There are two things that are almost universally true – we all need insurance of one kind of another, and we all hate paying for it. It’s one of the many catch-22s of modern life, but with a little bit of consumer savvy, you can drive your premiums down as low as possible while still maintaining a high level of coverage and service.
The following is a primer explaining some of the most important aspects of the four most common types of insurance; auto, homeowners, health, and life. I personally own insurance in all four of these categories. My hope is to supply the foundational knowledge necessary to ensure you get the best possible deal every time.
There are two things that are almost universally true – we all need insurance of one kind of another, and we all hate paying for it.
How About a Quick Answer?
Unfortunately, it isn’t easy or really possible to provide a generic and accurate answer to the question – “Which insurance product is right for me?“. When faced with a decision for auto, home and health insurance, your personal situation and finances will dictate which option is best. It’s only in the case of life insurance that a general recommendation can be given that most (other than insurance salespersons) would consider sound advice.
In the case of life insurance it makes the most sense to buy a 15 – 20-year level term policy at 10 times your gross annual income. If you earn $75,000 per year, this would mean purchasing a $750,000 policy. The choice between a 15 and 20 year policy really comes down to how long you need coverage. If you have very young children or are a young newlywed, a 20 year policy probably makes more sense than a 15.
For the other categories of insurance – auto, home, and health – I’d be doing you a gross disservice if I attempted to provide a generic answer since it’s highly unlikely that the advice would be good for everyone. Fear not though. A lot of work has gone into making this article a very fun read. Who knows? You might even re-read it, print it out and share it with your friends because of how excited you are about the information! Considering how important insurance is when an unforeseen event happens, you’d probably agree that learning a bit about it is a good use of your time.
Each of the four sections can stand independently of the others. So if you’re only interested in health insurance, you can skip to that section and not really miss anything.
Let’s get into it.
Auto Insurance
Full Coverage vs. Liability – Which Do You Really Need?
The simplest way to explain the difference between full coverage and liability coverage is that liability only covers damage done to other people’s car and property, while full coverage covers your car as well. Whether it’s their body or their vehicles, liability coverage covers the expenses of the people on the other side of an accident that’s your fault. It helps prevent you from ending up in court. Coverage isn’t unlimited, and carriers will normally limit both the amount they’ll cover for each person involved and for the accident as a whole.
Full coverage covers your side of things. If you get in an accident with only liability coverage, you’ll be on the hook for your own car repairs. With full coverage, the insurer will take care of those costs. Collision-level coverage will pay for repairs to your vehicle regardless of whether you’re at fault or not. Comprehensive coverage takes it even further and will often cover things like storm or fire damage that go beyond accidents. It’s important to understand that full coverage insurance does not automatically include coverage for your own medical bills.
Do you really need full coverage?
The answer, technically, is no. The vast majority of states only legally require drivers to carry liability coverage in varying amounts. See this article for a full list of state-by-state coverage minimums. If you have a loan on your car, your lender is likely going to require full coverage insurance as a means to protect their asset.
But remember that liability really only exists to help ensure that you aren’t financially ruined in the event you injure someone or damage their car and other property. But what about your own expenses? I’m of the belief that if you can afford it, carrying full coverage is a really good idea.
Deductible Choices – How Much Should You Shoulder?
The deductible is the amount of money you agree to pay out of your own pocket in the event that you have to file an insurance claim. For instance, let’s assume you have a no-fault auto insurance policy with a $500 deductible. If your car suffers $1,500 in damages, you’ll be on the hook for $500. The insurance company will pick up the remaining $1,000.
Because the size of the deductible impacts the price of the premium, it’s important to choose wisely. The insurance premium is your monthly or annual cost to have the policy. A higher deductible means lower premiums since the insurer is less exposed in the event of an accident. Should you opt for a lower deductible, the cost of your premiums will shoot up.
When choosing your deductible amount, consider whether you can afford the spike in premiums that comes with going low. It’s also important to think about the value of your car. If your car is old and not worth very much, you won’t be looking at a big payout on it anyway, so eating a higher monthly premium to lower your deductible probably doesn’t make sense.
