5 Insurance-Buying Mistakes to Avoid
Whether you’re insuring your house, car or yourself, never shop based on price alone.
Buying insurance can be confusing, but when the
unexpected happens – a house fire, a fender bender or a broken bone –
it's a relief to know that some of those financial losses will be
covered. But how do you know how much coverage you need? And what
questions should you ask before buying a policy? Many consumers aren't
sure. Insurance coverage is far from one size fits all, so here's a look
at mistakes some consumers make when buying insurance.
1. Assuming insurance is out of reach. The U.S. Census Bureau reports that 48 million Americans had no health insurance in 2012. And about 30 percent of U.S. households have no life insurance, according to LIMRA, a worldwide research and consulting organization for insurance and financial services. In some cases, consumers skip insurance because they think it's out of their budget. Often, that's not the case, according to Marvin Feldman, president and CEO of the LIFE Foundation, a nonprofit organization that educates consumers about financial planning and insurance. The LIFE Foundation collaborated with LIMRA on the 2013 Insurance Barometer Study, which found that the average consumer thinks life insurance is three times more expensive than it actually is. "[Consumers are] not researching it to determine what the cost is," Feldman says.
When buying health insurance or property and casualty insurance, ask about potential discounts. "Two-thirds of consumers don't realize they can get financial help if they buy their own health insurance, and they can get financial help if they go and buy in these health insurance marketplaces," says Lynn Quincy, senior policy analyst with Consumers Union, a division of Consumer Reports. "You may be way overpaying if you don't investigate this possibility." While health insurance discounts are often income-based, homeowners and auto insurers offer discounts for everything from being a member of groups like AARP, to being a good student or a good driver, to having a home security system.
[Read: Is Your College Student Properly Insured?]
2. Relying on assumptions or outdated figures. Changing economic conditions mean you might need more insurance coverage than you had in the past. Take life insurance. In the past, consumers might have based their life insurance coverage on their current income, but "if something happens and you're no longer around, you need more capital at work to provide the same income [to your beneficiaries]," Feldman says. Disability and long-term care insurance are even more complicated than traditional life insurance. "For disability, do you want coverage that lasts forever? Are there health issues in your family?" Feldman asks. "That's where you need to speak to somebody to get some guidance."
In the case of homeowners insurance, your home could be underinsured if you've renovated or if the cost to build a home has increased due to higher material costs or other factors. That's why experts recommend reviewing insurance coverage once a year to make sure it still fits your needs. Talk to your insurance agent if you're unsure.
3. Shopping on price alone. Comparing insurance policies can be confusing, but resist the urge to simply choose the policy with the lowest premium. Consider the company's reputation and the coverage you'd get for that premium. "As a general rule with health insurance, the higher the premium, the lower the amount you pay when you go to the doctor," Quincy says. Private health insurance plans must provide coverage examples showing what your estimated out-of-pocket costs would be for, say, having a baby or managing Type 2 diabetes. Some examples might not apply to you, but they can help you compare plans and see how much you might pay in coinsurance and copays.
"Make sure you're shopping apples to apples and getting quotes based on the same coverage that you have," says Lori Conarton, a spokeswoman for the Insurance Institute of Michigan. Your property and casualty insurance may not cover things like food spoilage in the event of a power outage or stolen electronics worth more than $1,000, so you may want to purchase extra endorsements to cover those possibilities, she adds.
You might also want to consider rental coverage. Auto insurance policies often allow you to add on coverage for renting a vehicle while your car is getting fixed after an accident, and if you only have one car, that kind of coverage can pay off. "Every customer who didn't have rental coverage wished they had it," says Richard Arca, senior manager of pricing at Edmunds.com and a former insurance adjuster. It typically adds about $20 for six months to a policy, he says.
