Money 402: Insurance

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Money 401: Investing

The entire purpose of insurance is to transfer risk

  • There are other ways to be prepared for certain emergencies
  • Certain losses without insurance will bankrupt you
  • It is a defensive strategic method
  • Only pay insurance on risks you cannot handle losing
  • It is not a good way to gain investments

Insurance is made of several parts

  • Deductible – the amount you have to pay out-of-pocket before the insurance company starts paying
    • Do a break-even analysis to find out how much you should pay
  • Premium – the payments you’re making every month to keep the insurance
  • Limit – the most that the insurance will cover, given the circumstances the policy covers
  • Copay/copayment – a certain percentage or amount that the insurance company will pay, which is technically a type of deductible
  • Every insurance policy makes their pricing the same way
    1. Takes many legally measurable circumstances that can affect the risk of them paying out including
      • Body type
      • Age
      • Health history
      • Accident history
      • Ethnicity
      • Religion
    2. Calculates the probability and cost of loss(es) across a duration of time
    3. Adds a little extra to increase the chances of a profit
    4. Divides the total amount out into month payments

Keep your insurance information in order in a single document

  • Type of insurance
  • Company
  • Plan ID#
  • Coverage amounts
  • Agent’s phone/address
  • Monthly premium

Try to save on insurance

  • Avoid features like
    • Extended warranties
    • Low deductibles
    • Savings plans
    • Features you don’t fully understand
  • Shop around for it every year or after every policy ends
    • Try to find discounts for the group insurance policies your workplace offers
    • Bear in mind that staying with an insurance company for a few years can sometimes give a discount
    • Online-only insurance companies are generally cheaper
    • Try an independent insurance agent who has the freedom to look at different companies’ insurances
  • Try to have multiple policies from the same company
  • Pay the premium up front to get a discount or avoid admin/interest charges
  • Buy insurance with after-tax dollars to ensure that the payouts are after-tax
  • Sign up for automatic payments to get a discount
  • Outside of what the law requires, insurance never has to be a permanent solution
    • Always do your own research before starting or ending a policy
    • Be sure there are no gaps in coverage across time
    • Don’t buy what you don’t understand

Types of insurance

  • Auto insurance
    • If your emergency fund is full, raise the deductible
    • Carry an adequate amount of liability
    • If it’s an older car, think about dropping collision coverage
    • There are sometimes discounts
      • Hybrid/electric vehicles
      • ABS, passive restraints and other safety features
      • GPS trackers, anti-theft box and other anti-theft devices
      • Keeping the vehicle garaged overnight
      • Low mileage
      • Good GPA in school or staying in the education system
      • Not getting a ticket or in an accident
      • Defensive drivers who prove themselves by going through an authorized course
      • Welcome bonus for leaving a current issuer before the policy expires
  • Homeowner’s/Renter’s Insurance
    • On homeowner’s insurance, guaranteed replacement cost if at all possible
      • Have the coverage include the natural disasters common in your area
    • Get renter’s insurance, it is unbelievably cheap
      • If you rent a home that burns down, the owner’s insurance will not cover you!
    • Consider an umbrella policy once you really start acquiring wealth
  • Identity Theft Protection
    • Avoid paying for ID theft protection that only monitors credit reports
    • Good protection services assign a counselor to clean up the mess
    • It takes an average of 800 hours to clean up identity fraud
  • Health Insurance
    • The number one cause of bankruptcy in the West is medical bills
    • Try to bring the insurance costs down if you’re healthy
      • Increase your deductibles/copayments/stop-loss
      • However, never decrease the maximum pay as it would be too much risk
  • Disability Insurance
    • Designed to replace income lost due to a disability
      • Aim for 65% of your current income
    • Based on occupation, but doesn’t consider age
    • Buy it if you run the risk of becoming disabled at doing the job you were trained to do
      • Lower your premium with a longer elimination period (time to start getting paid out)
    • The best disability insurance will come through the workplace
      • Usually called occupational insurance, and is usually only available in 2 year policies
    • Don’t pay for policies that last less than 5 years
  • Long-Term Care Insurance
    • Will pay for nursing home, assisted living facilities and in-home care
    • Absolutely necessary for anyone over 60
      • There is a 69% chance of needing it
      • Get it the day you turn 60
    • Medicaid and other government programs are dicey at best in their reliability
    • The last 6 months of a person’s life is where 80% of the medical expenses of their entire life go toward
  • Life Insurance
    • Technically, it should be called death insurance as it replaces income lost due to death
    • Most people are unaware of what their life insurance policy is
      • Term Insurance
        • Significantly less expensive
        • For a specified period
        • No savings plan built into it
      • Whole Insurance
        • Much more expensive
        • For life
        • Funds a savings plan
    • As stated before the need for life insurance, contrary to insurance salesmen, does not have to be a permanent solution
      • Whole insurance is a complete waste of money because insurance returns are always lower than pretty much everything else
      • The additional costs can more effectively fund a personal savings plan
    • Children only need burial expenses
  • Other Insurances
    • Credit Life Insurance & Credit Disability Insurance – a waste of money because that money is better spent actually paying off creditors
    • Supplemental Health Insurance – that’s the whole point of the health insurance itself
    • Accidental Death – a gimmick
    • Prepaid Burial Policies – saving should be ready for that
    • Mortgage Life Insurance – pay off the mortgage instead
    • Weird gimmicks
      • Return of premium
      • Waiver of premium
    • Generally, the more complex the insurance the less useful or beneficial it becomes for the price you’re paying
Next: Money 403: Passing The Wisdom On