Insurance Buying: Key Considerations

There are several things to consider when purchasing insurance. Firstly, it's important to assess your specific needs and circumstances, such as your age, lifestyle, employment benefits, and financial situation. This will help you determine the type and amount of insurance coverage you require. It's also crucial to shop around and compare different insurance providers, as well as understand the policy details, including exclusions and deductibles. Additionally, reviewing your insurance needs periodically is essential to ensure your coverage remains adequate. Furthermore, consider bundling policies with a single carrier to obtain potential discounts. Lastly, be mindful of your state's insurance requirements, especially for mandatory insurance types such as auto insurance.

How much coverage do I need?

When purchasing insurance, it's important to consider how much coverage you need. This will depend on a number of factors, including the type of insurance, your financial situation, and the level of risk you are comfortable assuming.

Let's start with auto insurance as an example. The amount of coverage you need will depend on the requirements of your state and your personal financial situation. Most states have minimum insurance requirements, so be sure to check what those are. If you have a lot of assets, consider getting enough liability coverage to protect them. For example, experts recommend having enough coverage to protect against bodily injury liability and property damage liability. The general recommendations for liability limits are $50,000 for bodily injury per person, $100,000 total for all people injured in an accident, and $25,000 for property damage liability.

Your driving habits and record will also impact the amount of coverage you need. If you have a history of accidents or tend to speed, consider getting more comprehensive coverage. Collision coverage pays for damage to your car in an accident or from hitting an object, while comprehensive coverage addresses damage that didn't occur in a collision, such as fire, theft, or flood. If your car is older and you have a good driving record, you may decide that you only need comprehensive coverage to protect against the risk of your car being stolen.

Now, let's discuss home insurance. The amount of coverage you need will depend on the value of your home and personal property. Lenders may require you to buy a policy that covers at least the amount of your mortgage. Remember that the more coverage you have, the less you'll have to pay out of pocket if disaster strikes. You can choose to insure your home and belongings for either replacement cost or actual cash value. Replacement cost is the amount it would take to replace or repair your home and its contents without deducting for depreciation, and it is generally recommended to insure your home for at least 80% of its replacement value. Actual cash value, on the other hand, takes depreciation into account and may be a more affordable option.

When it comes to life insurance, the amount of coverage you need will depend on the number of people financially dependent on you and the amount of debt and taxes that will be owed after your death. Industry experts often suggest a policy that pays out 10 times your yearly income. When estimating the amount of life insurance you need, consider funeral expenses, daily living expenses, mortgage payments, outstanding loans, credit card debt, taxes, childcare, and future college costs.

Health insurance is another important type of insurance to consider. While you may obtain it through your employer or a government-subsidized program, it's crucial to ensure you have adequate coverage to protect against catastrophic bills in the event of a serious accident or illness.

Finally, long-term disability insurance is worth considering, especially if your employer offers it as part of your benefits package. This type of insurance provides income replacement if you become unable to work due to disability, and the cost is typically based on factors such as age, lifestyle, and health.

Remember, when deciding on the amount of coverage, consider your specific circumstances, such as your age, lifestyle, and employment benefits. Don't hesitate to shop around, compare quotes, and ask insurance providers about exclusions and discounts to ensure you're getting the best value for your needs.

What does the policy exclude?

When purchasing insurance, it is important to understand what is not covered by the policy, also known as "exclusions". These exclusions vary depending on the type of insurance and the provider. Here are some things to consider and questions to ask to better understand what a policy excludes:

• Ask the insurance provider for a detailed explanation of what is excluded in the policy. By doing this, you can avoid the stress of discovering these exclusions after incurring damage or loss.
• Understand the specific events or situations that are not covered. For example, in the context of travel insurance, some policies may cover trip cancellations for any reason, while others only cover cancellations due to specific events.
• Inquire about specific scenarios that may be relevant to your situation. For instance, if you are purchasing travel insurance, ask if the policy covers costs associated with returning home early due to an emergency, or if it covers medical emergencies during your trip.
• Review the policy carefully before signing. Ensure you understand the guarantees and exclusions outlined in the policy. If there is anything unclear, don't hesitate to ask the insurance agent or company for clarification.
• Be aware of the different types of insurance and their typical exclusions. For example, liability insurance typically covers property damage and injuries caused by the policyholder to others, but it may not cover damage to the policyholder's own property or injuries sustained by the policyholder.
• Understand the impact of your personal circumstances on the exclusions. For instance, in the case of auto insurance, your driving record and history of tickets or points on your license can affect the extent of coverage and the exclusions.
• Consider the financial implications of the exclusions. For example, in the case of long-term disability insurance, understand how much income replacement the policy guarantees, as some policies may only cover a percentage of your income.

