How Not To Suck At Buying Insurance

Any kind of insurance.  Warren Buffett claims that risk is what happens when you don’t know what you are doing.  You can cure some risks with insurance.  That decision should not add more risk to your life.  Here are some things to know first.

  1. How much would I lose if the event occurred?  That is pretty easy for things like car theft, not so much for disability coverage or life insurance.  Sometimes you can get a hint by asking what would I do, give up, or sacrifice to get along if this happened?  If you care about the loss, do not compromise on the amount of the coverage.
  2. What is the probability of the event occurring?  Most people do not get risk.  If the probability of a death this year is one in a thousand at the end of the year you will either be 100% dead or 0% dead.  You cannot be 99.9% alive.  The probability should give you some idea about the required premium.  It should not make you comfortable about having no coverage..
  3. What are the real statistics?  Most people are wrong about the likelihood of some things.  Disability by sickness occurs about nine times more often than disability by accident.  Employment based claims are nearly negligible.  Everyone dies but not many insurable people die soon..
  4. What would I save with a deductible?  If you had no deductible coverage in your home-owners plan and lost your running shoes at the gym, would you make a claim?  Your deductible should be the smallest amount you would actually claim.  It is a way to efficiently manage your premium budget.
  5. Do I understand how insurers work?  All insurance is priced based on the cost of the event and the probability of occurrence.  If 100,000 people each have a million dollars of life insurance coverage and the probability of death within the year is 1 in 5,000 then the insurer will want to have premiums enough to pay $20,000,000.  $200 per person.  Plus overhead, plus commissions, plus taxes, plus profits.
  6. Pay annually if possible.  Monthly convenience has a high price.
  7. Some risks can be avoided or minimized.  Learn how to do so.  The premium to send an airplane into a war zone is high enough that you might want to send your goods another way.  Smokers pay more for life and disability insurance.
  8. What plan of insurance? All insurance “costs” the same, only the price varies.  Focus on the coverage first, premium later.  Life insurance, disability insurance and homeowners insurance come in many different packages.  The premium depends on what is in or out of the package.  Get the right coverage and then compromise on the package if you must.  Typically a deductible or waiting period.
  9. Prioritize.  Few people have just one insurable risk, but many people have budget restrictions.  If you have three needs and too little money for an excellent solution to each, buy one excellent solution and two okay solutions.  Get the excellent solution for the problem that keeps you awake or maybe the one hardest to live with if it occurs.  Buying inexpensive term life insurance when you are young is not a crazy solution.  Fix it when you can afford it.  Buy flexibility if you can.
  10. Know precisely what you are trying to accomplish.  Is the tiny premium more convenient than the catastrophic loss?  If you cannot afford the loss, then it is an easy decision.

It should not be your purpose to own insurance for its own sake.  Insurance must efficiently do something for you that, today, you can do in no other way.  Advisors can help, but you need to make the executive decisions.  Learn the game before playing.

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Don S

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