“Insurance Poor” is when you’ve got tons of insurance coverage…at the cost of “crushing” payments. 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! When you’re insurance poor, it’s likely that your insurance deductibles and premiums are the culprits.
Insurance is a good thing, yet it should protect what you love so that you can ENJOY what you love. So if you’re too stressed about money, that’s a problem! Being “insurance poor” can be a cyclical issue, too. For example, you might choose to pay higher premiums because you don’t have adequate savings to pay a deductible if you need to… which reduces your monthly cash flow and savings ability. In other cases, you might have plenty of savings, yet only for specific purposes, like education costs or retirement. IRA’s, 401ks, and 529 plans all tend to keep your money locked up tight, without flexibility.
Thus, you get trapped in a cycle that feels impossible to escape.
How Do You Balance Insurance Deductibles and Premiums?
In order to avoid the “insurance poor” pitfall, you’ve got to have the right balance of insurance deductibles and premiums. 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
The ultimate goal is to get the coverage you absolutely need, without paying unnecessarily high premiums.
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. Not to mention, if you do choose a higher deductible in favor of a lower monthly premium, your chances of building an emergency/opportunity fund are also better.
(The notable exception may be for people who have a chronic condition they are treating on an ongoing basis. In cases like that, 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/opportunity fund (or even a relative who can help in an emergency), that can allow you to lower your premiums and put the difference in savings.
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 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 no-or-low-cost employer-sponsored insurance? Having health insurance in place can help any demographic receive more affordable care. 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. Instead, increase your deductibles and save the money you would have spent on your premiums, and put them into your emergency/opportunity fund. It’s also a good idea to make sure you are protected against uninsured (or underinsured motorists) and, of course, 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. Furthermore, many people under-insure their homes, yet accidents happen! Insuring your home for the full amount means you can rebuild or replace everything for what it’s worth.
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 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. It’s worth giving your policies regular attention so that your coverage remains comprehensive.
Don’t Double-Dip Your Insurance
Also, 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, and all 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 desires for these insurances vary according to your situation. Below 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.
A blend of permanent and term insurance may be the right solution to make sure that a family is not “under-insured.” Convertible insurance 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.
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?
For starters, whole life is a type of permanent life insurance that is a unique asset in its own right. As a true permanent product, it’s not “what if” insurance, it’s “when” insurance. Because of this, permanent insurance can become part of your overall financial strategy.
Whole life cash value insurance can insure against more than one kind of potential loss. The “living benefits” of whole life can allow you to use even your death benefit for long-term care or disability. And, the cash value component allows you to use your dollars for any reason, making it a liquid savings vehicle. Cash value insurance makes the perfect “emergency/opportunity fund” where you can store the cash you save by raising your deductibles. We recommend cash value insurance for at least part of your savings strategy. The rates of return, tax advantages, and certainty compare favorably with banks.
Whole Life Insurance Expands Your Flexibility
Many people save diligently in designated accounts that can only be used for one purpose. Their accounts only solve retirement, education, or health costs. The result is financial inefficiency and a 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. It can even help with the expected, too! While it is essential to have proper insurance, it is just as critical to have money saved in a flexible asset. That way you can use it for emergencies AND opportunities.
Decrease Premiums You’ll Never Get Back, Increase Savings with Premiums You Can “Keep”
Most insurance deductibles are paid and never seen again. However, whole life insurance 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 asset 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’re happy to assist you with your insurance questions. That way, you can optimize your premium payments and get the most from your dollars. We invite you to connect with us, or you can simply email your questions to firstname.lastname@example.org.