Should I bundle policies?

Bundling insurance policies can be a great way to save money and simplify your insurance payments. However, it is not always the best option, and there are several factors to consider when deciding whether to bundle your policies.

Firstly, let's look at the benefits of bundling. The biggest advantage is the potential for significant cost savings. Most insurance companies offer multi-policy or multi-line discounts, which can add up to substantial amounts. For example, Progressive offers an average saving of over 20% on bundled home and auto insurance, while State Farm customers save an average of $1,073 annually. Bundling can also simplify account management, as you only have to deal with one insurance carrier, one app, and one payment for all your policies. Additionally, some companies will only charge one deductible if a single event damages multiple insured items, such as your home and car.

On the other hand, there are also some drawbacks to consider. If you have specialised insurance needs, you may not find a single insurer that offers the combination of coverage you require. For instance, high-risk drivers or homeowners in wildfire zones may need to use specialist providers that do not offer other types of insurance. In some cases, you may find cheaper rates by purchasing separate policies from different companies, especially if you qualify for various discounts. For example, you might get a discount on car insurance for good grades or a defensive driving course, or a discount on home insurance for installing security devices. Finally, bundling may make it less likely that you will shop around for better rates in the future, as switching multiple policies to a new insurer can seem like a hassle.

In conclusion, bundling insurance policies can provide cost savings and simplify your payments, but it may also limit your options and make you less likely to seek out better deals in the future. When deciding whether to bundle, be sure to compare the costs and coverage of bundled and unbundled policies from different insurers, and consider your specific insurance needs and circumstances.

How often should I review my insurance?

It is recommended that you review your insurance needs on a yearly basis. This is because as your needs evolve, so too will your insurance policy. For example, you may have acquired a new vehicle since you initially purchased auto insurance, or perhaps you've started operating a small business from your home. In these instances, you'll need to consider whether your policy needs to adapt to accommodate new risk exposures.

It's important to keep in touch with your insurance provider or broker to ensure that you are adequately covered. You should also review your insurance policy whenever you experience a significant life change, such as getting married, having children, moving house, or changing jobs. These events can impact the type and level of insurance coverage you require.

Additionally, it's a good idea to periodically shop around and compare insurance rates and coverage from different providers. This will ensure that you are getting the best value for your money and that your insurance continues to meet your needs. You may find that another provider offers more comprehensive coverage or additional benefits that better suit your circumstances.

Furthermore, reviewing your insurance annually can help you identify any changes in your financial situation that may impact your ability to pay premiums. It will also allow you to assess whether you have adequate coverage limits and whether you need to increase or decrease your coverage.

By conducting regular reviews of your insurance, you can ensure that your policy remains up-to-date and relevant to your evolving needs and circumstances. This proactive approach will provide you with peace of mind and financial protection in the event of an accident, illness, or other insured incidents.

How can I minimise risk?

Minimising risk is a key part of the insurance process. Here are some ways to reduce your risk and maximise your savings:

Firstly, only buy insurance that suits your needs. For example, if you are purchasing car insurance, consider your driving habits. If you have a history of accidents, or if you drive on dangerous roads, then you should opt for more complete coverage. On the other hand, if you have an older car, a good driving record, and there is little chance of your car being totalled, you may only need comprehensive coverage, which covers damage from fire, theft, or flood, and skip the collision insurance. Similarly, with health insurance, consider your age, lifestyle, and any pre-existing health conditions. If you are young and healthy, you may not need as comprehensive a policy as an older person or someone with a long-term illness.

Secondly, shop around and compare policies. Don't just buy from the company your lender recommends. Look at what different insurers offer for identical products and services. You can do this by checking your state insurance department, consumer publications, or your public library. Compare deductibles—the amount you have to pay out of pocket on each claim—and opt for a higher deductible if it means a reduced price.

Thirdly, ask your insurance provider about the exclusions in your policy. Every insurance policy has perils that are not covered, and it is important to be aware of these from the outset. You can also ask about any discounts that may be available, such as insuring your home and car with the same company, or installing extra security measures.

Finally, take measures to minimise risk and prevent loss. For example, if you own a home, perform seasonal maintenance checks. If you have a home-based business, improve your digital defences to protect against cybercrime. Good planning and risk management can help keep you protected.

Frequently asked questions