Do you need rental car coverage?
Rental cars present a tricky problem. In most cases, if you have full coverage auto insurance for your own vehicle, it’ll also cover a limited amount of damage on a rental vehicle.
Many credit cards also now carry a certain amount of insurance that will help cover rental car damage. It’s important to read your policies and contracts carefully to determine what your limits are.
The flip side of the coin is that not only are the amounts covered generally limited, but with rentals, you’re responsible for paying for the repairs up front. You can then submit a claim to recover your costs, but you’ll still be on the hook for the initial payment. The only way around that is to opt for the rental company’s collision damage waiver (CDW). It’s incredibly overpriced, but if you do have it, you’re in the clear. Due to the high cost, I don’t typically opt for the rental company’s insurance.
The answer to this question really comes down to “Just how much is your peace of mind worth?”
Ways to Save Money on Auto Insurance
- Car Shop with Insurance in Mind
Not all cars insure equally! Insurers consider several different factors when pricing premiums, including theft rates, age, and even the car’s color! If you’re in the market for a new vehicle, doing some research before buying can save you a ton of money on insurance.
- Inquire About Group Insurance
Many insurers offer group insurance policies that members can take advantage of to get lower rates. These rates commonly apply to groups like colleges, professional associations, and certain employers. It’s always worth asking the insurance company if any of the groups you belong to qualify for discounts.
Also, be sure to ask if the company where you work has a discounted rate with the insurance company. This is a potential perk that most people forget to take advantage of.
- Inquire About Low Mileage Discounts
The less you drive, the less likely it is you’ll be in an accident. That means lower risk for the insurance company and potentially lower premiums for you. Many companies offer discounts for low-mileage drivers. These are people who drive their cars less than the average, usually around 8,000 miles per year. If you’re a seasonal or casual driver, it’s probably worth asking about a discounted rate. Because I primarily work from home, this is a discount I’ve been able to take advantage of.
In an effort to help you save as much as possible on auto insurance, I’ve partnered with Liberty Mutual to get you the best possible rates. Visit their site to learn how they can save you money.
Homeowners Insurance
Homeowners Insurance Considerations
Insurance for your home is different from auto insurance in that it isn’t a legal requirement mandated by any level of government. There is absolutely nothing stopping you from owning a house without insurance. However, if the house is financed with a mortgage, it’s almost a certainty that the lender will require homeowners insurance to protect their investment. The terms will likely be made clear by the lender, but make sure you understand exactly what kind of insurance you’re required to carry.
Typical homeowners insurance covers dwelling, additional living expenses (ALE), personal liability, and personal property. Dwelling is just what it sounds like, the home itself and any attached structures. ALE refers to expenses that arise when your home is unavailable to you while repairs are being done, like hotels or lost rent. Personal liability covers the costs of injuries to others on your property. Finally, personal possessions covers damage to your belongings should they be stolen or destroyed.
Tailoring Coverage to Your Geographical Needs
Naturally, certain homes are at greater risk of damage depending on their location. A house in Oklahoma is a lot more likely to be damaged by a tornado than one in Maine. A home in Florida is much more likely to suffer hurricane damage than one in Arizona. It’s important for homeowners to understand the limits of their policies in cases of damage caused by natural disasters.
For instance, while homeowners policies generally cover damage from high winds, like those found in a hurricane, they rarely cover the storm surge flooding that often follows. In areas of particularly high-risk even wind damage may be excluded. If you live in an area with elevated risks of events like earthquakes, tornados, flooding, or hurricanes, it’s absolutely crucial to understand exactly what is and isn’t covered by your policy and seek extra coverage where needed.
Should You Consider an Umbrella Policy?
Umbrella policies get their name from the fact that they provide a broader coverage beyond the normal scope and limitations of standard homeowners and other types of insurance policies. Not only do umbrella policies cover liability beyond the dollar limits of other policies, they also cover a much wider set of liability types, often including things like slander, libel, and even false arrest. Generally speaking though, the increased liability limits are where umbrella policies tend to provide the biggest advantage.
