Often I hear people tell me “insurance is a scam” or “it’s too expensive”; yet when they need it they have never told me they wished they didn’t have it. Unfortunately it’s easy to take insurance for granted, after all we’re told we have to have it on our homes and autos when we take loans to purchase these items, so we seldom think about it unless it’s to shop for cheaper rates. And that’s where I think people go wrong – by trying to save a few dollars they, often unknowingly, put themselves at financial risk.
Now, I’m a fee-only planner – I don’t get paid to sell insurance, and I don’t think people always need to pay a lot of money for the correct coverage (depending on their personal history). But, and this is a big but, I do think people should be honest with themselves about what the correct coverage is. If you’re living almost paycheck to paycheck then you should have disability insurance – because if something happens how are you going to pay your bills? They don’t go away when you get sick or hurt, in fact often they just get bigger. The same goes for auto insurance – it’s not “if” you get into an accident, it’s “when”.
Is insurance a “scam”? No, I think in most situations insurance does exactly what it is designed to do – make you whole after a risk event occurs. But insurance companies are only required to pay for what you have covered, so if you wanted to save a couple bucks a month and dialed back on your coverage don’t complain when you get half of what you think you deserve. This is the true “cost” – having an unforeseen event occur and not being able to recover financially.
In general insurance companies will have different underwriting requirements. You may be able to find lower rates by shopping around, without changing your coverage. Or you may have to increase your deductible, the amount you pay before the insurance company does – which incidentally should come from your emergency fund and not impact your other savings.
How do you decide how much insurance to get? In my opinion talking to a professional is the best route to take, versus going online and possible just answering a few questions. Professionals will ask probing questions designed to get you to think, and they’ll help you determine what the best mix of insurance and self-funding is appropriate for your situation. Best of all at the end of the day it’s ultimately your choice. Everything they say is a recommendation – not an order. If you don’t like what you hear, get a second opinion. But be open and listen, don’t automatically assume they just want to sell you something.