How to Safely Reduce Insurance Costs

Times are tight, so people are looking for ways to slash expenses. Insurance is a good target for many people. There are a couple of ways to safely reduce insurance costs.

You might have unneeded or duplicate coverage. Those expenses can be eliminated. You also might be paying too much for coverage you need. Shopping around can reduce that cost without exposing you to additional risks.

Term life insurance.

Most people have either too much or too little life insurance. An industry model is that your life insurance coverage should be a multiple of your income. I have seen rules-of-thumb advocating from five times to 10 times gross income as appropriate coverage. I recommend a different approach.

Term life insurance is purchased to cover specific risks. For example, you want to ensure that in event of your premature demise the mortgage or college tuition are paid. A relatively young person also might want to ensure your spouse has a nest egg matching what you would have built up over the working years. For some people the goal of life insurance is to replace their income for five or 10 years.

I suggest you determine the reasons you own term life insurance. You might find some of the coverage no longer is needed. You also might find that instead of one large term life policy a more appropriate purchase is separate policies with different terms. For example, the need to pay tuition might end sooner than the need to pay the mortgage. An appropriate package might be a five-year term policy to protect the higher education of your children and a 20-year policy to cover the mortgage. Instead of using a formula, focus on specific needs, the amount of each need, and when the need is likely to end. See our August 2007 visit, available on the web site Archive, for details of how to determine the amount of coverage you need.

After determining the proper amount of coverage, shop around. The Internet makes shopping for term life easy, and as we discussed in past visits (see the June 2007 issue, available on the web site Archive) the cost of term insurance dropped dramatically over the last 10 years. Life expectancy is higher, reducing the cost. Also, insurers have refined their premium classifications. There used to be simply smoker and non-smoker, or preferred and non-preferred rates. Insurers think they know more now. People who used to fail to receive the preferred rating now might be preferred or an intermediate rating that has a lower premium than the standard rate.

Shop around on the web in addition to talking with insurance agents. It takes only a few minutes to discover if your current coverage costs more than you need to pay.

Finally, if at all possible, make one annual premium payment. Insurers impose a significant financing charge to pay over time. With some insurers, you are better off borrowing against your credit card than paying a premium in installments.

Whole life insurance.

A whole life policy should be purchased for a permanent need, such as paying estate taxes. Whole life policies build up a cash value that earns investment income. If you no longer have a need for the permanent life insurance, one option is to cancel the policy and distribute the cash value account. This is likely to be taxable, so it might not be the best use of the policy. Another approach is to sell the policy, known as a life insurance settlement. More details of life settlement transactions are in the February 2008 visit, available on the web site Archive.

Homeowners’ insurance.

This is an area where people are more likely to be underinsured. The cost to rebuild the home might exceed the limits on the policy. Market value and replacement cost are not the same, and it often costs more to rebuild a home than it would fetch on the market. Insurers give guidelines about replacement cost, but the burden is on you to be sure the policy limit is sufficient.

Be sure you are receiving all the discounts for which you qualify. Insuring both your home and autos through the same insurer usually nets a discount. A discount might be available to someone who is retired or otherwise at home during the day. Various improvements in the home might generate discounts, especially improvements in security, plumbing, electrical, and the roof.

Auto insurance.

A price war has been taking place among auto insurers for several years. The Internet makes it easy to compare prices for many insurers, though some major players still sell only or primarily through agents.

Beyond price shopping, be sure you are receiving all available discounts, such as for those who don’t drive the car to work and for a child attending college more than 100 miles from the parents’ home who does not bring a car. A safe driving record, good credit rating, and security system all rate discounts at most insurers.

Larger cars also tend to have lower premiums than smaller cars. People who are thinking of shifting to a smaller car for higher gas mileage should be sure higher insurance premiums do not offset the fuel savings.

Miscellaneous coverage.

Beware of duplicate or unneeded coverage.

Accident policies, usually called accidental death and dismemberment policies, usually duplicate basic life insurance and disability policies. Bill-paying insurance-often called credit-life, mortgage-life, or credit-disability life-also duplicates life and disability coverage, often at a higher cost.

Identify theft insurance became popular a few years ago when ID theft was growing rapidly and receiving a lot of media attention. Many homeowner’s policies now include the coverage or offer it as a rider. Most credit cards provide a lot of protection, and laws limit many losses. Credit monitoring services also include this coverage and more at a lower cost.

You probably are paying several times for emergency road service. In addition to AAA membership many credit cards, auto insurance policies, and even car warranties include it. Note the limits in each coverage to decide which to cancel.