INSURANCE INFORMATION INSTITUTE
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NEW YORK, January 5, 2009 ¯ With increasing job instability and the value of paychecks and investments going down, you may be tempted to cut corners on your insurance While there are many smart ways to save money on insurance, the Insurance Information Institute (I.I.I.) alerts consumers that there are also mistakes that could result in being dangerously underinsured.
“Asking about available discounts and comparison shopping are excellent ways to cut insurance costs,” said Jeanne M. Salvatore, senior vice president and consumer spokesperson for the I.I.I. “Consumers should not try to save money by reducing or dropping necessary coverage. This could result in a financial disaster if there is a fire, hurricane, severe winter weather or other catastrophe.”
Following are the six biggest insurance mistakes you should avoid:
With the value of real estate going down, some home buyers may think that they can reduce the amount of insurance on their home. Insurance, however, is designed to cover the cost of rebuilding a home. It is not linked to the sale price of the home. Homeowners should be careful to purchase enough insurance coverage to completely rebuild their home and replace their belongings.
A Better Way to Save Money: Take a higher deductible. Consider a deductible of at least $500. If you can raise the deductible to as much as $1,000, you may save up to 25 percent on many home insurance policies. The average person only files a claim every eight to 10 years so most homeowners will save money over time.
When shopping for insurance, it is important to select a company that is financially sound and has a reputation for outstanding customer service. Check the financial health of an insurance company by using ratings from independent rating agencies. Contact your state insurance department to find out whether they make available consumer complaint ratios by company.
A Better Way to Save Money: Ask friends, relatives and business acquaintances for recommendations. It is important to select an insurance company that answers questions and handles claims fairly and efficiently. Remember, you will be dealing with this company if you have an accident or other emergency, so you want to find a company that will be responsive to your needs.
Life insurance policyholders who need to raise money quickly often make the mistake of surrendering a whole life insurance policy for its cash value. This can potentially hurt the long-term financial health of your family for a short-term gain, and you may also regret the move if you have to buy another whole life insurance policy in the future. Older individuals pay higher life insurance premiums and, if your health has deteriorated between the time you surrendered a whole life policy and the time you want to buy a new one, your next policy will be even more expensive.
A Better Way to Save Money: Speak with your life insurance agent about borrowing against the cash-value of your whole life policy.
Damage from flooding is not covered under standard homeowners and renters insurance policies. Instead, you must purchase a separate flood insurance policy. Most people tend to underestimate the risk of flooding. In fact, 90 percent of all natural disasters in this country involve flooding, according to the National Flood Insurance Program (NFIP).
A Better Way to Save Money: Look into the cost of flood insurance before selecting a house or apartment, since flood insurance should be calculated into the cost of the home. In 2007 the average amount of flood coverage was $201,598 and the average NFIP premium was $505; more detailed information on the risk and cost of flood insurance can be found at FloodSmart.gov.
Every state has financial responsibility laws for drivers requiring you to buy a minimum amount of liability coverage. However, if you buy only the minimum coverage, you may end up paying significantly more out-of-pocket in the long run. In our litigious society you will likely need more liability insurance than the state requires because accidents generally cost more than the minimum limits. If you are found legally responsible for bills that are more than your insurance covers, you will have to pay the difference yourself, and these costs could wipe you out. You may want to talk to your agent or company representative about purchasing higher liability limits to reflect your personal needs. And you can consider purchasing an umbrella or excess liability policy. These policies pay out once your underlying coverages have been exhausted. A typical umbrella policy costs between $200 and $300 per year for a million dollars in coverage.
A Better Way to Save Money: Before you buy a new or used car, check into insurance costs. Your premium is based in part on the car’s sticker price, the cost to repair it, its overall safety record, and the likelihood of theft. Many insurers offer discounts for features that reduce the risk of injuries or theft. These include air bags, anti-lock brakes, daytime running lights and anti-theft devices. Some states require insurers to give discounts for cars equipped with air bags or anti-lock brakes. Cars that are favorite targets for thieves cost more to insure. The Insurance Institute for Highway Safety provides information that can help you decide which car to buy.
You can also consider dropping collision and/or comprehensive coverage on older cars. It may not be cost-effective to continue insuring cars worth less than 10 times the amount you would pay for coverage. As a general rule, it does not make sense to pay comprehensive or collision on a car worth less than $1,000 as any claim payment you receive would not substantially exceed your premiums minus the deductible. Auto dealers and banks can tell you the worth of a car, or you can look it up online at Kelley Blue Book.
Buying a renters insurance policy can provide a very important financial safety net. Renters insurance covers personal possessions in the event there is a fire or other insured disaster. It will not only pay to replace your belongings, but also provides coverage for additional living expenses and liability protection in the event someone is injured on your property. With the average policy costing only about $200 per year, it is also affordable. Unfortunately, a 2006 Insurance Research Council poll found that only 43 percent of renters had insurance compared with 96 percent of homeowners.
A Better Way to Save Money: Look into multi-policy discounts. Purchasing several policies with the same insurer will generally provide some savings in the form of a discount, check the cost of getting your renters insurance policy with the same company that provides your auto, life or excess liability policy.
For more information about insurance, go to the I.I.I. Web site.
The I.I.I. is a nonprofit, communications organization supported by the insurance industry.