Insurance is one of the most confusing and misunderstood things we buy. So today and for the next couple of weeks we’re going to talk about basic rules for buying insurance, including what you need and what you don’t need.
First up – a preview of my Insurance Buying Guide which will go live in the next few weeks. It will have its own page, and you can access it from the header on the main page or at the top of any post. Here are three rules of thumb to keep in mind when buying any type of insurance. Stay tuned for the rest.
Only insure things you can’t afford to lose
When you insure you protect. You protect yourself from loss. But not just any loss. If you tried to insure yourself against every conceivable loss you’d quickly run out of money. That’s why you need to be smart about which insurance you buy.
A good rule of thumb is you should only insure things you can’t afford to lose. This helps you avoid insuring against every possible event. Think back to the time you were in the furniture store, looking for that new couch. When you found the right one, your salesman probably tried to sell you the extended protection plan to protect the fabric from damage. But ask yourself – Would I suffer irreparable harm if the leather got scratched? No! It’s just a couch.
The same goes with most other things you’re sold an extended warranty on. Office chairs, digital cameras, smartphones, washing machines, laptops…I could go on and on. Just say no.
Think about who you’re insuring
Banks love it when you pay to insure them. I’ll give you two situations where this is the case.
When you get a mortgage, the bank asks if you want to add an obscure insurance known as mortgage life insurance. They claim that if you die you or your survivors won’t have to pay off the mortgage. That’s true, but the policy pays off the lender if you die, not your survivors. And it costs ten times what term life insurance costs.
In a related example, some sneaky credit card companies have been putting unemployment insurance or other coverage onto people’s bills each month. Again, these products protect the lender if you’re not able to make your payments. Make sure you go through your statement every month to make sure your bank isn’t ripping you off.
In either case, a simple level term life insurance policy is best because the proceeds go to your survivors who can decide how best to use the funds.
Don’t buy any policy that’s narrow in its benefit
Many types of insurance fall into this category. Just to name a few: Accidental death and dismemberment, stroke insurance and cancer insurance.
These policies are so narrow in their coverage that very few people in very few situations are likely to benefit from them. They are riddled with exclusions and are designed to take advantage of your fear of getting one of these conditions.
It’s best to buy general insurance, such as life insurance or disability insurance, that covers much more than these single-issue insurance policies.