Learn how to buy insurance the proper way to secure your future financially.
To many people, insurance is a boring and complicated topic. Most people associate insurance with disease, disability, death, disaster and would do just about anything other than reviewing and spending money on insurance.
However, you wouldn’t want to deal with money issues when a catastrophe happens. ‘But it won’t happen to me’, you say? Remember Murphy’s law: anything that can go wrong, will go wrong. You want to be prepared when it happens.
Murphy’s law: Anything that can go wrong, will go wrong.
To purchase a suitable insurance, you have to understand the purpose of getting one. Studies show that more than 90% of people purchase and carry the wrong types and amounts of insurance coverage because they don’t know how to buy insurance the actual purpose of buying one.
Many people are overwhelmed by the jargon in sales and complicated policy statements. Therefore, they pay more than needed for their policies and fail to get coverage through the suitable policies. There are generally 3 rules to buying insurances, and we will cover them in this article:
Rule 1: Only insure the big amounts
The whole point of insurance is to protect you against losses that are too big to recover from. They are not designed to smooth out the bumps of everyday life. At this stage, you are debt-free except for your mortgage and you have at least 3 to 6 months worth of savings in your account.
Which is to say, you are able to cover small expenses here and there without breaking too much of a sweat. Think about what your most valuable assets are. And consider your potential large expenses. They likely include the following:
If you are a working adult, your most valuable asset is probably your future earnings. If you were to become disabled and unable to work, what would you live on? Long-term disability insurance helps you handle this type of situation.
If you have dependents (family members) that depend financially on you, how would they manage if you died? Life insurance can fill the monetary void left by your death.
In this age of soaring medical expenses, you can easily rack up a $100,000 medical and hospitalization bills in short order. Major medical health insurance helps pay such expenses.
Yet, a surprising number of people don’t carry any health insurance: this is potentially catastrophic if a health disaster happens.
This applies to business owner. What would happen if someone sues you for hundreds of thousands of dollars, or even a million dollars or more for negligence in some work that you messed up? Liability insurance can bail you out.
Psychologically, buying insurance coverage for the little things that are more likely to occur is tempting. You don’t feel like you are “wasting” your insurance premium for something that did not occur. You want to get some of your money back!
However, you won’t be facing a financial disaster if you have to pay for minor car repairs because you get into a minor collision. On the other hand, if you lose your ability to earn an income because of a disability, you will face financial ruin should you not have an insurance to cover yourself.
Don’t buy insurance based on your perception of likelihood of claiming the coverage. Buy only essential insurances that cover big amounts that can be financially catastrophic.
Rule 2: Buy broad coverage
Buying coverage that’s too narrow is another major mistake that people make when buying insurance. Such policies seem like a cheap way to put your fears away, but they don’t really help you that much when it comes to a real disaster.
For example, some people would rather buy flight insurances than buying a life insurance. They seem to worry more about their demise when getting on an airplane than getting into a car. Statistically, getting involved in a fatal car accident or getting some dreaded diseases is far more likely than going down in an aeroplane – in which your beneficiaries get nothing if you do not purchase a life insurance.
Therefore, it is wiser to buy a life insurance if you have dependents (broad coverage to protect your loved ones financially in the event of your death, no matter how you die) than buying a flight insurance that is far too narrow in terms of coverage.
It is also a wiser choice to buy a health insurance that covers a wide variety of diseases instead of buying a narrow health insurance (such as a sleep apnea health insurance). A medical equivalent to flight insurance is the cancer life insurance policy.
Older people who are fearful of having their life savings depleted by a long battle with this dreaded disease often make the mistake of taking up this narrow insurance. If you get cancer, the insurance company pays the bills.
But what if you get some other dreaded diseases, such as heart disease or diabetes that are even more common than cancer? Cancer insurance won’t pay for these costs. Purchase major medical coverage, not just cancer insurance.
Make sure your policy covers majority of dreaded diseases. Compare several policies for their coverage if you want to, which brings us to rule 3.
Rule 3: Compare policies and buy direct
Whether you are looking for life, disability, home or auto insurance, some companies may charge double or triple the rate of other companies for the same coverage.
However, insurers that are charging the higher rates may not be better about paying claims. You may even end up with the worst combination ever – high prices and lousy service.
There are plenty of health and life insurance companies, and your job is the find the best combination of policy – low price and good coverage. If you have an insurance already, most likely you got it from agents and brokers who earn commissions based on what they sell.
The commissions, of course, can bias what they recommend. And not surprisingly, policies that pay agents the highest commissions also tend to be more costly. After all, the commissions come from the premiums you pay, be it monthly, quarterly or annually.
Besides the attraction of policies that pay higher commissions, agents also get hooked on companies whose policies they sell frequently. After an agent sells a certain amount of a company’s insurance policies, he/she is rewarded with higher commission percentages on any future sales.
Knowing this, the best way to purchase the most suitable insurance for yourself is to shop around and decide for yourself. Choosing the correct insurance for yourself seems to be a daunting task, but fortunately there are more and more platforms that allow you to compare insurances without bias and without hidden commissions.
Compare quotations of major life insurance companies at one glance to choose the most suitable coverage for yourself here (link applies only to U.S. residents).
Life insurances guarantee a certain sum to be paid to your beneficiaries in the event of your death or disability. The premium differs from company to company and are decided based on your age and your health conditions, as well as the guaranteed payout for your beneficiaries.
Compare quotations of major health insurance companies at one glance to choose the most suitable coverage for yourself here (link applies only to U.S. residents).
Health insurances pay for the medical expenses should you contract a dreaded disease, such as heart diseases, cancers, diabetes etc. Like life insurances, the premium differs from company to company and are decided based on your age and your health conditions, as well as the guaranteed medical coverage. Keep in mind that you want to get a broader coverage for this kind of policy.
Compare quotations of major auto insurance companies at once glance to choose the most suitable coverage for yourself here (link applies only to U.S. residents).
Auto insurances pay for the damages to your car as a result of accidents. Getting an auto insurance is generally a good idea as car is often an important asset in a household. When selecting an auto insurance, choose to have a higher deductible (amount of money you are required to pay out of pocket) before the insurer pays the rest the of the expenses.
Having a higher deductible lowers your monthly insurance premium substantially. Choose a deductible amount that is comfortable for you (for example $500) and compare the policies across companies using the link provided. Keep in mind that your goal is to insure against accidents that can be financially disastrous to you, and go for the policy that offers lowest premium given the same deductible amount.
To Do List
- Get a quote for life and health insurance (for U.S. residents)
- Compare the coverage for different companies vs premium
- Compare the new coverage and premium for quoted policies vs your current policy if you have one
- Decide on the best coverage and premium policy and buy direct from the provider
This article is one of 6-step series “Achieve financial freedom in 5 years time“.