How to use Insurance
Insurance is a requirement for a sound financial plan. To pay a bit every month to help you recover from a catastrophe is money well spent. But most people have so little capability to recover from any setback that they are buying the wrong kind of insurance. The biggest place I see this is Health Care, we don’t have Health Insurance in this country anymore, we only seem to have prepaid Health Care. When you have to provide insurance information for a routine $200 doctor visit then it’s not really insurance which is meant to cover a catastrophe, but getting reimbursed for your pre paid health care.
This is a silly way to operate. If you’re going to pay hundreds of dollars every month for something whether you use it or not, you can be sure that people will use it at every reasonable, and many unreasonable, opportunities. This is not what Insurance should be. Another example is people who have a $200 deductible on their auto insurance. I mean $200? please. It’s hardly worth filling out all the paperwork and going through the insurance hoops unless you get $500 or more for your trouble. And if you make the claim they’ll probably raise your rates anyway.
Remember that by its nature on average insurance must be a losing game. That is the average premium must be enough to not only cover the average loss, but also the overhead of fraud, taxes, and running the insurance company. Likely your premiums are on average twice as expensive as the amount you will ever claim. But, you might be that unlucky sod who’s house burns down, or gets an expensive disease, or has his car totaled. In this case you’ll be very happy that you bought into this losing game. So what should you do when confronted with a losing game that you have to play? My idea is to make the game as cheap as possible, and opt not to play if at all possible. Buy the least coverage I can to do the job.
Use insurance to only cover the big high risk things. The best way to do this is to raise your deductible as high as you can reasonably cover. I have $1000 deductible on my car insurance as well as on my home owners policy. This means that for any minor issue less that $1000 I don’t even have to deal with my insurance company, but if my car is totaled I’m covered. I’m covered by health insurance at work, but if I wasn’t then I’d buy a policy to cover only catestrophic issues, and pay for all my doctor visits out of pocket. The cost for that kind of health insurance is a fraction of a “full coverage” policy.
I figure raising my deductible from $200 to $1000 saves me about $300/year in premiums on my auto and home owners policies. In 10 years I’ve never had a claim on either one so I’m currently $3000 ahead on that deal, plus the return on that money over the past years. So get your cash cushion in place and raise your insurance deductibles, there is money to be saved there.