If you love to save money, you probably hate paying for insurance. After all, who wants to buy something you hope to never use? Still, the right insurance policy is often the only thing that stands between you and financial disaster.
Without insurance, you're vulnerable to a range of financial risks. Still, picking the right insurance can be confusing. Learn some of the pitfalls other shoppers make so you avoid similar errors and find the insurance you need.
Not Shopping Around
Yes, it's faster to go to an insurance website, plug in your information and simply take the first policy that's offered. However, that's not the way to get the cheapest rate, the best service or the best insurance coverage for your needs.
"The most simple mistake consumers make is not shopping around when looking for a new policy," said Michael Banks, founder of The Fortunate Investor website.
Pro tip: Knowing how to buy insurance is crucial. "Compare rates for several companies, read online reviews from their customers and speak to representatives to get a feel for whether or not that company is the right one for you," Banks said. "Most insurance plans are long term, so you want to make sure that you're happy with your purchase from the very start."
Failing to Purchase an Umbrella Policy
If you are found liable for damages in excess of your current insurance policy limits, you're on the hook for paying the excess out of your own pocket.
"Having sufficient insurance prevents that," said Thomas J. Simeone, an attorney with Simeone & Miller LLP and adjunct professor at The George Washington University Law School in Washington, D.C.
Umbrella insurance policies increase your insurance coverage limits. For a small premium, umbrella policies provide an additional $1 million or more of liability coverage on top of your existing auto and home liability policies, Simeone said.
"They are the best value in insurance because they protect you from 99 percent of the claims that may be made against you," he said. "For wealthy people, they are a no-brainer. Yet many people do not buy them, either to save money or because they do not understand the need for them."
Pro tip: Talk to your insurance agent about adding an umbrella policy to your other coverage. Your agent can help you determine if $1 million is sufficient, or if you need more coverage.
Not Maintaining Coverage
Keep your car insurance policy continuously in force. Forgetting to pay premiums on time can cost you. "The most common and costly auto insurance mistakes center around coverage lapses," said Neil Richardson, a licensed insurance agent with The Zebra, a comparison website for car insurance quotes.
Consumers who maintain auto insurance coverage for at least six months see their rates begin to decrease due to the discount that is available for continuous insurance in all states except California, Richardson said. "The discount continues to grow until the five-year mark," he said. "When a policy lapses, however, consumers lose their prior insurance discount and have to start over from scratch."
Pro tip: "Make sure to keep track of your billing and renewal dates," Richardson said. "Also, make sure when switching to a new company that you don't cancel the old policy until the new one is active."
Not Asking for Discounts
Don't assume you are automatically receiving all the car insurance discounts for which you qualify. For example, if you have a student in your household who is insured, ask your agent about potential discounts.
"Ask about a price cut if they are able to get good grades," said Richard Lewis, the Richmond, Va.-based digital marketing manager for Elephant Auto Insurance. Many insurers also offer discounts for having multiple cars on the same policy, going paperless, prepaying your coverage and more. "Discounts vary by company but one thing remains the same: The answer is usually 'no' until you ask," Lewis said.
Pro tip: "A simple phone call to your insurance provider could end up saving you a significant amount of cash," Lewis said.
Skimping on Coverage Amounts
Insurance companies try to lure customers in with low prices. To do that, they reduce coverage amounts to provide the lowest quote, Simeone said. However, if you have the bare minimum coverage and an accident occurs, you could end up not being fulling compensated.
"This is particularly true for uninsured motorist coverage, which basically covers you or your car if you are injured by an uninsured driver," Simeone said. "Unfortunately, there are a lot of uninsured drivers, so that risk is greater than what people think."
Pro tip: Talk to an insurance professional to make sure your policy limits adequately cover you in case the unexpected happens.
Buying a Car Without Considering the Cost to Insure It
If you're in the market for a car, do your car insurance shopping before you head to the dealership. Buyers get so caught up in the idea of a new vehicle that they forget about the need to insure the car, Richardson said.
Pro tip: "Shopping for insurance quotes before heading to the dealership will help you avoid paying too much to insure that new car," Richardson said. Even a quick search online can get you a few quotes so you know what a good deal looks like.
Not Creating an Inventory of Items
If you don't have an inventory of the personal property you keep at home — such as furniture, electronics, tools and clothing — you could fall into the trap of being underinsured on your homeowners policy.
"If you don't know the value of these things, then you don't know if the coverage in your policy is enough to reimburse you should your house be completely destroyed," said John Bodrozic, co-founder at HomeZada, a digital home management company that helps you manage data about your home for several purposes, including for insurance.
Bodrozic said many high-value items have limits in a standard policy, or are not covered at all. "Another reason to have a home inventory is for those valuable items such as art, antiques, jewelry, memorabilia and other collectibles (that) are typically not covered," he said.
Pro tip: It is important to know what your homeowners policy covers. "By taking a home inventory, you can document these items and the value, and get them covered in your insurance policy by adding to the policy," Bodrozic said.
Not Updating Homeowners Coverage Over Time
Renewing your homeowners policy without updating it could leave you short on rebuilding money should a disaster strike. The dwelling coverage on your policy tells you how much insurance is available to rebuild your house, Bodrozic said.
Your coverage might have been sufficient to rebuild your house shortly after you bought the home. But it would take more than what is on the policy to rebuild your house if you invested $50,000 in a new kitchen or $30,000 in a new outdoor deck and barbecue area, he said.
