Fixing foolish insurance mistakes
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Seven ways you're being foolish with insurance.
Playing an April Fools' joke on a friend can be fun, but being foolish with your insurance can be costly. Skimping on your coverage can result in financial ruin, or at least a hefty bill that will part a fool (you) and his money.
Penny-pinching might be smart in some circumstances, but trying to save by reducing your insurance protection can be foolhardy, says Tom Bigoski, owner of the Thomas Bigoski Insurance Agency in Gainesville, Va.
"A foolish person will take low liability coverage and low deductibles," Bigoski says. "A smart person will get high liability coverage with a high deductible."
Whether you are purchasing car insurance, homeowners insurance, life insurance or disability insurance, leave off the dunce cap, and think before you make an expensive mistake.
You can easily do something ridiculous when you buy car insurance. One way is to purchase only the minimum liability coverage required by law and think that that would offer enough financial protection if you cause injuries in an accident, says Ron Moore, senior product manager for MetLife Auto & Home in Minneapolis.
The liability minimums would barely cover a day in the hospital if you hurt two people in a car crash, says Tim Dodge, director of research for the Independent Insurance Agents & Brokers of New York in Syracuse. And if your coverage is lacking, a very serious crash could wipe you out.
"You need to have enough liability to protect your savings and your future earnings, because you could end up declaring bankruptcy or having your wages garnished," Dodge says. "Higher levels of liability coverage don't cost as much as you would think, either. Each additional layer of protection costs proportionately less."
You can be a dolt when it comes to disability insurance or life insurance. Don't over-rely on the coverage you have through work.
"It could be catastrophic if you lose your job at the same time you become severely ill," says Tom Bigoski, owner of the Thomas Bigoski Insurance Agency in Gainesville, Va. "Sometimes life and disability insurance policies are portable from one job to the next, but often you have to convert to a more expensive policy. You may not be healthy enough to qualify for a new policy, either."
Bigoski also notes that employers can choose to take their policies away at any time because the group policy belongs to the employer, not the employees.
"You should always take any insurance policy that's free, but don't have more than 50% of your life and disability insurance through your work," he says.
Kevin Finneran, vice president of life product management at MetLife in Bloomfield, Conn., says employer-sponsored disability insurance often covers only your salary and not bonus or commission income, which means your benefits could be much lower than what you're actually bringing home.
It's smart to raise your homeowners insurance deductible to save money on your premiums. But be careful because that can be an extremely foolhardy move if you don't have cash reserves available.
"Your deductible should only be as high as you can comfortably swallow," says Tim Dodge, director of research for the Independent Insurance Agents & Brokers of New York in Syracuse. "If you keep $5,000 or $10,000 in a checking account, you can handle a higher deductible, but if your emergency fund has $500 in it, then you really shouldn't take a $2,500 deductible on your home insurance policy."
On the other hand, says Tom Bigoski, owner of the Thomas Bigoski Insurance Agency in Gainesville, Va., insurance is meant to cover a catastrophe, not a $400 repair bill.
"Increasing your deductible can save you hundreds that you can put away in an emergency fund," he says. "Just make sure your insurance deductible isn't higher than the maximum amount you can afford to pay if you had to make a claim tomorrow."
If you live in a designated flood zone, your mortgage company probably will require you to buy flood insurance. But if you're not quite in harm's way, don't fool yourself into thinking you don't need a flood policy, because 25% of all floods occur in low-to-moderate risk areas, says Tim Dodge, director of research for the Independent Insurance Agents & Brokers of New York in Syracuse. Even if you don't live near a body of water, flood damage can be caused by snowmelt or a hurricane.
"Flood insurance is relatively inexpensive if you live in an area with little risk of a flood, but the damage caused by even a small flood can be costly," he says. "You should consider the cost of flood insurance versus the likelihood of a flood, versus the cost of a repair."
Ron Moore, senior product manager for MetLife Auto & Home in Minneapolis, says homeowners also should purchase coverage against sewer or drain backups because if a backup turns your finished basement into a smelly swamp, the damage can be expensive.
If you have a sump pump, you should purchase an insurance rider that covers damage if it fails, notes Tom Bigoski, owner of the Thomas Bigoski Insurance Agency in Gainesville, Va.
Another bit of foolery is to assume that the liability coverage in your homeowners insurance and your car insurance will be enough for every eventuality.
"I think umbrella insurance should be sold along with every swimming pool," says Tim Dodge, director of research for the Independent Insurance Agents & Brokers of New York in Syracuse. "You can be sued if someone is hurt around the pool, and the liability for an accidental death would be huge."
Tom Bigoski, owner of the Thomas Bigoski Insurance Agency in Gainesville, Va., says umbrella insurance, which is relatively inexpensive, provides $1 million or more in additional liability coverage. The coverage can protect your current assets and future earnings in case of a lawsuit.
"Many people believe they don't have enough assets to need an umbrella policy, when the reality is if they or a family member cause a serious car accident, their auto insurance may not cover all of the other person's injuries," says Ron Moore, senior product manager for MetLife Auto & Home in Minneapolis.
An umbrella policy also can provide protection against your liability in a case of slander or libel.
"If you get sued for something you or your teenager wrote on Facebook about someone else, your personal injury coverage on your home insurance may not be enough," says Dodge. "The chances are low that someone would win, but your umbrella insurance will also pay the legal fees to defend yourself."
Foolishness for couples is purchasing life insurance only for a working spouse, ignoring the value of the stay-at-home parent, Kevin Finneran, vice president of life product management at MetLife in Bloomfield, Conn., says.
"When considering life insurance, if a stay-at-home parent is caring for children, how will the cost of caring for the children be provided for if something happens to that spouse?" he says.
Term life insurance policies are relatively inexpensive, particularly for a young, healthy parent.
"A big mistake people make is to spend their insurance budget on a small amount of (permanent) whole life insurance instead of term life insurance," says Tom Bigoski, owner of the Thomas Bigoski Insurance Agency in Gainesville, Va. "A healthy 35-year-old male can buy a 30-year, locked-in term life insurance policy for $500,000 for the same cost as just $100,000 in whole life insurance."
No foolin': Your homeowners insurance or renters policy probably doesn't provide enough protection for your most valuable belongings.
"Standard home insurance covers damage to your computer by fire or an explosion, but the reality is that you're more likely to spill a drink on your keyboard or drop your iPad," says Dodge. "A rider on your insurance policy can cover your computers for a low premium."
You also should get a rider to cover the full value of any expensive jewelry, collectibles or art you own.
"You should ask your insurance agent about special coverage for anything your neighbor doesn't have," says Tom Bigoski, owner of the Thomas Bigoski Insurance Agency in Gainesville, Va. "If you have an antique grandfather clock, high-end jewelry or artwork, you need to purchase extra coverage for that."
And if a fire or other disaster destroys all your possessions and the home itself, your homeowners insurance policy should be big enough to rebuild and replace everything. Some homeowners foolishly think they need only enough insurance to cover the current market value of their property.