You may be Over Insured!

If you’re not reviewing your insurance policies at least every 5 years you may be over insured. Having too much insurance can be as detrimental to your finances as being under insured.

All insurance is designed to do two things. Reduce your exposure to risk and make a profit for the insurance company. But your insurance company isn’t actually absorbing any risk at all. The premiums you are charged are designed specifically to cover all future claims while still producing a profit for the company. It’s really not much different than the odds set by a casino where “The House” never loses.

InsuranceWe all know we must have insurance to protect ourselves from financial catastrophe. The key word is catastrophe. At the time you buy a policy you factor in your risk exposure and your ability to absorb that risk and buy the policy that meets your needs. But these two factors change over time.

Take for instance your car insurance. When you bought your first new car you probably put little or no money down and the lien holder required you to maintain full coverage and a low deductible. After all it’s their money at risk at this point not yours.

But 4-5 years later your car is paid for and only worth a fraction of what you originally paid. It’s time to redefine catastrophe. If you have an emergency fund that can cover a higher deductible raise your deductible and put those saved dollars into your emergency fund. If your emergency fund could easily cover a total loss you might even consider dropping collision coverage entirely. In most states if you are not deemed responsible for the accident the responsible party’s insurance will pay your damages but check with your insurance agent for particulars in your state.

Homeowners insurance should be viewed the same way. As your wealth increases your ability to absorb risk increases as well. You may be able to drop optional coverage and/or increase your deductible.

Typically young couples just starting a family have too little life insurance while senior citizens typically have too much. If you are single and not responsible for anyone’s financial support you probably don’t need any life insurance at all.

Young families can buy a lot of level term life insurance for relatively low cost. The savings can help build your emergency fund as well as your retirement accounts. But once the kids have moved out to start their own lives it’s time to re-define catastrophe again. You may find you can lower your coverage or switch to a decreasing term policy where the premium stays the same but the coverage drops incrementally over time. If you have never consulted a fee only “Certified Financial Planner” this might be the best time in your life to consider it.

Extended Warranties and Service contracts are all based on the insurance model and should be viewed from the same perspective. If the product failed would it cause you a catastrophic financial loss? If so, you should question whether the purchase makes financial sense in the first place. Second, you should factor in the quality of the product you are considering. How reliable is this product compared to the competition? Can I buy a superior product for less than the cost of the inferior product plus the extended warranty or service contract? My favorite tool to assess product reliability is www.consumerreports.org . They are an independent nonprofit organization that has provided me with quality advice for decades. The first thing I do is eliminate brands with low product reliability.

In closing, all savings reaped from lowering your insurance coverage should go towards your emergency fund. After all, you are increasing your risk exposure. It just makes “cents”.