Many people cut corners on insurance in an effort to save money. They don’t buy policies that they should have, or they are underinsured on the policies they do have. They think that paying a smaller premium is a way to save money and do better financially. Technically, this is a way to save money. But only until you need the insurance and then you learn that all the money you saved on premiums is peanuts compared to the amount that you have to pay out of pocket if you don’t have good insurance.
One of the ways that we have remained out of debt is by not skimping on insurance. It sounds counterproductive. We spend around $5,000 per year on insurance premiums for our home, our cars, umbrella insurance, life insurance, flood insurance, disability insurance, and long term care insurance. This doesn’t count the health insurance through our employers, of which we pay a portion. Our policies are not basic. We’ve bought as much liability as we can afford and we’ve added several options to many of our products to deal with some special cases we have. It’s a lot of money to lay out every year, but without several of these products we would be deeply in debt.
The auto insurance came through in a big way twice: Once on a wreck that wasn’t our fault but was caused by a driver with no insurance (there was massive damage and some injuries), and again when the accident was our fault and there were injuries that had to be paid for. Had we not had insurance or been underinsured, we would be in debt to the tune of over $100,000 right now. But because we paid for the added liability insurance and the protection against an uninsured motorist, our assets were never touched.
The home insurance came through during a hurricane when a tree fell on the house. Not only was there structural damage, but some rare items were also damaged. We’d paid extra for a rider to cover those rare items and were able to get them repaired and restored. Had we not paid extra, they would have been a loss or we would have incurred debt to fix them. The flood insurance also came through that day because water got in the basement and damaged carpet and some other items. Our homeowner’s insurance would not have paid for that, so we would have needed to foot the bill on our own.
We hope to never need the life insurance, disability insurance, or long term care insurance, but as neither of us is getting any younger, we recognize the probabilities that at least one of those policies will probably save our bacon one day. Without them, if one of us dies, becomes disabled, or requires long term care, any and all of our savings could be eaten up trying to replace income or pay for care.
Having insurance that covers all of our needs keeps us out of debt. Yes, we pay a lot per year and we could probably cut back on our policies and save some money. But that would be gambling. Saving $100 per year is nothing if we are ever faced with $100,000 in long term care expenses or sued for a million dollars. That $100 or even $500 per year that we saved wouldn’t even put a dent in those kind of expenses. And we would end up in debt. The kind of debt that is almost impossible to ever pay off. The kind of debt that derails your financial plans forever. That’s just not a risk that we’re willing to take. Insurance has saved us more than once and, while I hope it never has to again, I’m glad that it’s there to keep us out of massive debt.
I absolutely agree that adequate insurance is essential. You’re better off skipping your annual family vacation than failing to having sufficient insurance. If you think you’re paying too much for insurance, then shop around a bit for lower premiums. Consider consolidating your insurance with one carrier for a volume discount.
In the end, it’s better to let an insurance company pay the costs of a major liability than you.
How much are you paying for the various insurances? What percentage of you income is that?
Adequate insurance doesn’t guarantee squat.
I wish I could remember the exact figures, but, I am fairly sure it said that most of health-related bankruptcies were filed by people WITH health insurance.
The average American is definitely WAY under-insured. Though paying more is not always better, I *get* where you are coming from with this article.
I think to take it a step further – it is always good to insure for catastrophe. Insuring for little things that can be saved for in cash makes little sense.
Reminds me, though, we moved into a 100-year-flood-zone and immediately got flood insurance (I grew up in a 100-year-flood-zone – never flooded, but came close). Anyway, they downgraded us to a 10-year-flood zone or something (long story) and the government was offering a discount (one that lasted for many years) for people who got mandatory insurance before the deadline. The statistics on who does not have flood insurance here is insane – it’s been compared to the next New Orleans, for many years – and like only 10% of people here had flood insurance. Anyway, flood insurance is now mandatory here – a lot of people still don’t have it. OF course, during this time all sorts of people were trying to sell us flood insurance. Um, had it ten years? Thanks?
When I got sick almost 8 years ago, my short term disability policy was a very handy thing to have. It eventually paid out $10,000 to me and the premium had been only about $30 a month for a couple of years. Unfortunately no long term disability was available otherwise I would still be collecting it. Having a sudden illness that knocks the socks off you is much easier to take when you still have the equivilant of your paycheck coming in less taxes (and there is no income tax on disability insurance that you paid for). On another frugal board a woman my age thought short term disability was worthless as she felt she could ‘self insure’–well if that is how she wants to spend her savings, I didn’t have it saved so the insurance was a God send.
It’s ok to pay for all those insurance if you have high and stable income. But if you are going into debt just to keep all these policies, it’s not worth it. Even if you insure yourself for all the bad things that might happen to you, you will end up spending tons of money and might get nothing in return. That’s how the insurance companies make their profits.
I’m curious about your long term care insurance. It’s something I’m looking into after caring for an elderly father who had a stroke. How did you decide on which long term policy to get?
Emily, if you mean you are looking for long term care insurance for your father who is already elderly and has had a stroke, it is probably already too late as the premiums would be out of sight if they would write a policy for him at this point anyhow. My in laws had long term care insurance policies and had to drop them as they finally couldn’t afford the premiums any more and they are basically healthy. If you think your father is going to need nursing home care soon, you should talk with the social workers at several nursing homes and they will be able to give you the scoop on nursing home costs, what Medicaid and Medicare will pay, etc. as each state and circumstance is different.
If you are looking into long term care insurance for yourself, I can’t answer that as it is something we can’t afford for ourselves and so haven’t actually looked into it.