How much insurance makes you over-insured?
Whether by laziness, ignorance or fear, many people actually carry too much insurance – and pay more than they should.
“There is a big misconception out there that the more you pay, the better coverage you get,” says John Barrett, an independent health insurance broker in Pasadena, Calif. “That is false. People pay for a lot of bells and whistles they don’t need.”
Insurance experts offer these insights into how to adopt a policy of not paying too much for your policies.
When it comes to car insurance, be sure to keep your coverage current. Loretta Worters, vice president of the Insurance Information Institute, suggests dropping collision insurance when the annual premium for the coverage is 10 percent or more of the car’s Kelly Blue Book value.
“If your car is more than 5 years old, you may be over-insured,” Worters says.
Keep in mind, however, that as long as the car is financed or leased, the holding company will require you to maintain collision coverage.
As for liability insurance, you might aim for your state’s minimum if you have few assets, says Philip Reed, senior consumer advice editor at automotive website Edmunds.com.
“If you’re young, single and rent an apartment, you can easily go with the minimums,” Reed says. “If you own your home or business and have deeper pockets, you might want something more comprehensive.”
Many people also over-estimate how many miles they drive per year – and could slash their auto insurance bills if they adjusted it to reality. To do so, calculate how many miles you’ve driven on the vehicle since you acquired it, then divide by the number of years you’ve owned it, Reed suggests. Also, consider any significant lifestyle changes that affect your mileage, such as switching to a job closer to home.
Most carriers offer roadside assistance as an add-on, which is redundant if you also pay for roadside assistance from AAA or another program. Similarly, some policies pay for a loaner car should an accident put yours in the repair shop – a perk you don’t need if the vehicle is under a warranty offering the same benefit.
When it comes to rental car insurance, most of the time there’s no reason to pay for most or all of what the rental company offers. Many credit cards provide free rental car insurance when you pay for the service with the card. And your personal collision and comprehensive insurance coverage applies to other vehicles you drive, including rentals.
“There are very few instances in which you need additional insurance when you rent a car,” Edmunds.com’s Reed says.
Health insurance broker Barrett says that most people need only a fraction of the health coverage they pay for – and that may be even more of an issue since passage of a federal mandate forbidding insurers from charging co-pays for preventive visits and procedures.
Young, healthy people who see a doctor only once or twice per year should stay away from plans that provide unlimited office visits, or those that offer generous prescription drug benefits. And maternity coverage for those unlikely to become pregnant? Steer clear. Barrett says maternity coverage boosts health care premiums by 40 percent to 60 percent.
Worters, the Insurance Information Institute executive, says married couples who both have access to a group insurance plan should consolidate under one policy. “It is seldom worth the extra premium to have a secondary insurer,” she says.
The aim of life insurance coverage is not to anoint your family’s grief with a financial windfall, San Francisco financial planner Kristin Harad says. In fact, most young people without dependents don’t need life insurance at all.
“If you’re single, you might consider only a small amount of life insurance to cover funeral costs, but only if you want to eliminate that stress on your family,” Harad says.
For those with spouses, children or other dependents, it’s wise to create a list of items you want your life insurance to cover – such as paying off the mortgage or fully support a surviving spouse – and things you must cover, such as daily living expenses for your family. Then determine how much coverage you can afford. Somewhere between your wants, your needs and your budget lies the amount of life insurance you need, Harad says.
Be careful not spend on life insurance at the expense of saving for other, more likely emergencies.
“You want to take a holistic view of your situation, and consider the more realistic situations you might face like job loss, long-term disability or medical conditions,” Harad says. “If you just focus on term life insurance for catastrophic risk, you may be better served to use some of that money to build up your emergency fund so you can help your family more.”
“When buying homeowner’s insurance, make sure you insure your home, not the land,” the Insurance Information Institute’s Worters says. “While your home and its contents are at risk from fire, theft, windstorms and other perils, the ground your home sits on is not.”
Buy homeowner’s insurance that covers the cost of rebuilding your home and replacing the contents — nothing more. Avoid the temptation to tweak your coverage to keep pace with fluctuations in the real estate market.