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.
Adversely,
- 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, and State Farm all spend well over $500 million annually in the U.S. to tell us how much danger we are in.
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.
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I don’t think that cancelling life insurance is a very good plan for families who would really need the money if a significant earner died. Of course, families with substantial savings could afford to do this, but I would guess that most readers of this blog aren’t there yet. Will cancelling life insurance really save you enough to be worth the risk?
Thanks. I love your blog.
I agree – I have personally considered cancelling life insurance due to a high net worth, but did not suggest it as an option for everyone in all situations. Life insurance can be cancelled when the income loss of that earner no longer creates irreparable harm.
Good tips.
The only thing I disagree with is cancelling the life insurance.
Is a 15-year term really costing you that much? I have 8 years left on a 20-year $750k policy (for each my wife and myself) and it’s less than a thousand per year total. Even though we’re early-retired wealthy it such a good cost-risk-reward situation that it makes sense for us to continue carrying it to the end of the term.
I’d think twice about dropping a reasonably-priced term life policy.
You are correct. I likely will not since I only have a few years left and it’s a cheap term plan.
This is SO true! Most people are overpaying for insurance. I realized it was as easy as calling my insurer and flat-out asking for discounts. That’s why we both took an online defensive driving class to significantly reduce our car payment.
If you drop collision and get in an auto accident that is your fault does that mean your insurance will not pay?
If you drop collision, you’d pay for repairs to your own vehicle, regardless of fault.
G.E. Miller – that is incorrect/misleading.
If you get into an accident and don’t have collision coverage, you only pay for your damage/repairs if the accident is your own fault. If it’s the other party’s fault, then *their* liability coverage is what pays your bills.
If the other party doesn’t have liability insurance, then your own insurance company will cover it so long as you have Uninsured Motorist Coverage (which most states require, and everyone should have – because it costs next-to-nothing).
The only fine print to all of that is you have to fight your own battle here. Without collision coverage, your insurance company isn’t going to fight for your money for you. This can also take time. So if you need the car repaired/replaced immediately, you’ll likely have to do it on your own dime until the insurance company settles the case. It may even require getting a lawyer. For that reason, I HIGHLY recommend a dash cam – it will easily pay for itself 100 times over if you ever have any non-fault accident (with or without insurance).
I’ve already had an instance where a hit-and-run driver later tried to blame me, and if not for my dash cam they would’ve declared it a 50/50 fault accident since it was my word vs theirs. The dash came spared me from having to get a lawyer (that might not have even been able to do anything), saved me $5k in repairs, and turned what could’ve dragged out for months into a settlement check that showed up one week after I sent the footage.
That’s correct. I didn’t clarify that your own insurance would not pay for any repairs, but if others were deemed to be at fault, their insurer could. Good advice on the dash cam.
No problem!
I only started reading your blog a few weeks ago. But I have been following Mr. Money Mustache and Early Retirement Extreme for many years. I’ve noticed that you and MMM have similar viewpoints on a lot of things, ie insurance, expenses being more important than income, etc. Do you read MMM? I like reading both of you guys a lot. I love when I come across an article that articulates a point I have been trying to make to friends or family and have them read the article to further explain my point such as this one.
Great article. I had no idea about most of these savings. Thanks!
A Consumer Reports survey found that of those who had switched insurers in the last five years, 62% found a lower rate. But, like you mentioned, nobody seems to bother switching. In fact, most of us have been with the same insurance company for 10+, 15+ years.
It’s crazy to think we (consumers) will shop around for almost EVERY other product in our life, and we will switch to a new brand in a heartbeat – even if it means just saving $10. Meanwhile, we just keep paying our auto insurance bill automatically. And insurers know this.