catastrophic losses. But, as savings levels permit, don’t continue to overpay for too much insurance that you don’t need.