It seems like at every turn in life, there is an option to buy insurance. From cell phones to your trusty canine companion’s health care. There is insurance for everything.
Almost every time I purchase something I’m asked to insure it for a “low” monthly fee, and I have to hold myself back from rolling my eyes while I politely smile and say no thank you. If I’m in the insurance industry and I feel this way, no wonder the general population is confused.
It seemed like a good idea at the time
When I start working with new clients, I find that often times people believe they have lots of insurance. And they do… They are spending hundreds of dollars a month. But unfortunately, it’s usually for crap they don’t need and they are at risk financially in other important areas. I see a list of products that seemed like a good idea at the time, but it doesn’t correlate with their financial plan, it’s often overpriced, or the client is unclear on what coverage they actually have.
In the most unfortunate of situations, there will be a client who has insurance, but because of the specifics of the contracts they didn’t know about, they are not covered. Which can be devastating in an event like a family’s primary bread winner passing away and the surviving spouse finding out their mortgage isn’t actually covered when they believed it was.
So how do we sort through it all?
What is the good, the bad, and the ugly? All these extended warranties, extra insurance premiums for credit cards, electronics, and lassie’s incidental health costs can really add up and rob your opportunity to invest for the future. We can get so distracted with trying to protect against everyday annoyances that we don’t think to secure our future.
In an attempt to help you figure out a balance, I will tell you some of my pet peeves and give some alternatives that will save you in the long run:
Electronics, cars, tools, phones, and toys. There is extended warranty for just about everything. Do you know why? There is a TON of money in it since people very rarely use them. I’d steer clear of them as much as you can. Right about now you might be asking “But what if something breaks? How will I replace it?!”.
In reality, if something is going to break or you were unfortunate enough to purchase a lemon, you will most likely catch it within the manufacturer’s warranty time frame. If you are past the warranty limit and don’t have the cash to replace or fix household items, read on.
I am a huge fan of cash emergency funds. Three to six months of expenses is ideal, but you will surprise yourself with how much money you will save over time by keeping even $1000 stashed away for the times your tire goes flat, the dog gets sick, or your phone decides to go for a swim in the toilet. Instead of paying monthly warranty payments, consider using that money to insure yourself for the little things and you will have a beginner emergency fund in no time.
The warranty industry takes advantage of consumers that are in a depleted cash situation and keeps them that way with little payments tacked onto everything. Do yourself a favor. Don’t be cash poor.
Creditor and Mortgage Insurance
Almost everyone has something that they insured at the bank when they signed the loan. Insuring your loans is a good idea, it’s the way you do it that can get tricky. This stuff is easy to get, but it is usually overpriced, decreases in value over time (for the same monthly payment for the life of the loan), and the institution that sold it to you is the beneficiary. And that’s not even the worst of it!
The term for the process of deciding whether you are eligible for insurance is called underwriting. Creditors and banks will do this AFTER you make a claim. Yes, you could have been paying an extra fee on your mortgage or loan for years that may or may not pay out. Can you imagine finding out you aren’t covered when you thought you were doing all the right things? It happens, and it’s devastating.
Personal insurance that is underwritten BEFORE the policy is issued is the only way to know that you are covered for sure. How do you know if you have the good stuff? Be sure to ask whoever helped you get this insurance into place, or another advisor you feel will be honest with you.
If you just had to tick a few boxes and sign, I would be wary. On the other hand, if you had to answer a lengthy host of questions about your health, had to do medical requirements like a blood test, or the insurance company asked for permission to see your medical records all before you got the insurance in place, you probably have the good stuff.
Hospital pay and accident combo insurances
This stuff is so expensive for what it offers my eyes nearly popped out of my sockets the first time one of my clients brought a policy to me. I’ve seen policies that only cover 6 months of disability for the same premium of a superior product that would cover a disability to age 65!
The reason I think so many people have these “packages” is because it packs a lot of little benefits into one policy so it can make a person feel like they are well insured and they are making a smart choice. But when I say little benefits, I mean little. It also combines my biggest pet peeves from my previous points. Taking advantage of people in a cash depleted state AND deciding whether the policy holder is eligible after a claim has been made.
The coverage may pay out if you have a short-term accident or sickness, but only if you’ve been injured or disabled within the specific definition of the contract. This can be very specific. And you’d better hope it’s all resolved in a timely manner. It will probably pay you for the days you spend in the hospital, but it will cut you off from that in 1-2 weeks. So if things are serious, you’re out of luck.
I’ve always scratched my head a little bit when it comes to accidental death insurance as well. If you die in an accident versus any other situation does that make you more dead? You will be missing from your family either way. Their needs once you are gone don’t change based on how it happened.
I’m going to sound like a bit of a broken record here, but having an emergency fund would help for a few unexpected days off while you are out of commission and is a much more affordable alternative in the long run. For more serious or longer term disability (if your employer doesn’t provide you with it or the benefit isn’t enough) you can get personal disability income insurance. Your ability to earn income is your biggest asset, so you should protect it. Just be careful to know what you are signing up for.
On the life insurance side of things, the amount of insurance you require should be assessed by how much combined debt you have and how much supplemental income your family or business may need if you are no longer there. The amount of life insurance you have should be directly determined by your financial plan.
Again, if there is only one thing you take from this post, it’s make sure your eligibility is determined BEFORE you start paying premiums.
Thinking long term
This is by no means an exhaustive list. So how do you decide what kinds of insurance to embrace or decline? Most of the time, any kind of insurance that covers small things for short periods of time can be covered with a cash emergency fund. Having cash in the bank and keeping it there might take some time and practice, but it’s a foundational practice of people with healthy financial lives.
Insurance is meant for bigger picture events that would really throw your financial plan off course long term like a severe diagnosis or a disability. Cashing in RRSP’s and other investments for these situations can deplete your financial future in a hurry. Often people that haven’t secured this part of their financial plan end up with an ailing financial forecast after they get a clean bill of health. Don’t let this be you.
Insurance is meant to manage risk
Insurance was created to take the hit when you can’t manage it yourself. The more cash you manage to build up, the more you can handle small unexpected expenses. But make sure you don’t become penny wise and pound foolish and develop an all or nothing approach.
Think about the event you are being asked to insure and ask yourself if it will affect your life for three months, six months, or years to come. That will help put things into perspective. It is commonly accepted that the most successful people think long term, and running your insurance options through the filter of your long term financial plan is the key to avoiding the unnecessary crap.