This “checklist” series of articles looks at common areas of spending to identify a list of opportunities to reduce costs. Not every tradeoff opportunity will make sense for you, but we hope you find this a helpful compilation.
Insurance is cost that you spend in the earnest hope that you’ll get nothing in return. While you hope to never need it, insurance can protect you from life events that would otherwise devastate your personal financial position. Insurance is also an industry that thrives on highly complex and litigious rules that frustrate many a consumer and can make it difficult to compare plans and painful to switch providers.
What is insurance good for?
As noted above, insurance is best used to protect you from low probability losses you can’t afford (self-insure). Whether it is for your car, your home or your heath, at its core, insurance is the substitution of a small known cost (called a premium) to avoid a large possible cost. The policy’s price is designed to cover:
- The full cost of paying out to anyone who makes a claim
- The cost of administration and selling of insurance to new customers 1 Those geckos don’t pay for themselves!
- A buffer for risk (unknowns and poor data)
- Market driven return on investment for company owners. 2 turns out those insurance companies aren’t running a charity
With all these costs to pay for, it should come as no surprise to learn that on average self-insurance is cheaper where possible. That said, each person should look at their own risk tolerance to decide. 3 If you can’t sleep at night because of anxiety about having to cover a risk, you’re probably better off just buying the insurance for your own peace of mind!
With that preface, let’s talk about some things look at when minimizing cost (but still providing the protection you need).
Ways to reduce insurance cost
Shop only reliable carriers every 3 years
Ever wonder why 15 minutes can save you 15% or more auto insurance? …because insurance companies advertise lower rates while quietly raising the rates on their existing customers every year. Been awhile since you shopped? You’re probably subsidizing Joe’s 15% savings. To break this cycle, use online insurance brokers to shop the market all at once (www.policygenius.com is a useful resource to do this) or check whether you are eligible for coverage through specialized providers such as Hartford for AARP. Find a lower rate but don’t want the hassle of switching? Contact your existing insurance carrier to let them know you found a better one…many times they will drop your rates to keep you from walking out the door.
Review your policy coverages
Make sure you carry the standard-recommended coverages. Review your policy periodically (i.e. every 3-5 years) to ensure that it meets or exceeds industry norms and addresses any unique goals or circumstances you may have. For example, if you have a healthy emergency fund (3-6 months of expenses), you might choose to increase your deductibles or eliminate collision coverage on old vehicles.
Reduce Term Life Insurance Cost
Term life insurance is designed primarily to replace income lost in the event of premature death. It is generally appropriate while dependent children are living at home, and reduced or eliminated when they leave and are themselves independent.
- Set coverage level to replace lost income/value due to unexpected -premature death… The “rule of thumb for parents of dependent children is 8-10 times the annual lost income from both spouses. Additional coverage may be required to pay for child-support in the event a non-income producing stay at home parent should die early.
- Shop term insurance As new terms begin, shop trustworthy providers to determine that your policy is competitive. Prices vary by up to 30%.
- Discontinue term insurance when dependents leave With few exceptions, older parents should cancel term insurance when dependent children leave home. Reasons include: 1) In later life dependents will no longer be in the home 2) family assets should have increased and 3) it becomes notably more expensive (eventually cost prohibitive)
Reduce Whole Life Insurance
Whole life insurance combines an insurance policy with an investment program. On paper, this can sound very appealing, however, in most cases you can do better by buying a pure “term insurance” policy separately and investing separately. If you already own a policy, consider liquidation. Key questions are:
- How does its return compare to investment services?
- Is there a penalty for premature liquidation?
- What is its cash surrender value?
- If you do not own a policy, it is usually best not to purchase one (again, typically best to keep insurance as insurance and investments as investments).
Reduce Health Insurance Cost
Shop Health Insurance Health insurance is complex; options vary greatly, depending on sources and affordability.
- Employer subsidized insurance is usually the cheapest option available
- High deductible plans allow you to cap your max out of pocket
- Explore subsidies available through a state or federal program
- If you have a high deductible plant many employers offer a Health Savings Account (HSA). This allows you to pay for your health costs (other than premiums) before taxes. If you are in a 20% tax bracket that is a 20% savings on all prescription drugs, medical out of pocket costs and a lot of over the counter drugs as well! Best of all, if you don’t use it this year you carry it forward until you do.
- If you have a traditional (not high deductible plan) plan, consider a Flexible Spending Account (FSA). This offers the same advantage as the HSA, however, it has to be spend by the end of the year and is lost if you don’t spend it (so estimate low!).
- Alternative’s to healthcare include faith based risk sharing programs. As a nonprofit, this can be a significantly lower cost option, however, not that it can be administratively more cumbersome (your monthly premiums often sent to different people each month to cover their medical costs) and require participants to adhere to specific lifestyle constraints consistent with the faith based organization.
Reduce Long Term Care Insurance Cost
Shop Long Term Care Insurance. Today we live longer, but much of this added time falls short of the “golden” years and is notable for failing health and mounting ailments 4 Making it especially fun to chat with Great Uncle Larry…have I told you about the massive cyst my doctor found right under my…look at the time! . Most major health costs occur in the final year of life. In-home care is expensive, as is assisted living and nursing home care. Because self-insurance requires much higher asset levels, most families today either will consider LTC Insurance or plan to use Medicaid if the family’s net worth is low. After age 60, these coverages become more costly and the likelihood of being denied increases.
Reduce Identity Theft Insurance Cost
Because the risk of identity theft is high and growing and most will value expert counsel and insurance should it occur. Identify Theft Insurance is widely recommended among financial advisors. Increasingly, identity theft insurance is bundled with other security services (e.g. your antivirus software of choice or other insurance provider).