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Every day brings me another insurance offer. In today’s mail, I was invited to insure against identity theft for $34.99 a month.
Last week, I was sent a “final notice” to purchase a home warranty. In the same batch of mail, I was offered a $20,000 whole life insurance policy for $132 a month.
My most faithful correspondent is my water company. Every month it invites me to insure the water pipes under my lawn for about $1,000 a year. I would pay up to $6,000 in repairs should a pipe fail.
Lately, when I buy tickets online, a check box appears offering me coverage that would refund my purchase if I could not attend because of illness. A similar offer appears when I book a hotel room.
I’ll bet this isn’t just happening to me. You may be getting a lot of uninvited insurance offers as well. If it helps, here are a couple of rules I learned while studying for the CFP that help me decide what insurance to buy.
The first rule is to buy insurance against catastrophes that we cannot afford. Skip coverage against risks that we could pay from savings.
This means I’m not buying insurance for two tickets to the Philadelphia Flower Show. I invoke the same rule when I throw away the offer for the water line insurance and the home warranty. If something breaks around the house, I can afford to pay for the usual repairs.
I do buy health, homeowners, auto insurance and umbrella insurance policies. If something went seriously wrong in these domains, the cost could be more than I want to bear.
Life insurance falls into a gray area. A second rule can help here: Only buy life insurance when someone depends on your earnings. Following this rule, I carried term life insurance when my kids were young. Now that they are grown, I’ve dropped life insurance.
These rules aren’t absolute. Some people may buy life insurance to help settle their estate, for instance. Others may feel reassured by purchasing an extended warranty on a new car. Still, these two rules help me fend off uninvited offers that seem designed to prey on our natural anxieties.
Aggravation vs. Devastation is the contrast that Greg seems to be addressing in this thoughtful posting.
In my “day job” I typically suggest to clients that they focus their insurance dollars on protecting against devastation (e.g. Liability Umbrella, disability and life insurance for HH income protection) and opt to self-insure whenever possible against aggravation (via selecting higher home / auto insurance deductibles that correspond with their level of cash reserve funds) and generally bypass most warranties and service plan type offers.
The majority of folks I work with could recover from a $1000 out-of-pocket collision deductible after an auto accident without too much difficulty. Very few could say the same after a $1,000,000 personal injury judgement against them, or the loss of a breadwinner’s paycheck due to injury, illness or premature death.
An intentional strategy of re-deploying insurance dollars previously spent on aggravation-level exposures to instead buy protection against devastation-level events can also help to keep their total annual out-of-pocket premiums paid for all HH coverage more manageable.
Nice article Greg, and I agree. Never mind a deductible, we took off collision on our car altogether. We do carry high deductible renters insurance. On the other hand, we carry personal property insurance on a few valuable items. Our reasoning is that while we could afford to have them lost or stolen, the risk of that happening in our nomadic lifestyle is higher, so it’s worth insuring against. The math might say it isn’t, but personal finance is personal…
Just thinking, another area in which we sometimes buy “insurance” is with flight and hotel reservations. We will sometimes pay more for fully changeable/refundable tickets, or pay the higher flexible rate for accommodations. It’s not uncommon for us to change our plans.
I kept forgetting to take collision coverage off my car (2007, but only 71,000 miles). Recently I got too friendly with a column in a high rise parking deck and it probably cost the insurance company more than the car is worth for the repairs….
When I was working I carried disability insurance on top of that provided by my employer. As Rick mentioned below, a couple of years ago I wrote an article here on travel insurance: always carry medical and evacuation/repatriation, other travel insurance only if you have prepaid high expenses you can’t cancel for a refund if necessary. And don’t buy it from a tour or cruise company.
Question to Andrew Forsythe: You write that “ while the comments below describe various scenarios where some of the niche…….”At the time of writing how did you know what the comments would be?