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How to Buy the Right Insurance at the Right Price

Save money on insurance by following these three rules

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​We have insurance because bad things happen in life — auto accidents, fire, floods, hail, medical crises, even death. When things go wrong, you will want to have some protection for you and your family.

Unfortunately, buying insurance is complex. It’s easy to have too much or too little. It’s easy to pay far too much for insurance if you’re buying from the wrong company. A complete guide to buying insurance would fill several volumes of books. I can, however, give you three simple rules for making these large and critical purchases.​

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Rule 1: Don’t buy too much or too little insurance

Understand that insurance companies price their products to make a profit. If they make money, you will, on average, lose money — or at least make less money than you would had you invested it rather than bought the insurance policies. Let’s look at two extreme examples.

Unnecessary insurance: Let’s say you buy a $1,000 LED high-definition TV that has a one-year warranty. The store offers you an extended warranty to protect your purchase for three additional years for $250. Now your cost is $1,250. In most cases, I would recommend skipping this insurance and saving the $250. If the TV broke even one day after the one-year warranty expired, that TV is now older technology and could be bought for about $750. This means you are out a maximum of $500 since you saved $250 by not buying the extended warranty and could buy the replacement for $750. That is a loss that you could bear (I hope) and would not be catastrophic.

The same thing goes for auto insurance for some people. You want and need liability insurance. If you injure someone, that could cost you hundreds of thousands of dollars or more. But if you have an older car and a sizable nest egg, you may be better off skipping collision and comprehensive (such as hail damage). In fact, if I had a $3,000 fender bender and a $1,000 deductible, I probably wouldn’t submit a claim if I wasn’t required to. That’s because the insurance company might raise my premiums to more than cover the $2,000 claim.

Necessary insurance. Assuming you can afford it, you want to insure against things that would present a hardship if they happened to you. A house fire would be an example of a catastrophic loss for all but the wealthiest of people. Yet this doesn’t mean you can’t partially self-insure. For example, you could pick a higher deductible homeowners policy that lowers your premium, assuming you had enough money in the bank to cover what insurance didn’t.

An even better example is health care insurance. Not only can health care expenses be catastrophic, but you could end up paying much more without insurance, because you won’t get the discounted rate negotiated between the health care provider and the insurance company. Check out a high-deductible health savings account (HSA) that gets the provider discounts with huge tax savings.

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Rule 2: Fight inertia and shop

I’ve found so many people who will spend hours getting the best deal on inexpensive things, then not think twice about paying large insurance renewals with hefty rate increases without shopping. I suspect many insurance companies count on this inertia.

Perhaps every year or two, gather your policies and premiums and start shopping. Get quotes from at least a few companies, including your current insurance company. Some companies use independent agents who can get quotes from multiple insurers. Other insurance companies use what are called captive insurance agents and will only work with those agents. Examples of companies using captive agents are Allstate, State Farm and Geico. Progressive, Liberty Mutual and Travelers are companies that use independent agents.

Because insurance costs are high and you’ve already spent the time to gather all of your policies, I suggest you contact an independent insurance agent, as well as two or three insurers using captive agents. Then compare the quotes and choose the two or three that have the lowest rates. Be sure to look up customer satisfaction in places such as the J.D. Power auto insurance customer survey.

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Rule 3: Don’t mix investing and insurance

The purpose of investing is to grow your wealth, while the purpose of insurance is to protect it. You’ve worked a lifetime to build up a nest egg to allow you to achieve financial freedom. You want insurance to protect that freedom from a catastrophic event that would dramatically lower your standard of living.

You can also grow your wealth through an insurance company with products such as cash value life insurance and various annuities. Because data shows that low fees generally result in higher investment returns, I’ve found that the added fees of investing indirectly through an insurance company typically lead to lower returns than direct low-cost and more diversified investing. Some of these products sound appealing, but they are typically complex. I’ve had people come to me with policies they did not understand. When I explain, they are unpleasantly surprised by what they bought and how it performed. Unfortunately, these policies are often very hard to get out of as well.

Wrapping things up

Quit paying for insurance you don’t need, but, assuming you can afford it, make sure you are insured for catastrophic losses. Insurance is expensive, so get the best deal by doing some comparison shopping. Keep in mind that any change you make is likely to be across multiple policies, such as auto and homeowners insurance. That’s because insurance companies often give discounts for multiple policies. Shopping insurers really won’t take that long, and as some of the commercials say, a little time could save hundreds of dollars a year.

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