Pro tip: "Make sure to update the policy after new remodel projects," Bodrozic said.
Not Buying Landlord Insurance
If you rent out part of your home, don't think that homeowners insurance keeps you fully protected. "The most common insurance mistake I see is that homeowners rent out a property — or part of a property — and assume the homeowners insurance will continue to provide coverage," Simeone said.
However, standard homeowners coverage only applies if the home is being used as a primary home — not as a rental property, in full or in part.
"For coverage of a rental property, you need to purchase landlord coverage," Simeone said. "I have seen people try to make a claim due to damage done by a tenant or for claims by a tenant and find out they had no coverage because they did not update their insurance coverage."
Pro tip: Talk to your insurance agent if you're planning on renting out all or a portion of your house. Otherwise, you might find your insurance policy won't cover the damage a tenant leaves behind.
Underestimating Income When Buying Coverage on Health Insurance Exchanges
When you search for health insurance plans through the health insurance exchanges, you enter your income to determine if you are eligible for a tax credit, and how large that credit will be. If you underestimate income, you could end up with a health care tax credit much higher than the one for which you qualify, said Butch Zemar, a Chicago-based healthcare reform specialist, employee benefits consultant and health insurance broker with the Corkill Insurance Agency.
This will cause you to owe extra to the IRS when you file your tax return. "I've seen as much as $10,000 paid back to the IRS for receiving too much tax credit/subsidy for their health insurance," said Zemar.
Pro tip: To avoid this, make sure when estimating annual income to include all the income you will have for the entire calendar year.
Not Funding Tax-Advantaged Accounts
Take advantage if your employer offers a flexible spending account, or you have a high-deductible health insurance plan that allows you to contribute to a health savings account.
Such accounts allow employees to set aside tax-free dollars from paychecks to pay for specific medical expenses that aren't covered by insurance, said Edward Petersmarck, director of practice development at M&O Marketing in Southfield, Mich., a marketing company for insurers. "These accounts can help cover things like eye surgeries to dental problems and can be used to cover expensive copays or deductibles," he said.
Pro tip: If you're eligible, reduce taxes and save for future medical expenses with an HSA. For 2017, you can contribute up to $3,400 for individual coverage or $6,750 if you have family coverage.
Opting to Forgo a Medical Exam When Buying Life Insurance
Most life insurance companies today offer applicants two choices of underwriting, said Anthony Martin, the Roseville, Calif.-based CEO and founder of Choice Mutual Inc., an agency that focuses on serving seniors who are in search of coverage to ensure their funeral costs.
One option is fully underwritten. In this process, your medical history is examined. Vital measurements and blood and urine samples are taken. The other option is a nonmedical policy that doesn't require an exam.
Nonmedical policies can result in coverage in a few days, while a fully underwritten policy can take more than a month to process and approve, said Martin. It might be tempting to choose the option that does not require a medical exam. But it could cost you in the form of higher premiums.
Pro tip: "Getting a medical exam gives people access to significantly lower rates," Martin said. He said that depending on the health of the applicant, fully underwritten rates can be anywhere from 20 to 75 percent cheaper than the price of a nonmedical policy. "People are attracted to faster application times (and) not having to give blood or urine," Martin said. "In the end, this convenience costs them dearly."
Related: 8 Ways to Save on Life Insurance
Not Buying Term Life Insurance That Matches Your Needs
People often opt for term life insurance to cover a need if the person dies before a specific financial obligation — such as paying off a mortgage or paying for a college education — has been met.
"Many people do not purchase the correct length of term to fit the coverage needs," said Mike Raines, owner of Raines Insurance Group in Cumming, Ga. "This could prove costly if coverage is still needed at the end of the original term."
At that time, Raines said, life insurance rates will be higher due to your increasing age or a health condition. Raines cited the example of someone who buys life insurance to protect his family in case he dies prior to paying off the mortgage. If he has a 30-year mortgage, but only by a 20-year level premium policy, the term will end 10 years prior to when he really needs the policy to end.
Pro tip: Raines said your agent should make sure you are purchasing the appropriate term for your needs.
Smokers Who Quit Smoking But Don’t Change Policies
If you've tried to purchase health insurance when you're a smoker, you know it's significantly more expensive. "Life insurance companies all define tobacco user status by how long it's been since your last cigarette," Martin said. "Insurance companies will ask about tobacco usage anywhere within the last one (to) five years, typically."
"If you got a policy at a tobacco user rating and you have over a year under your belt since your last cigarette, you should look into switching companies," said Martin. "After the one-year mark, you can essentially start qualifying with companies for nontobacco rates. Even though you are older, this would result in a massive savings."
Pro tip: Check with your insurance agent, as well as other companies, on the requirements for being considered a nonsmoker. Once you meet these requirements, switching to a new policy could save you a pretty penny.
Relying Solely on Employer Coverage for Disability Insurance
Your disability policy might not provide as much protection as you expect. Review your disability policy through your employer to find out exactly what your policy covers.
Depending on your employer, you might be fully covered for the full amount of your income by the disability insurance policy your company pays for you. However, you could also be underinsured, as most employer policies only replace about 60 percent of your income, according to Fidelity. In addition, any benefits paid under the policy through your employer count as taxable income, further reducing the amount you actually get to spend, according to TMA Insurance Trust.
Pro tip: Review your disability policy and consider a buying additional disability insurance to ensure your entire paycheck is replaced if something happens to you.