There are some very good arguments for carrying an umbrella policy. The main one is the cost. Umbrella policies only kick in once your primary insurance has been exhausted. That means that they’re relatively inexpensive to tack on. People with high net worth or high-income jobs will get more out of an umbrella policy. But with $1 to $2 million in additional coverage often being available for only a few hundred dollars a year, it’s not a bad choice for most people.
Ways to Save Money on Homeowners Insurance
- Disaster-Proof Your House
Understandably, homes in areas of high natural disaster risk generally carry higher premiums. If you live in a place like Florida where hurricanes and tornados tend to be a problem, expect to pay a lot. However, many companies offer discounts if you take certain steps to help minimize damage, such as installing storm shutters. Inquire with your insurer about what you can do to lower your premiums through storm-proofing.
- Don’t Confuse the Value of Your House with the Value of Your Land
When you buy your house, you’re not just paying for the structure, you’re paying for the land, and land is worth a lot. If a storm wipes out your home, the land will still be there, so don’t factor its cost into your home insurance. Using the total price you paid for your home as a basis for your coverage amounts is a rookie mistake! What you’re looking for is enough coverage to handle cleanup and house replacement.
- Consider A Security System
Homeowners insurance covers property theft, and as with natural disasters, anything you can do to reduce the risk faced by the insurance company should help your rates. Installing a quality security system to deter theft can bring your rates down a bit. Installing systems that offer protection against fire help even more. These types of complex security setups generally aren’t cheap though, so speak to your insurer to work out the details before pulling the trigger.
In an effort to help you save as much as possible on insurance for your Home, Condo or Rental, I’ve partnered with Liberty Mutual to get you the best possible rates. Visit their site to learn how they can save you money.
Health Insurance
How Health Insurance Plans are Classified and Organized
If you’re shopping for health insurance, you have a number of options across the different brands, plans, and levels of coverage available to consumers. The cost of your plan and the coverage that it provides will depend on a number of factors, including your age, your state’s marketplace, and the level of coverage you purchase.
Plans are generally broken down by the level of coverage as follows:
Platinum (highest price): 90% medical cost coverage
Gold: 80% medical cost coverage
Silver: 70% medical cost coverage
Bronze: 60% medical cost coverage
Catastrophic (lowest price): Pays only once you’ve reached a very high deductible. In 2018 that was $7,350 for an individual.
In addition to differing levels of coverage, there are also different types of plans. The most common types are health maintenance organizations (HMOs), preferred provider organizations (PPOs), exclusive provider organizations (EPOs), and point-of-service plans (POSs). There are also high-deductible health plans that offer lower costs and can be tied to a health savings account (HSA).
Health Maintenance Organizations vs. Preferred Provider Organizations
There are some key differences between HMOs and PPOs that consumers should understand when shopping for health insurance. Selecting an HMO plan often comes at a lower cost than a PPO, but has some additional limitations. Specifically, HMOs have stricter rules on who patients can see while still having costs covered.
Most HMOs require you to select a primary care physician (PCP) that you must then see for the vast majority of your medical needs. Should you need to see a specialist, you’ll need a referral. You also won’t have coverage for care from outside the network unless it’s a dire emergency. As you can probably tell, HMOs are pretty restrictive.
PPOs, on the other hand, offer significantly more freedom. PPOs don’t require you to select a primary care physician, so you can seek coverage from any doctor within your network. They don’t require a referral to see specialists, and you have the option of seeking care outside of your network, although your out of pocket costs will likely be higher if you do. Those freedoms come at a cost though, as PPOs normally have higher monthly premiums than HMOs.
