Take the time to increase your insurance vocabulary

It is important to understand a few key terms like deductibles, premiums, liability, riders, cash-value, and level term to name just a few. By understanding these terms you can better access your needs and what is important and what is a waste of your money. Opportunity costs is at play here. You want to spend money on insurance only when it is truly needed to protect yourself from a major incident. Focus on probabilities, not possibilities!

When buying insurance, focus on protecting yourself from a catastrophe

Buy insurance for the big stuff in life and cover the small stuff yourself. You MUST have an emergency account set aside as you maneuver your way through life. That emergency account covers the deductibles when catastrophe hits and the out of pocket costs when small matters occur. The emergency account reduces the stress when catastrophe hits. Make sure you have an emergency account!

Insurance is about mitigating risks

The worst fears we have are in our head. We have to be honest with ourselves when we consider the possibility vs. the probability of incurring loss due to different types of incidents that may occur in our life. For example, you don’t need hurricane insurance in Iowa. You don’t need alien abduction insurance anywhere (yes, it exists). Understand the odds and that means rejecting most insurance policies.

Do buy health, home, and car insurance

These are requirements in life if you want to protect the rest of your assets from loss due to your liability in any accident in life. Do your research, get multiple quotes, and focus on keeping the deductibles as high as possible to reduce the cost of your yearly premiums. Take your savings from reduced premiums and pay down debt, increase savings, and/or invest for your future in no-load index stock and bond mutual funds.

High deductibles reduce your yearly premiums, lower deductibles raise those premiums

Raise your deductibles and lower your yearly premiums. It’s worth repeating. If you do have a catastrophe (one is coming around the corner whether we like it or not), you pay the deductible out of your emergency account that you have set aside for the bad things that happen in life. Do not complicate this matter. Plan ahead or suffer the consequences. No emergency fund makes a bad accident, much, much worse.

Avoid most insurance policies that feed off your fear of loss

This is a long list of policies that you do not need (they make the insurance industry rich at your expense). They include: extended warranties, rental car, PMI, mortgage life, flight, life insurance on kids, wedding, credit card, cell phone, disease, accidental death, and car loan gap insurance to name just a few. Avoid these policies and the salespeople who peddle them and be careful of anecdotal stories. Just because someone benefited from one of these policies does not make it a good deal. The vast majority of people will not, that is the truth.

The insurance industry is a multi-billion dollar machine

They pay their life insurance agents big commissions to sell products (annuities and cash-value life insurance) with high yearly fees (which pays for those commissions). These products are sold using slick marketing campaigns.

Do you need life insurance? 

Millions of people do not. Ask yourself this question: Will someone suffer financially from my death? If the answer is no, don’t waste your money on life insurance. If the answer is yes, focus on buying term life insurance once you have identified your Social Security life insurance benefit (go to Socialsecurity.gov and print off your statement to see the child, surviving spouse, and maximum family benefits). When buying term, look at annual renewable term (premium will go up slightly each year) or level term for the period you will need coverage (5, 10, or 20 years for example). Make an informed decision.

When buying term life insurance, go online

Avoid the local life insurance agent. The agent’s conflict of interest will cause him/her to push the high commissioned cash value policies like whole life, variable life, and traditional life. Stay far away from these fancy looking salespeople. Instead, go online to a term clearinghouse like accuquote.com or term4sale.com. Let them fight for your business as they scour the United States looking for the best term policy that fits YOU. Also, make sure your family knows what to do with that money if that day comes. In the vast majority of cases, life insurance will not be taxed. Does your loved one know what to do when presented a check for hundreds of thousands of dollars? Most do not.

Educate yourself outside of the insurance industry

Find the right teachers when learning about insurance and other money subjects. Your local life insurance agent is not the right person (going back to that conflict of interest). His or her training is primarily on sales. Never forget that! Here are some really good teachers who provide insight on the insurance business without selling you a policy: Eric Tyson, Jane Bryant Quinn, and Jonathon Clements. Let’s finish this recap with a quote from Miss Quinn.

“How would I buy life insurance? I would start with low-cost term insurance, expecting to cancel it when I retire or when my kids are grown and my spouse is self-supporting. I’d find the insurer through a quote service. I’d build up investments somewhere else, in retirement funds, stock-owning mutual funds, Treasury securities and real estate, to guarantee my security. I would buy no life insurance on any of my children.” – Jane Bryant Quinn, Making the Most of Your Money

The Bottom Line on Insurance