Your Life for Less

I’ve written about insurance a lot over the past few months. I even developed an Insurance Buying Guide to help you decide which types of insurance you need.

In a previous post about inertia and why staying the course can hurt you, I said that those who remain with their insurance provider year after year are probably paying too much. Most people never shop their insurance rates, so they have no idea what kind of deal they’re getting.

But this assumes all insurance companies are equal. According to Consumer Reports and J.D. Power, some insurers are better than others. In surveys they conduct, two insurers stand above the rest in customer service year after year: USAA (for military service members and their families) and Amica Mutual. What if you’re already with one of these two – do you still need to shop quotes?

This blog is normally all about helping you handle money better and save as much as possible. In this case I have to make an exception. With insurance, you can’t base your decision on cost alone.

Instead, the focus needs to be on how you’re treated when you make a claim. Surveys have shown that when the chips are down, these two companies stand head and shoulders above the others in resolving your claim.

Think about it this way. You buy insurance hoping you’ll never need it, but expecting that if you do the company will be there for you. In my opinion it’s worth paying a little more for a company with a proven record of great customer service.

We’ve all heard stories about cars being totaled or trees falling on houses and what a pain it was to deal with the insurance company. Switching to one of these two companies will greatly reduce your chances of going through something like this.

But if price is a big deal to you, shopping around can make a big difference in your premiums. Get quotes from at least three companies so you know what kind of deal you’re getting.

If you want to be with one of the two best but the premiums are too high, try raising the deductible.

Take this from a cheap guy: Cheapest is not always best in the insurance industry. Focus instead on how you’ll be treated during the claims process and you’ll be happier in the end.

Photo by goinsurancerates.com

Should Fido have his own insurance?

My Insurance Buying Guide is now up! You can access it in the header at the top of any page.

It’s impossible to insure ourselves against every type of risk we’ll face in life. Even if we could, when it’s over we’d be broke. Learning which risks to accept will help your sanity and your wallet at the same time.

Last week I covered 5 types of insurance that make sense for most people. This time I have 8 types of insurance to avoid:

Extended warranties

Retailers like to sell this stuff like hotcakes on everything from digital cameras to office chairs. In fact, this is probably the insurance type you’ll be sold most often on this list. When should you buy an extended warranty? Never. The payout is generally between 9 and 12 cents on the dollar, meaning that for every dollar you pay into these policies you’ll get 9-12 cents in benefits. The other 88-91 cents lines the pockets of the salesperson.

Some people argue that extended warranties make sense for electronic gadgets. But new technology causes electronics to depreciate rapidly, so in the unlikely event your gadget breaks a couple years down the road you’re better off paying out of your own pocket to repair or replace it.

Life insurance for kids

I cringe when I hear about people who waste money buying life insurance on their kids. The purpose of life insurance is to provide a financial benefit to your dependent survivors in the event of your death. Nobody depends on your kids for income, so they don’t need life insurance.

Credit card payment protection

This insurance will make the minimum payment on your credit card if you lose your job, get sick or injured, or die. The cost is based on your balance – the higher your balance the higher the premium. As an alternative, get disability insurance which covers your minimum payments. Building an emergency fund is also a good strategy.

I’ve heard of credit card companies adding this garbage automatically to peoples’ bills each month. So check your statements to make sure you aren’t being charged.

ID theft insurance

Buying insurance to protect yourself from identity theft is reactive. ID theft insurance doesn’t protect you from becoming a victim – it simply pays for some of your expenses (legal fees and mailing letters to creditors) after you’ve become a victim.

But you want to be proactive. There’s a better way to protect yourself, and that’s freezing your credit files. This prevents anybody from applying for credit as if they’re you, and is the best thing you can do to prevent ID theft. It’s easy to do online and costs very little ($30 or less; free in some states).

Cell phone insurance

These policies are supposed to protect you if your phone is lost, stolen or broken. You pay a deductible (usually $50 or $100) and get a second-rate phone to use in place of your original one. The cost? About $5 to $7 a month. The problem is these policies have so many limitations that it’s difficult to make a claim. Most won’t cover you if there’s water damage, for example.

Unless you’re extremely accident-prone, this insurance is unlikely to be useful to you. Most smartphones come with a warranty, so check that first.

Pet insurance

Unless your pet is older and goes to the vet several times a year, skip this insurance. Instead, put the money you would have paid for premiums into a savings account to use if your pet needs treatment.

Home warranties

Home warranties supposedly give you peace of mind if your appliances break and need expensive repair. The typical policy costs $500 a year plus a deductible. But companies that sell this junk think up all sorts of reasons to deny you coverage, and they are notoriously difficult to deal with. You’re only allowed to use their contractors, who may not be able to schedule you in for weeks. Instead, start a home repair fund and give yourself the flexibility to find the best person for the job.

Mortgage life insurance

This is designed to pay your mortgage payment if you die or become disabled. But do you know what banks call it behind our backs? “Croak and choke” insurance. Like credit card payment protection, it only protects the bank. Make sure you have adequate life insurance and disability insurance to cover your mortgage.

Photo by jmpetresort.com

Insurance is one of the most confusing and misunderstood things we buy. So today and for the next couple of weeks we’re going to talk about basic rules for buying insurance, including what you need and what you don’t need.

First up – a preview of my Insurance Buying Guide which will go live in the next few weeks. It will have its own page, and you can access it from the header on the main page or at the top of any post. Here are three rules of thumb to keep in mind when buying any type of insurance. Stay tuned for the rest.

Only insure things you can’t afford to lose

When you insure you protect. You protect yourself from loss. But not just any loss. If you tried to insure yourself against every conceivable loss you’d quickly run out of money. That’s why you need to be smart about which insurance you buy.

A good rule of thumb is you should only insure things you can’t afford to lose. This helps you avoid insuring against every possible event. Think back to the time you were in the furniture store, looking for that new couch. When you found the right one, your salesman probably tried to sell you the extended protection plan to protect the fabric from damage. But ask yourself – Would I suffer irreparable harm if the leather got scratched? No! It’s just a couch.

The same goes with most other things you’re sold an extended warranty on. Office chairs, digital cameras, smartphones, washing machines, laptops…I could go on and on. Just say no.

Think about who you’re insuring

Banks love it when you pay to insure them. I’ll give you two situations where this is the case.

When you get a mortgage, the bank asks if you want to add an obscure insurance known as mortgage life insurance. They claim that if you die you or your survivors won’t have to pay off the mortgage. That’s true, but the policy pays off the lender if you die, not your survivors. And it costs ten times what term life insurance costs.

In a related example, some sneaky credit card companies have been putting unemployment insurance or other coverage onto people’s bills each month. Again, these products protect the lender if you’re not able to make your payments. Make sure you go through your statement every month to make sure your bank isn’t ripping you off.

In either case, a simple level term life insurance policy is best because the proceeds go to your survivors who can decide how best to use the funds.

Don’t buy any policy that’s narrow in its benefit

Many types of insurance fall into this category. Just to name a few: Accidental death and dismemberment, stroke insurance and cancer insurance.

These policies are so narrow in their coverage that very few people in very few situations are likely to benefit from them. They are riddled with exclusions and are designed to take advantage of your fear of getting one of these conditions.

It’s best to buy general insurance, such as life insurance or disability insurance, that covers much more than these single-issue insurance policies.