High Deductible Health Plans and Health Savings Accounts
HDHPs serve in a similar to capacity to catastrophic coverage plans, in that they’re designed to provide low monthly premiums in exchange for a very high deductible. To qualify as an HDHP, a plan must have a deductible of at least $1,350 for an individual, or $2,700 for a family. Aside from the deductibles, HDHPs follow the same rules as the plans they’re based on, like HMOs and PPOs. Many bronze level plans meet the deduction requirements for an HDHP, opening up the ability to combine the plans with a health savings account.
Health savings accounts allow holders of HDHPs to put money away tax-free for use towards their healthcare costs. By applying pretax earnings, HSAs effectively lower the cost of healthcare and your annual tax bill. For 2018, contribution limits were $3,450 for individual HDHPs and $6,900 for family plans. HSAs carryover at the end of each year, so the money is never lost, and interest earned isn’t taxed, making them awesome options for anyone with a high deductible health plan. Most HSAs also have investment options which provide even more opportunities for growth.
Ways to save money
The marketplace definitely gives consumers a more direct path towards shopping for healthcare, but that doesn’t necessarily mean it’s the best or cheapest option. The knowledge a good broker can bring to the table can go a long way towards getting the best possible price, and remember, the broker does not work for the insurance companies, they work for you.
Most HSAs also have investment options which provide even more opportunities for growth.
2. Look for Group Insurance Rates
As with auto insurance, group insurance can be a great way to save money on healthcare premiums. Don’t just assume you’re not eligible for group insurance. Think about all the groups and associations you belong to and inquire about potential rate discounts. Sometimes the discount on premiums for being a member of an association is greater than the actual cost to join the group, so do your research! Most employers also subsidize insurance coverage to a degree so you should explore this option as well.
3. Use a Health Savings Account
This one is so important you need to read about it twice! The key thing to realize is that money put into an HSA isn’t taxed. That means it effectively reduces your health care costs by whatever your marginal tax rate is. That’s a huge opportunity to save, so if you’re already on a high-deductible plan, seriously consider an HSA. Of all the options available to pay for healthcare expenses, the health savings account is by far my favorite. In my post about HSAs, I go into more detail concerning the tax benefits. A high deductible healthcare plan combined with an HSA is the option I personally use.
Life Insurance
Don’t Get Caught Without It When It’s Needed Most
Life insurance is one of those things that most people put off or consider an unnecessary expense. Unfortunately, that view often leads to heartbreak when the time comes that it would’ve been really useful. The death of a loved one is a terrible time under the best of circumstances, but when financial hardship is mixed in, it becomes much worse. Holding a life insurance policy is all about ensuring that, should the worst occur, your family won’t be consumed by bills and debt in addition to grief.
Don’t Use Life Insurance as an Investment
Some people view life insurance as an investment vehicle as well as an insurance policy. Specifically, whole life insurance policies carry an investment portion in addition to the insurance portion. However, these types of whole life plans carry high fees that are often coupled with insurance agent commissions. The pitch often used to sell these types of plans is that the cash value of the investment portion of the plan is guaranteed. While true, there are still major drawbacks to this approach.
First and foremost, the cash portion of a whole life insurance plan grows incredibly slowly. This is typically due to agent commission structure and the expensive investments that are used. While I don’t recommend them, they really only make sense for people who have zero tolerance for risk in their investment portfolios.
From an investment perspective, it’s a better idea to choose level term life insurance and invest the money saved from lower premiums in a more traditional investment vehicle. I’d recommend index funds at a low-cost broker like Vanguard. The return on most whole life insurance plans is so small that even a low-risk vehicle returning only a few percent per year will outperform them.
Term Life or Whole Life – Which Should You Choose?
Whole life plans offer some other features that some people find attractive – namely, guaranteed death benefits and fixed monthly premiums. That said, they have some significant drawbacks in addition to just being terrible investment vehicles. Most notably, whole life premiums are much, much higher than term life premiums. When you consider that the premiums on whole life policies can be thousands of dollars higher per year, the fact that they’re locked in suddenly doesn’t seem like such a great feature.
