My father, who was pretty savvy about money, once told me, "You always insure for the disaster, not for the annoyance."
What did he mean by that?
Don't use insurance to avoid minor financial blows, only the ones that are going to knock you down and out.
I'm watching a commercial for a major insurance company. A lady has come into a "store" to buy "customized auto insurance," so customized that there's a little picture of her on the box. (Yes, in this admittedly amusing fantasy world, insurance comes in a box.) She wants "a lot" of insurance (a little "gas tank" style dial appears, showing almost full) but, no, she wants "a little less" (the gas tank dials itself back to three-quarters full) "a little less"(we're now down to a little bit above half) "and a low deductible."
It's an amusing commercial, pleasant and friendly. However, this is not the way you should buy insurance...of any type.
Let's face it. As I've said elsewhere, most of us only have so much money to spend on insurance. We need to be careful to spend it wisely.
As an example, let's talk about auto insurance.
There are two main types. One covers repairing damage to or the loss of your car; the other involves damage to everything else, including people. (You can also buy insurance to pay your medical bills if you're injured in a crash, and insurance to pay you if the other driver is at fault, but has no money and no insurance.)
Collision insurance repairs or replaces your car if it's involved in a crash: you run into another car, a lamp post or a 2000 lb Brahma bull. (Don't laugh; I once saw one strolling down the Texas road on which I lived; I called the sheriff, and he sent someone to round it up.) Comprehensive insurance covers just about anything else that might damage your car--a tree falls on it, a tornado takes it to Oz, a graffiti artist uses it for a canvas or someone steals it.
Collision and Comprehensive almost always involve a deductible. You can choose the amount, usually starting at $500. The amount the insurance company will pay will be either the cost of repairing your car or the cost of replacing it--less the deductible--at your car's current market price. Keep that last phrase in mind; we'll come back to it later .(To prevent people from trashing their own car when they need money, some insurers will always pay less than the replacement cost. Check your policy.)
The second kind of insurance is liability insurance. This is insurance to cover damage that you are responsible for, especially if you are judged negligent in some way. You hit someone's car or run into their house (it happens!) or hit them because of those worn tires, or because you didn't see a stop sign, or because you were texting someone and this insurance provides money to repair or replace their damaged car or property, for medical bills or to pay damages if you are sued Most states now require drivers to have a minimum amount of liability insurance. Drive without it and you can be fined or even jailed.
And this is where the "annoyance" versus "disaster" situation shows up.
Far too many people worry first and foremost about repairing their damaged car. They buy Collision & Comprehensive with a low deductible, and skimp on liability insurance. But a higher deductible--say $1,000-- means you'll only be out of pocket $500 more if your car needs to be repaired. That's a financial annoyance.
You don't think so? Then skimp on liability insurance; if you seriously injure or kill someone, you are now at risk for losing, not a car, but everything you own...and then some. That's a financial disaster.
Here's a hypothetical example.
Ruth and Amy both buy identical new cars that cost $18,000. They both budget the same amount of money to spend on car insurance.
Ruth buys C & C with the lowest possible deductible, $500, which means that if her car gets damaged, she's only out $500 to get it fixed or replaced. A low deductible costs much more than a high deductible though, so she opts for only $50,000 worth of liability insurance, the minimum her state requires.
Amy opts for C&C with a $1,500 deductible, which costs much less; with the savings, she buys $300,000 worth of liability insurance.
Five years into their car ownership, both are involved in major crashes. They aren't injured, but other people are. Both Ruth and Amy's cars are totaled. Ruth was texting on her cell phone when she crashed; Amy failed to see a stop sign.
Both are sued by those injured for $350,000 in medical bills and damages.
Ruth contacts her insurance agent and is stunned to find that they will only pay her the current market price of her five-year-old car, approximately 40% of what she paid for it, less $500. The court awards those suing her a total of $250,000; her insurance carrier pays her $50,000, the full amount of her liability insurance. She has no savings,and owns no property other than her car; she will therefore spend decades paying off the additional $200,000. For her, this is a financial disaster.
Amy is paid $1,500 less than Ruth towards replacing her totaled car. But she has $300,000 of liability insurance, enough to make it worth the insurance company's while to negotiate with the lawyers of those who are suing her. They agree on a settlement of $190,000, which the insurance company pays. Amy is able to buy a decent used car and goes on with her life. Even if she'd had to pay $250,000, like Ruth, the insurance would have covered it.
Because she was willing to risk paying $1,000 more to replace her car, this has been a financial annoyance.
Consider risks versus cost when you buy insurance....and buy protection for the financial disaster, not the financial annoyance.
