“Good” Insurance
Feb 02 2009
Back when I was a lieutenant (slightly after the earth cooled), there was another lieutenant in my squadron talking about the “good” insurance that he had for his car. I think his name was Joe Bagadonuts. Anyway, Joe was pretty sure he had really “good” insurance for his car because his deductible was only $50. Unfortunately Joe didn’t realize (and I wasn’t smart enough to point it out either) that the deductible doesn’t define “good” insurance. What Joe needed to do, was remember why we insure things to begin with.
Insurance is best used to cover for losses that would be catastrophic in nature and relatively unlikely to occur. So, while Joe most likely needed insurance to cover the “catastrophic” loss from an accident, he might not have needed a $50 deductible. Perhaps Joe could have covered the first $500 or $1,000 dollars of a loss. Joe most likely could have saved quite a bit on his insurance premiums if he had carried a higher deductible. Yes, it would have hurt if he had been in an accident with a policy with the higher deductible, but he wouldn’t have been wiped out financially.
So, what can we learn from Joe? Take a look at your insurance policies…especially your homeowner’s and auto policies. If you are carrying very low deductibles you might want to consider increasing the deductibles to save some money on your insurance bill to around $1,000 or more if you can (one note of warning…the holder of your auto loan or mortgage may require a certain deductible).
What should you do with your savings from the reduced premiums? Well, first see if you might have an exposure to an event that is relatively unlikely to occur, but the results would be catastrophic. A lot of Americans have insufficient liability insurance. You should take a look at your auto and homeowner’s policy liability coverage. If your auto is less than 100k/300k you need to think about increasing that. If your homeowner’s policy has a liability limit of less than $100,000 you need to look at that too. If you have both of those limits in place, it is time to consider an umbrella liability policy for probably $1M-$2M. Just imagine, you have an auto accident or an accident at your home that involves a death. You could be looking at a $1M plus wrongful death lawsuit. If you don’t have the insurance to cover it your savings, potentially your home and even your future earnings are at risk. Granted, an unlikely scenario but with those catastrophic results, it is exactly what you should be thinking when you think of “good” insurance.
If you’re fortunate enough to have proper liability coverage in place look at your emergency fund and make sure you can cover the increased deductible. If you’ve got that covered too, then enjoy the money or set it aside for another goal…like your retirement or a vacation.
