The following is presented for informational purposes only. If you have specific questions about insurance costs or coverage options, please speak with a certified insurance agent.
Insurance is a gamble of a sort. When you pay your premiums you’re gambling on the possibility of disaster striking – car accidents, floods, fire, the works. Of course you don’t want those things to happen, but if they do, you’re covered.
Unfortunately, insurance premiums can be a huge budget-buster, especially when all they seem to be buying you is a solution to a problem you don’t have yet (and hopefully will never have).
In many cases you can’t avoid buying insurance (well, you can, but you’d be in an awful lot of trouble), but there are a few things you can do to keep the overall cost of insurance manageable.
Avoid making claims whenever possible
Here’s the thing about insurance – you have to have it, but you never want to use it. Generally speaking, no matter how long you’ve been paying for insurance without issue, the moment you make a claim you run the risk of your premium increasing.
As soon as an insurance company pays out a claim on your behalf, you’re considered to be more likely to cost them additional claims in the future. To offset that risk, your premium goes up.
This means that even though you’re paying for insurance, and the purpose of insurance is to offset the cost of repair or replacement of personal property, it’s really best if you don’t ever use your insurance.
That’s not always possible, especially in catastrophes or any situation where you simply can’t afford to pay for the needed repairs or replacement out of pocket. You need to weigh the short-term and long-term costs. A $1,000 repair to your vehicle, for example, may cost you only $500 today (your deductible), but an additional $2,000 over the following three years thanks to increased insurance premiums. Speak to your insurance rep to understand your policy and what a potential claim might do to your monthly premium.
Higher deductibles can save you over time
Your deductible is the upfront, out-of-pocket cost you must cover before your insurance will pay out. In most policies, the higher your deductible, the lower your monthly premiums. This is because a higher deductible usually means that you’re less likely to file a claim, and that the insurer would have to pay less in the event of a claim.
Pay close attention to your options when it comes to deductibles and monthly premiums. Consider the cost difference between higher and lower deductibles. A good idea is often to take the higher deductible plan and put the cost difference into savings. After a little time, you’ll have saved up enough to cover the deductible, should you ever need it.
Pick a policy that matches your needs
There are a lot of different types of coverage offered within a potential policy, all coming with different levels of coverage. Some coverage might be redundant. Some coverage simply might not make sense for your present situation. Before you agree to any policy, make sure you understand all the coverages included.
For example, when it comes to auto insurance, liability coverage is pretty much mandatory. This is what covers damage caused by you to someone else’s property. When you hit someone’s car, your liability coverage pays for the repairs. (On the other hand, if someone hits you, their liability coverage pays for your repairs.)
Collision coverage is separate and can be used to cover damage you caused to your own property. If you hit a tree your collision coverage would be used to repair your car.
While liability coverage is most likely mandatory (depending on the laws of the state where you live), collision is usually only required if you don’t own your vehicle outright. If you’ve got an older car, the potential payout on a collision claim would likely be low (usually the value of your car at the moment it was damaged or destroyed). You may be better off putting the cost of collision coverage into savings.
Don’t make assumptions about coverage
Expensive modifications to your car (expensive rims, high-end audio equipment) probably aren‘t covered by your auto policy. Work-related tools often need their own special insurance coverage. Your homeowner’s policy may not cover certain natural disasters.
You can’t plan for every eventuality, but you can do your best to be prepared by understanding what is covered and what isn’t covered. From there you need to assess your risks and costs. You might not think you need renter’s insurance (“I don’t own anything all that nice”), but if you accidentally set your kitchen on fire, can you afford to pay for the repairs out of pocket?
Make sure your claims history is accurate
Finally, as we discussed earlier, when you file an insurance claim you’re considered to be more likely to file future claims. But what if you’ve never filed a claim and your rate goes up anyway?
Just like your credit report may potentially contain incorrect information, you may have incorrect claims attributed to your name, which would cause your premiums to be higher than necessary.
Thanks to the FACT Act, you’re entitled to a free copy of your CLUE report (Comprehensive Loss Underwriting Exchange) every year. This report will show you all loss claims associated with your identity going back seven years. Follow the link to request a copy of your report and verify that all the claims listed are accurate. Removing an inaccurate claim from your report could potentially reduce your premium rate significantly.