Insurance is the product you buy in case the unthinkable happens. Unfortunately, by the time you need it, it’s too late to make sure you have the right type and amount of insurance coverage. Make sure you don’t make the following mistakes while buying financial protection against disaster.

Common insurance blunders
Make any one of these mistakes and you could wind up paying too much for insurance or leave yourself severely underinsured.
7 common insurance mistakes
1. Not shopping around for insurance
2. Only comparing rates
3. Not comparing agents
4. Not knowing your policy
5. Not buying certain types of insurance
6. Buying unnecessary insurance policies
7. Not updating your coverage

1. Not shopping around for insurance.

The most common mistake is that people don’t shop around for insurance, says J. Robert Hunter, director of insurance at the Consumer Federation of America. “When I talk to insurance consumers, there’s this funny combination of fear and boredom,” he says. They wind up going to one agent and letting this person handle their insurance needs.

Hunter says if they would just read the insurance buyers guides offered by their state insurance departments and then call around to a few different companies, it could make a huge difference in the price they pay for insurance.

2. Only comparing rates.

When you’re shopping around, it’s best to look not only at prices but at companies’ pay claims reputations, says Kirk Okumura, author and editor of the Life Underwriter Training Council Program at the American College, where his responsibilities include writing study material and textbooks for insurance courses.

You can check out insurance companies by looking at how they rank with third-party insurance rating companies, such as A.M. Best, Fitch Ratings, and Standard & Poor’s.

Also examine a company’s complaint ratio. State insurance departments sometime publish this information and the Web site of the National Association of Insurance Commissioners publishes these numbers.

3. Not comparing agents.

Not all agents are created equal. First, make sure an agent is properly licensed, says Kansas Insurance Commissioner Sandy Praeger. Check with your state department of insurance.

Then make sure to get referrals and ask each agent some questions. “Ask them to explain the policy,” Okumura says. “Ask what value they’re going to bring to the table. How will they help you?”

— Posted: Aug. 20, 2007

4. Not knowing your policy.

Consumers’ biggest mistake is not knowing what’s in the fine print of their policies, says Etti Baranoff, associate professor of insurance and finance at Virginia Commonwealth University. They don’t know what their deductibles are and don’t realize what’s not covered until disaster strikes.

Common insurance blunders
1. Not shopping around
2. Only comparing rates
3. Not comparing agents
4. Not knowing your policy
5. Not buying certain types
6. Buying unnecessary policies
7. Not updating your coverage

She says consumers need to talk to their agents to find out what’s not covered and do an evaluation each year.

5. Not buying enough of certain important insurance products.

Don’t skimp on health insurance no matter how robust you feel today. “I don’t think anybody today should be without health insurance,” says Praeger. “Finding a way to at least have catastrophic health insurance, I think, is really important so you don’t just go into such medical debt that you never can dig your way out.”

Also consider getting life insurance if you have dependents. It can help pay the bills after a working parent dies unexpectedly. Praeger recommends buying it when you’re young and healthy — it’s much cheaper and easier to obtain when you don’t have a chronic disease.

Unless you have major assets to tap, think about getting long-term disability insurance. “It’s the single most important coverage for anyone who works,” says Okumura. “Disability income is more important than life, even though it gets more press,” he says, adding that people are much more likely to become disabled than they are to die early. If you become disabled and can’t work, long-term disability insurance can help keep you and your family financially solvent.

He suggests maintaining an emergency fund of three to six months’ worth of living expenses to take care of short-term disabilities. Then you can save your money to buy the long-term policy with your employer, if available.

Okumura also advocates getting long-term care insurance as soon as it becomes feasible to do so. Long-term care insurance can help pay for the cost of expenses associated with chronic illnesses, as well as nursing home care and in-home caregivers. The younger you are, the easier it is to qualify, he explains. “People think they don’t have to deal with it until they’re 50,” he says, arguing that people can develop multiple sclerosis (MS) at 30 or 40 years of age. “You’re uninsurable at that point.”

— Posted: Aug. 20, 2007

6. Buying unnecessary insurance policies.

You wouldn’t take out a homeowners insurance policy if you didn’t have a house, nor would you buy auto insurance if you didn’t own a vehicle. But you might make some of the following insurance blunders:

Common insurance blunders
1. Not shopping around
2. Only comparing rates
3. Not comparing agents
4. Not knowing your policy
5. Not buying certain types
6. Buying unnecessary policies
7. Not updating your coverage

• Buying unnecessary life insurance coverage. Most people don’t need life insurance on their kids, says Hunter. While the death of a child is tragic, financially it’s not as detrimental as a breadwinner passing away.

It makes sense to have life insurance if you have dependents, but if you’re single you don’t need it either, he says.

• Buying specialized insurance. Be wary of purchasing too-specific variants of broader types of insurance. You may need life insurance, but you shouldn’t buy it at the car dealership, says Hunter. He offers this rule of thumb: “Don’t buy insurance from somebody you went to buy something else from.”

The same goes for dread disease policies. “Specific illness insurance like cancer coverage … I’d read the fine print there, carefully, because you may just be paying double,” says Praeger, who also serves as president-elect of the National Association of Insurance Commissioners. If you’re insured through a major medical policy, you may not receive additional benefits from these types of extra coverage, she adds.

If you’re worried about identity theft, don’t rush out to buy identity theft insurance. “I think there’s a lot of discussion and concern about identity theft today, and I think people prey on that concern by offering something that you may already have coverage for,” Praeger says. Check your homeowners policy. It might already include some identity theft protection, she says. Credit cards also offer some protection against unauthorized charges.

7. Not updating your coverage.

Evaluate your coverage whenever you go through a life change, such as childbirth or marriage, but at least once annually. “If your home has gone up in value, make sure you increase your policy limits,” says Praeger. “If you have a replacement cost, your replacement cost ought to be about 80 percent of the value of your home. So, if you’ve made a room addition, make sure you increase accordingly.”

“For a health insurance review each year, if you’re a dual-income family and your spouse has coverage, look at both policies and decide if it’s more cost effective for you to be covered under one or if it still works best to be covered under each individual policy,” she says.

If the kids have left home, you can get more affordable auto insurance coverage. “Make sure you let your insurance company know that it’s just you and your spouse driving, that those reckless teenagers are gone and are not driving that car,” says Praeger. Also, tell your agent if you’re not driving as much and you may be able to reduce your premium.

If you move from a house to an apartment, consider getting renters insurance to protect your belongings against fire or theft. The person who owns the place you’re renting will have the structure insured, but your possessions are your responsibility, says Praeger.

For an annual review, do it 30 to 60 days in advance of renewal time, suggests CFA’s Hunter, so you will have time for a thorough analysis. Go to your state’s insurance Web site and look over the buyer’s guide for insurance, he says.

Study it and then look over your policies. Then call your agent or company with questions about your coverage. If you’re not satisfied, check out the competition.

— Posted: Aug. 20, 2007

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