Term life plans, on the other hand, are much cheaper because they only cover you for the limited period of time the premiums are paid. If you drop the coverage, the benefit goes away. They also carry no accumulated cash value. However, they’re so much cheaper that the difference in premiums, if put into a smart investment vehicle, essentially offsets all the comparative benefits of whole life plans. A well-managed term life plan can leave your family members with more money in the end, without the need to pay insane premiums.
Life insurance is best used to cover premature death of a family breadwinner. They’ve historically been among the worst vehicles for investing money. My advice is to keep your insurance and your investing separate.
Why You Need to Stick with a Reputable Top-Tier Provider
The life insurance market can be incredibly predatory. In an industry with so much emotion attached, it’s no surprise that there are some outright scams you can easily fall victim to if you’re not careful. One common scam is the fraudulent reporting of your net worth to qualify for a larger policy and, more importantly, the agent for a larger commission.
That makes it incredibly important that you choose a reputable carrier for your life insurance. Sticking with a bigger carrier eliminates most of the risk from scammers, since the big agencies like Amica, Liberty Mutual, and USAA have reputations to maintain. These companies are trusted for a reason, and they don’t take the integrity of their service lightly.
Ways to Save Money on Life Insurance
1. Choose Term Life Coverage and Invest the Rest
To recap, the savings to be had by avoiding whole life premiums are enormous. That money can then be wisely invested in an index fund. This saves you money now while also helping you to grow your net worth over time.
2. Take Your Health Seriously
The healthier you are, the less of a risk you represent to a life insurance provider. Preexisting conditions can cause premiums to skyrocket. If you’re currently healthy, do everything you can to stay that way and get insurance now, while it’s still cheap. If you’re a smoker, quit. Packing a few extra pounds? If so, consider an exercise program to lose the weight. Doing both will improve your health and can make a big difference for your insurance premiums.
Additionally, most insurers offer more coverage at discounted prices in exchange for taking a medical exam. I’d seriously consider doing it.
3. Pay Your Premiums Annually
This is pretty good advice across all insurance types. By paying your premiums annually, the insurer gets the entire year’s premium upfront. They like this. It makes a big difference for their cash flow and accounting, and in exchange, they’re willing to offer fairly decent discounts. If you can afford to pay in one shot, do it.
Concluding Thoughts…
Hopefully, the information provided in this guide has been helpful to you. While each type of insurance requires a degree of consumer savvy to benefit from the specific knowledge, there are also some universal truths that apply across all types. The first is that you should always shop around. Insurance is a highly competitive industry, and while we all wish it was cheaper, there are deals to be had just by weighing your options. Another is that anytime you can bundle insurance policies, you’re likely to get a better deal. Talk to your carrier about the savings they can offer you by bringing all your policies under one roof.
By following these rules and putting the knowledge you’ve gained here to work, hopefully you’re well on your way to ensuring that your insurance policies meet your coverage needs at the best possible rates – because if there’s one thing we can all agree on, it’s that your money is better off in your pocket than theirs!
If there’s anything I’ve missed or can help out in any way, please let me know in the comments below! Looking forward to connecting with you!
Full Disclosure: Some of the links on this page contain my eHealth Insurance affiliate code. If you obtain a quote using those links I may receive a few pennies. Doing so does not change the price of insurance or their recommendations for you.
Legal Disclaimer: The information provided and accompanying material is for informational purposes only. It should not be considered legal or financial advice. You should consult with an attorney, CPA or other professional to determine what may be best for your individual needs.
This Post Has 2 Comments
Excellent write-up full of useful information. I really appreciated the information you laid out about differences in auto policy types. Insurance has been an area I really need to become more familiar with if I ever wish to move into financial advising. It’s my weakest spot, in my opinion. This post will serve as a reference point for me to refer to down the road.
Also, I plan to write a piece in time for open enrollment regarding the differences in high deductible plans, the Healthcare.gov exchange, PPOs, HMOs, etc. The info above has been useful.
Thanks for sharing!
You’re very welcome Riley. I had trouble finding a good article that described each of the insurance types which became the inspiration for this article. Happy that you found it useful.
Let me know if I can help with anything.