Are You Insurance Poor? The Truth about Insurance Deductibles and Premiums The Act of God designation on all insurance policies… means, roughly, that you cannot be insured for the accidents that are most likely to happen to you.”
– Alan Coren, English humorist

“Insurance Poor” is a term for being over-insured. In other words, you’re so poor from making the payments to protect yourself from the “what ifs” that you don’t have money for much else!

It can be a cyclical problem. Perhaps you don’t have liquid savings to pay higher deductibles, so you pay higher premiums to get lower deductibles, thus perpetuating a lack of cash flow and savings. Or, perhaps you’re “saving too much,” but always in a 401k, an IRA, or an education account there the money is tied up for a specific purpose. The cycle continues; you never feel you can reduce your premiums, because cover higher deductibles feel risky.

What’s the Way out of the Insurance Deductible vs. Premium trap?

With the right amount of insurance, the right kind of insurance, and most importantly, the right approach to insurance, you’ll never be “insurance poor.”

The right AMOUNT of insurance.

Get the coverage you absolutely need, without paying unnecessarily high premiums.

A rule of thumb. Generally consumers come out ahead with low premiums and higher deductibles. Assuming you have the savings to cover a higher deductible, being willing to use some savings or emergency funds for higher deductibles will typically save you money in the long run, even if you do occasionally have a higher out-of-pocket payout.

In one analysis of health plan premiums and deductibles, it was found that a high-deductable health plan might save a consumer as much as $2300 a year… or more, if the deductible was not reached. (The notable exception may be for people who have a chronic condition they are treating on an ongoing basis. If a consumer is managing diabetes, arthritis, or crohn’s disease, a high-deductible health plan may result in higher out-of-pocket expenses.)

Know your financial limits. Regardless of which policy is best over time, it is counter-productive to have insurance plans with deductibles that are completely unrealistic. For instance, if you let health problems fester because you can’t afford to go to the doctor or get tests without your insurance paying 80%, you’ve got to have insurance that recognizes your current limitations.

However, if you have thousands in an emergency fund or cash value account (or even a relative who can help in an emergency), that can allow you to lower your premiums and put the difference in savings.

Psychology vs. Math. Psychologically, most people find it easier to pay high premiums, month after month, than to occasionally pay a higher deductible. But that doesn’t mean that it makes financial sense. Mathematically, occasional higher deductibles are generally more than offset by the monthly savings in premiums.

The right KIND of insurance.

It’s impossible to anticipate exactly what insurance you’ll need, but here are some rules of thumb:

Health Insurance: everybody needs it. Young, healthy, or on a budget? Self-employed, unemployed, or otherwise ineligible for a no-or-low-cost employer-sponsored insurance? An HSA (Health Savings Account) connected to a high-deductible health plan has low premiums and also allows you to pay for health care costs with before tax dollars.

Car insurance: also non-negotiable. However, you’ll pay a premium each month to insure yourself with no to low deductibles. Save up deductibles, make sure you are protected against uninsured (or underinsured motorists), and drive safely!

Home Insurance: a must! Mortgage companies require your home to be insured against fire and other hazards, but tragically, some owners have been known to allow policies to lapse after a house is paid off.

If you are a renter rather than a homeowner, you can get a “renter’s insurance,” policy for as little as $20 a month. (Check the Prosperity Life Center for competitive rates, or whoever holds your car insurance, as you’ll get a multi-policy discount.)

Check your coverage. In the above policies, pay attention to “replacement cost” vs. simply reimbursement for current value. Sometimes policyholders mistakenly believe their home or belongings will be replaced if damaged, but if your policy only covers current value, you could be left holding the bag for a significant difference.

Enough is enough. Also check to make sure you are not insuring something twice (or more). For instance, you don’t need towing insurance with your car insurance company, roadside assistance through your cell phone provider (carriers such as AT&T offer roadside assistance for about $5 a month) plus an AAA membership. And your auto policy likely insures you when you drive a rental car, so check your policy before you flush $100 on your next vacation.

Do you have an umbrella? An umbrella policy is a multi-purpose policy that extends liability coverage for auto, home, and watercraft policies. It can extend insurance coverage in case of a major accident or lawsuit by as much as 1 to 5 million dollars for very little cost. Umbrella policies are a must for anyone with significant assets. Unfortunately, in this litigious age, the more you may have, the more likely you are to be a target for a lawsuit.

Disability, long-term care, term life or permanent life insurance? Individual needs for these insurances vary according to your situation. Here are some rules of thumb:

Don’t rely on term life insurance alone. Term life insurance can be very useful, particularly to younger families who need the protection and may not be able to afford permanent insurance premiums to maintain as much insurance as they desire. However, as the advantages of permanent insurance go far beyond the death benefit alone, you’ll want to convert to whole life permanent insurance as you are able.

Mix and match. A blend of permanent and term insurance may be the right solution to make sure that a family is not “under-insured.” Convertible term is term life insurance that can be later converted to permanent insurance. This helps override one of the major problems with term insurance, which is that people can be denied life insurance when they need it most.

Not all permanent life insurance is created equally. We recommend that most people use a certain kind of whole life insurance (permanent life insurance with a cash value component) with a paid-up additions rider as a safe place to store money. Universal life, variable life, and other such policies lack some of whole life’s benefits and shift risk onto the policyholder, thus, we do not recommend them.

The right APPROACH to insurance.

Unlike other kinds of insurance, rather than going into a big black hole of wasted money, your whole life premiums can actually lower the rest of your insurance expenses! How? Let’s take a look:

Whole life is a type of permanent life insurance that works quite differently. It’s assumed that the policyholder will maintain the insurance until the insured passes away. It’s not “what if” insurance, it’s “when” insurance. Because of this, permanent insurance becomes part of your overall financial strategy.

Whole life cash value insurance can insure against more than one kind of potential loss. One of our 7 Principles of Prosperity is to MULTIPLY your dollars by getting them to do more than one job. Living benefits can allow you to use even your death benefit for long-term care or disability, and cash value accounts allow you to use dollars for any reason.

Cash value insurance makes the perfect “emergency fund” where you can store cash saved from lowering premiums. We recommend cash value insurance for at least part of our clients’ savings, because the rates of return, tax advantages, safety, and ability to use your account as collateral compare favorably with banks.

Whole life cash value helps you expand your personal financial flexibility. As we discussed at length last week in our post, “Financial Flexibility: Saving Too Much in All the Wrong Places?” many people save diligently in designated accounts that can only be used for one purpose, such as retirement, education, or health costs. The result is financial inefficiency and lack of flexibility.

Too often, insurance contributes to the same lack of flexibility. The premiums we pay for health insurance won’t restore our belongings in a house fire, and our car insurance won’t make our house payment if we become disabled.

The solution? Insurance that can multi-task! Insurance should help us not only insure against the unexpected, but save for the unexpected – as well as save for the expected costs of life. While it is essential to have proper insurance, it is just as critical to have money saved in a flexible cash value account that can be used for emergencies as well as opportunities.

Decrease the premiums you’ll never get back, increase your savings by paying premiums you can “keep.” Most insurance deductibles are paid and never seen again. However, whole life premiums build cash value that can be used or borrowed against for multiple purposes. You can reduce premiums on your “what if” insurance and save the difference in a flexible that will provide money for “when” it’s needed.

Ultimately, premiums should reduce risk for YOU, not your insurance company. Properly structured whole life insurance increases your short-term liquidity today while providing long term protection.

Does your insurance make sense for you? We work with clients  in multiple ways – providing comprehensive, fee-based financial advice, as well as assisting clients in limited, specific ways. Contact us for a complimentary consultation to explore how we can best help you.