On new and leased cars, GAP insurance can also make sense. You've might have heard that when you buy a new car, it loses value as soon as you drive it out of the lot. Leased vehicles also often carry a lower fair market value than what you owe on the vehicle. That means in either of those cases, if you total the car, the insurance company will only reimburse you for the car's fair market value – and you could be out a lot of cash. GAP coverage, which stands for "guaranteed auto protection," safeguards people from that problem. "It's highly recommended for people who lease vehicles," Arca says.
1. Assuming insurance is out of reach. The U.S. Census Bureau reports that 48 million Americans had no health insurance in 2012. And about 30 percent of U.S. households have no life insurance, according to LIMRA, a worldwide research and consulting organization for insurance and financial services. In some cases, consumers skip insurance because they think it's out of their budget. Often, that's not the case, according to Marvin Feldman, president and CEO of the LIFE Foundation, a nonprofit organization that educates consumers about financial planning and insurance. The LIFE Foundation collaborated with LIMRA on the 2013 Insurance Barometer Study, which found that the average consumer thinks life insurance is three times more expensive than it actually is. "[Consumers are] not researching it to determine what the cost is," Feldman says.
When buying health insurance or property and casualty insurance, ask about potential discounts. "Two-thirds of consumers don't realize they can get financial help if they buy their own health insurance, and they can get financial help if they go and buy in these health insurance marketplaces," says Lynn Quincy, senior policy analyst with Consumers Union, a division of Consumer Reports. "You may be way overpaying if you don't investigate this possibility." While health insurance discounts are often income-based, homeowners and auto insurers offer discounts for everything from being a member of groups like AARP, to being a good student or a good driver, to having a home security system.
[Read: Is Your College Student Properly Insured?]
2. Relying on assumptions or outdated figures. Changing economic conditions mean you might need more insurance coverage than you had in the past. Take life insurance. In the past, consumers might have based their life insurance coverage on their current income, but "if something happens and you're no longer around, you need more capital at work to provide the same income [to your beneficiaries]," Feldman says. Disability and long-term care insurance are even more complicated than traditional life insurance. "For disability, do you want coverage that lasts forever? Are there health issues in your family?" Feldman asks. "That's where you need to speak to somebody to get some guidance."
In the case of homeowners insurance, your home could be underinsured if you've renovated or if the cost to build a home has increased due to higher material costs or other factors. That's why experts recommend reviewing insurance coverage once a year to make sure it still fits your needs. Talk to your insurance agent if you're unsure.
3. Shopping on price alone. Comparing insurance policies can be confusing, but resist the urge to simply choose the policy with the lowest premium. Consider the company's reputation and the coverage you'd get for that premium. "As a general rule with health insurance, the higher the premium, the lower the amount you pay when you go to the doctor," Quincy says. Private health insurance plans must provide coverage examples showing what your estimated out-of-pocket costs would be for, say, having a baby or managing Type 2 diabetes. Some examples might not apply to you, but they can help you compare plans and see how much you might pay in coinsurance and copays.
"Make sure you're shopping apples to apples and getting quotes based on the same coverage that you have," says Lori Conarton, a spokeswoman for the Insurance Institute of Michigan. Your property and casualty insurance may not cover things like food spoilage in the event of a power outage or stolen electronics worth more than $1,000, so you may want to purchase extra endorsements to cover those possibilities, she adds.
You might also want to consider rental coverage. Auto insurance policies often allow you to add on coverage for renting a vehicle while your car is getting fixed after an accident, and if you only have one car, that kind of coverage can pay off. "Every customer who didn't have rental coverage wished they had it," says Richard Arca, senior manager of pricing at Edmunds.com and a former insurance adjuster. It typically adds about $20 for six months to a policy, he says.
On new and leased cars, GAP insurance can also make sense. You've might have heard that when you buy a new car, it loses value as soon as you drive it out of the lot. Leased vehicles also often carry a lower fair market value than what you owe on the vehicle. That means in either of those cases, if you total the car, the insurance company will only reimburse you for the car's fair market value – and you could be out a lot of cash. GAP coverage, which stands for "guaranteed auto protection," safeguards people from that problem. "It's highly recommended for people who lease vehicles," Arca says.