What did he mean by that?
Don't use insurance to avoid minor financial blows, only the ones that are going to knock you down and out.
I'm watching a commercial for a major insurance company. A lady has come into a "store" to buy "customized auto insurance," so customized that there's a little picture of her on the box. (Yes, in this admittedly amusing fantasy world, insurance comes in a box.) She wants "a lot" of insurance (a little "gas tank" style dial appears, showing almost full) but, no, she wants "a little less" (the gas tank dials itself back to three-quarters full) "a little less"(we're now down to a little bit above half) "and a low deductible."
It's an amusing commercial, pleasant and friendly. However, this is not the way you should buy insurance...of any type.
Let's face it. As I've said elsewhere, most of us only have so much money to spend on insurance. We need to be careful to spend it wisely.
As an example, let's talk about auto insurance.
There are two main types. One covers repairing damage to or the loss of your car; the other involves damage to everything else, including people. (You can also buy insurance to pay your medical bills if you're injured in a crash, and insurance to pay you if the other driver is at fault, but has no money and no insurance.)
Collision insurance repairs or replaces your car if it's involved in a crash: you run into another car, a lamp post or a 2000 lb Brahma bull. (Don't laugh; I once saw one strolling down the Texas road on which I lived; I called the sheriff, and he sent someone to round it up.) Comprehensive insurance covers just about anything else that might damage your car--a tree falls on it, a tornado takes it to Oz, a graffiti artist uses it for a canvas or someone steals it.
Collision and Comprehensive almost always involve a deductible. You can choose the amount, usually starting at $500. The amount the insurance company will pay will be either the cost of repairing your car or the cost of replacing it--less the deductible--at your car's current market price. Keep that last phrase in mind; we'll come back to it later .(To prevent people from trashing their own car when they need money, some insurers will always pay less than the replacement cost. Check your policy.)
The second kind of insurance is liability insurance. This is insurance to cover damage that you are responsible for, especially if you are judged negligent in some way. You hit someone's car or run into their house (it happens!) or hit them because of those worn tires, or because you didn't see a stop sign, or because you were texting someone and this insurance provides money to repair or replace their damaged car or property, for medical bills or to pay damages if you are sued Most states now require drivers to have a minimum amount of liability insurance. Drive without it and you can be fined or even jailed.
And this is where the "annoyance" versus "disaster" situation shows up.
Far too many people worry first and foremost about repairing their damaged car. They buy Collision & Comprehensive with a low deductible, and skimp on liability insurance. But a higher deductible--say $1,000-- means you'll only be out of pocket $500 more if your car needs to be repaired. That's a financial annoyance.
You don't think so? Then skimp on liability insurance; if you seriously injure or kill someone, you are now at risk for losing, not a car, but everything you own...and then some. That's a financial disaster.
Here's a hypothetical example.
Ruth and Amy both buy identical new cars that cost $18,000. They both budget the same amount of money to spend on car insurance.
Ruth buys C & C with the lowest possible deductible, $500, which means that if her car gets damaged, she's only out $500 to get it fixed or replaced. A low deductible costs much more than a high deductible though, so she opts for only $50,000 worth of liability insurance, the minimum her state requires.
Amy opts for C&C with a $1,500 deductible, which costs much less; with the savings, she buys $300,000 worth of liability insurance.
Five years into their car ownership, both are involved in major crashes. They aren't injured, but other people are. Both Ruth and Amy's cars are totaled. Ruth was texting on her cell phone when she crashed; Amy failed to see a stop sign.
Both are sued by those injured for $350,000 in medical bills and damages.
Ruth contacts her insurance agent and is stunned to find that they will only pay her the current market price of her five-year-old car, approximately 40% of what she paid for it, less $500. The court awards those suing her a total of $250,000; her insurance carrier pays her $50,000, the full amount of her liability insurance. She has no savings,and owns no property other than her car; she will therefore spend decades paying off the additional $200,000. For her, this is a financial disaster.
Amy is paid $1,500 less than Ruth towards replacing her totaled car. But she has $300,000 of liability insurance, enough to make it worth the insurance company's while to negotiate with the lawyers of those who are suing her. They agree on a settlement of $190,000, which the insurance company pays. Amy is able to buy a decent used car and goes on with her life. Even if she'd had to pay $250,000, like Ruth, the insurance would have covered it.
Because she was willing to risk paying $1,000 more to replace her car, this has been a financial annoyance.
Consider risks versus cost when you buy insurance....and buy protection for the financial disaster, not the financial annoyance.
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