A good April Fool’s prank is good for laughs and maybe “likes” on social media, but being foolish with your insurance can be costly. Skimping on coverage can lead to financial ruin, or at least a hefty bill that will part a fool (you) and his (your) money.
Penny-pinching might be smart in some circumstances, but trying to save by reducing your insurance protection can be foolhardy, says Tom Bigoski, owner of The Bigoski Insurance Agency in Gainesville, Virginia.
“A foolish person will take low liability coverage and low deductibles,” he says. “A smart person will get high liability coverage with a high deductible.”
Whether you are purchasing car insurance, home insurance, life insurance or disability insurance, leave off the dunce cap, and think before you make an expensive mistake.
You can easily do something ridiculous when you buy car insurance. One way is to purchase only the minimum liability coverage required by law and think that that would provide enough financial protection if you cause injuries in an accident, says Ron Moore, senior product manager for MetLife Auto & Home in Minneapolis.
The liability minimums would barely cover a day in the hospital if you hurt 2 people in a car crash, says Tim Dodge, assistant vice president of research for the Independent Insurance Agents & Brokers of New York in Syracuse. And if your coverage is lacking, a very serious crash could wipe you out.
“You need to have enough liability to protect your savings and your future earnings, because you could end up declaring bankruptcy or having your wages garnished,” Dodge says. “Higher levels of liability coverage don’t cost as much as you would think, either. Each additional layer of protection costs proportionately less.”
You can be a dolt when it comes to disability insurance or life insurance. Don’t over-rely on the coverage you have through work.
“It could be catastrophic if you lose your job at the same time you become severely ill,” says insurance agency owner Bigoski. “Sometimes life and disability insurance policies are portable from one job to the next, but often you have to convert to a more expensive policy. You may not be healthy enough to qualify for a new policy, either.”
Be aware that your employer can choose to take its policy away at any time because the group policy belongs to the employer, not the employees.
“You should always take any insurance policy that’s free, but don’t have more than 50% of your life and disability insurance through your work,” Bigoski warns.
Kevin Finneran, retail life insurance product manager with MetLife in Charlotte, North Carolina, says employer-sponsored disability insurance often covers only your salary and not bonus or commission income, which means your benefits could be much lower than what you’re actually bringing home.
It’s smart to raise your home insurance deductible to save money on your premiums. But be careful because that can be an extremely foolhardy move if you don’t have money set aside.
“Your deductible should only be as high as you can comfortably swallow,” says Dodge, of the Independent Insurance Agents & Brokers of New York in Syracuse. “If you keep $5,000 or $10,000 in a checking account, you can handle a higher deductible, but if your emergency fund has $500 in it, then you really shouldn’t take a $2,500 deductible on your home insurance policy.”
On the other hand, says Bigoski, of The Bigoski Insurance Agency in Virginia, insurance is meant to cover a catastrophe, not a $400 repair bill.
“Increasing your deductible can save you hundreds that you can put away in an emergency fund,” he says. “Just make sure your insurance deductible isn’t higher than the maximum amount you can afford to pay if you had to make a claim tomorrow.”
If you live in a designated flood zone, your mortgage company probably will require you to buy flood insurance. But if you’re not quite in harm’s way, don’t fool yourself into thinking you don’t need a flood policy, because 25% of all floods occur in low-to-moderate risk areas, says Dodge.
Even if you don’t live near a body of water, flood damage can be caused by snowmelt or a hurricane.
“Flood insurance is relatively inexpensive if you live in an area with little risk of a flood, but the damage caused by even a small flood can be costly,” he says. Moore, with MetLife Auto & Home, says homeowners also should purchase coverage against sewer or drain backups because if a backup turns your finished basement into a smelly swamp, the damage can be expensive.
If you have a sump pump, you should purchase an insurance rider that covers damage if it fails, notes Bigoski, owner of The Bigoski Insurance Agency.
Another bit of foolery is to assume that the liability coverage in your homeowners insurance and your car insurance will be enough for every eventuality.
Bigoski says umbrella insurance is relatively inexpensive and provides $1 million or more in additional liability coverage. The coverage can protect your current assets and future earnings in case of a lawsuit.
“Many people believe they don’t have enough assets to need an umbrella policy, when the reality is if they or a family member cause a serious car accident, their auto insurance may not cover all of the other person’s injuries,” says MetLife’s Moore.
An umbrella policy also can provide protection against your liability in a case of slander or libel.
“If you get sued for something you or your teenager wrote on Facebook about someone else, your personal injury coverage on your home insurance may not be enough,” says Dodge, of the Independent Insurance Agents & Brokers of New York. “The chances are low that someone would win, but your umbrella insurance will also pay the legal fees to defend yourself.”
Foolishness for couples is purchasing life insurance only for a working spouse, ignoring the value of the stay-at-home parent.
“If a stay-at-home parent is caring for children, how will the cost of caring for the children be provided for if something happens to that spouse?” asks MetLife’s Finneran.
Term life insurance policies are relatively inexpensive, particularly for a young, healthy parent.
“A big mistake people make is to spend their insurance budget on a small amount of (permanent) whole life insurance instead of term life insurance,” says Bigoski, of The Bigoski Insurance Agency. “A healthy 35-year-old male can buy a 30-year, locked-in term life insurance policy for $500,000 for the same cost as just $100,000 in whole life insurance.”
No foolin’: Your home insurance or renters policy probably doesn’t provide enough protection for your most valuable belongings.
“Standard home insurance covers damage to your computer by fire or an explosion, but the reality is that you’re more likely to spill a drink on your keyboard or drop your iPad,” says Dodge, of the Independent Insurance Agents & Brokers of New York. “A rider on your insurance policy can cover your computers for a low premium.”
You also should get a rider to cover the full value of any expensive jewelry, collectibles or art you own.
And if a fire or other disaster destroys all your possessions and the home itself, your insurance policy should be big enough to rebuild and replace everything. Some homeowners foolishly think they need only enough insurance to cover the current market value of their property.
“Many times, the cost to rebuild or repair a home is more than its market value,” says MetLife’s Moore. “The amount of home insurance you have should equal the replacement cost.”