Rule 1: Buy Insurance Only for
Financial Risks You Canít Afford to Bear on Your Own
The purpose of insurance is to cover
catastrophes that would devastate you or your family.
Donít treat insurance as a chance to cover all your losses
no matter how small or insignificant, because if you do
youíll fritter away money on insurance you really donít
need. For example, if your house caught fire and burned
down, you would be glad you had homeownerís insurance.
Homeownerís insurance is worth having, because you likely
canítóand you certainly donít want toócover the cost of
rebuilding a house. On the other hand, insuring an old
clunker is a waste of money if the car is only worth $800.
You would be throwing away money for something you could
cover yourself if you had to.
Rule 2: Buy from Insurers Rated A
or Better by A.M. Best
Insurance companies go bust, they
are bought and sold, and they suffer the same economic
travails that all companies do. Between 1989 and 1993, 143
insurance companies declared bankruptcy. You want to pick
a reliable company with a good track record.
A.M. Best is an insurance company monitoring service that
rates insurance companies on reliability. Look for
insurers rated A or better by A.M. Best, and periodically
check to see whether your insurer is maintaining its high
rating. If your insurer goes down a notch, consider
finding a new insurance company. You can probably get A.M.
Bestís directory of insurance companies at your local
public library, and you can find A.M. Best on the Web at
Rule 3: Shop Around
There are many, many, many kinds of
insurance policies, and insurers donít advertise by price.
You need to do some legwork to match your needs with the
cheapest possible policy. Talk to at least two brokers to
start with. Look for no-load insurance companiesócompanies
that sell policies directly to the public without a broker
taking a commissionósince they usually offer cheaper
Rule 4: Never Lie on a Policy
If you fib and get caught, the
company can cancel your policy. If you lie on an
application for life insurance and die during the first
three years you hold the policy, the company will cancel
your policy, and your beneficiaries will receive nothing.
Health, life, and disability insurers run background
checks on applicants through the Medical Information
Bureau, so you can get caught lying. The medical
examination you take for life insurance can also turn up a
lie. For example, if you smoked tobacco in the previous
year, it will come up in the test.
Rule 5: Donít Buy Specific-Risk
PoliciesóBuy General Policies Instead
When it comes to insurance, you want
the broadest coverage you can get. Buying insurance
against cancer or an uninsured motorist defeats the
purpose of having an insurance policy. If you have ulcers,
your cancer insurance will not help you. Get comprehensive
medical coverage instead.
Uninsured motorist insurance is
supposed to protect you if you get hit by someone who
doesnít have car insurance or doesnít have adequate car
insurance. But, in my opinion, you donít need it if you
have adequate car insurance yourself, as well as health,
disability, and life insurance. I should point out that
some attorneys advise you to carry uninsured motorist
insurance because, by doing so, you may be able to recover
damages for ďpain and suffering.Ē
Rule 6: Never Cancel One Policy
until You Have a Replacement Policy in Place
If you cancel a policy without
getting a replacement, you will be uninsured for however
long it takes to get a new policy. And if disaster strikes
during this period, you could be financially devastated.
This rule goes for everyone, but especially for people
getting on in years, since older folks sometimes have
trouble getting health and life insurance.
Rule 7: Get a High Deductible
You save money by having insurance
policies with high deductibles. The premium for
high-deductible policies is always lower. Not only that,
but you save yourself all the trouble of filing a claim
and needing to haggle with insurance company
representatives if you have a high deductible and you
donít need to make as many claims.
People who buy low-deductible
policies usually do so because they want to be covered
under all circumstances. But the cost, for example, of a
$400 fender-bender is usually worth paying out of your own
pocket when compared to the overall cost of being insured
for $400 accidents. Statistics show that most people have
a fender-bender once every ten years. The $400 hurts to
pay, but the cost of insuring yourself for such accidents
over a ten-year period comes to far more than $400.
One other thing: If you have a low
deductible, you will make more claims. That means you
become an expensive headache for the insurance company.
That means your rates will go up, and you donít want that
Rule 8: Use the Money You Save on
Insurance Payments to Beef Up Your Rainy Day Account
While you can save money on your
insurance premiums by following the rules mentioned
earlier, itís probably a big mistake to use that money
for, say, a trip to Hawaii. Instead, use any savings to
build a nice-sized rainy day fund that you can draw on to
pay deductibles. A big enough rainy day fund can cover
both periods of unemployment and your insurance
By Stephen L. Nelson, CPA
Kirkland WA certified public accountant & author Stephen
L. Nelson CPA has written more than 150 books. His
bestselling book is Quicken for Dummies, which sold more
than 1,000,000 copies. His books have sold more than
4,000,000 copies in English and have been translated into
more than a dozen other languages. His web site is
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