Insurance: Use It for the Big Losses in Life

Here's how we handle all types of insurance in our house:

1. We get a good policy with a trusted company.

2. We set the deductible as high as possible (companies have limits on how high deductibles can be.)

3. We bump up our emergency fund savings to cover these higher deductibles so we have the money needed to pay for them in case we do have to use the insurance.

4. Anything minor (small fender-bender, easily fixable wind damage to the house, etc.) we fix ourselves -- out of our own pockets.

5. We will use our insurance for only major catastrophes. And hopefully, we'll never need to use any of our policies at all.

Doing the above has the advantages of costing us the least possible while still protecting us from major financial hits. I was particularly reminded about the wisdom in paying for small repairs yourself when I saw Bankrate's piece on six ways to avoid home insurance snafus. They stated that small claims can cost more than large ones (and thus insurance companies will raise your rates accordingly.) The details:

"The conventional wisdom (among consumers) is that if you file one really big claim, you're thought of as being a 'bad' customer for the insurance company," says Michael Braun, assistant professor of marketing at the Massachusetts Institute of Technology's Sloan School of Management. "However, we've found that people who file larger claims are not necessarily bad customers."

Instead, small claims -- the ones that are not particularly catastrophic -- are disproportionately expensive for an insurer to process. This is because smaller claims bear the same administrative costs as large ones. "Companies have to staff a call center to answer the phone when people call, they have to have adjusters ready and they have to have people reviewing all of the claims to make sure they are legitimate," says Braun.

Smaller claims are also more expensive if they happen frequently. "If a claim was made because lightning struck a house, the likelihood of (lightning striking twice) would be small. It would probably not deter a competing insurance company from offering a competitive quote on that house," says Young. "But if that house had a series of burglaries, it could deter an insurance company." Premiums would likely increase substantially unless the homeowner could prove that significant protective devices were installed to reduce the chance of loss, she adds.

One way you could view the "expense" we incur by saving additional monies in our emergency fund versus putting them into higher-paying investments is that this extra money is "free" to us -- especially now that we've had several years of paying much lower than normal premiums. The amount we've saved in insurance costs is several times higher than the extra amount we have in our emergency funds to cover any possible deductible. Seems like a good deal to me.

Comments

[Minimum Wage]

Too bad there is no such thing as "career" or "education" insurance. My greatest loss was uninsurable.

[cory]

Or dignity insurance.

[FMF]

MW -- Actually, there's disability and life insurance that protects your income if something happens to you.

[Jake]

The federal government offers career insurance. It's called many names: welfare, food stamps, unemployment benefits, etc. Most state governements offer career insurance as well.

Not sure about education insurance, you're the first person I've ever heard of who lost his education.

[Minimum Wage]

Your so-called government career insurance (e.g. welfare) is virtually nonexistent for childless adults. I am not aware of any government assistance available to a childless adult working full time at minimum wage.

I did not lose my education but my education lost what little value it once might have had. I don't think my education has any nontrivial value today.

[klauss]

What would you say is a good ratio, deductible to total cost where using car insurance makes sense (i.e. deductible is less than xx% of total repair cost). I used my car insurance one time in my life and the premiums rose significantly. If I knew the amount they would have risen I would have paid out of pocket for sure.