7/10 Post score
Health, life, home, and auto – people won’t stop there; pet, pet’s kids, travel, tattoo, lawn care, ring, debt, you name it. People will spend money on more than they have to just because there’s an obligation to begin with.
On average, Americans spend 14% of their income on insurance. And in Michigan, in particular, insurance costs $14,700 per year – 22% of the median income.
For one thing, insurance is not a waste of money. In the case of emergencies and catastrophes, insurance can be vital to staying afloat and dealing with debt after – insurance is protection.
When we think about insurance, however, it is easy to get lost in the hype and forget the facts. For instance, a simple Internet search for “health insurance” yields a staggering 3.31 billion results. With so much information flooding us at every turn, it’s easy to feel overwhelmed.
It’s easy, that’s what it is. It’s also easy to decide to get insured for certain things, and spend some time comparing insurance plans. What’s not easy is deciding which insurance is necessary, which is not.
So, how can you filter out unnecessary insurances and avoid over-insurance?
The biggest vulnerability to your wealth is getting carried away. Get the right insurance to cover yourself and your family against catastrophe. But don’t be carried away into getting more than you need.
Use your own judgment for insurance, not your friends’, Google’s or neighbors’. Set realistic goals for how much you want and need to save.
Make financial planning a priority, even if it means cutting back in other areas for a while.
Here are 10 things to keep in mind to avoid over-insurance in the first place:
- You will never be able to buy or insure everything. It is better to have a small number of essential insurance policies than a large number of non-essential plans.
- Speak with financial professionals about insurance needs, goals and possibilities. They’ll make recommendations based on your financial situation, goals and risk tolerance.
- Compare costs, benefits and terms of coverage before making any decisions about coverage. If you make an under-informed decision by comparison shopping, you might end up paying more than you need to – remember, the cheapest isn’t always the best!
- Don’t get insurance that duplicates existing coverage.
- Never pay more than you need to in premiums to avoid over-insurance. Do not make the decision to over-insure based on a feeling of “good insurance” – it’s not good for you and it’s not good for your finances.
- It’s okay to change coverage if you’re in a financial emergency, like when you lose your job and have no income for a time. Changing your coverage is acceptable as long as there are no other major changes in family dynamics or circumstances that would require major changes in insurance coverage.
- Make use of insurance deductible. Deductibles can help you avoid high out-of-pocket costs associated with claims.
- Do not forget to check the fine print and any exclusions or co-payments for any health or health insurance coverage.
- Look for discounts and other perks, like free screening tests or a free membership to a Health Maintenance Organization (HMO) that covers all your family’s medical needs. This can be an effective way to reduce cost but also lower predictability in your coverage.
- The only way to make sure you stay out of trouble is to cover yourself. Don’t leave your insurance needs unmet by putting off getting needed coverage.
Where to put the extra money? Extra insurance or trash can?
Well, the answer to this question is surprisingly not easy. It all comes down to risk assessment.
Risk assessment is the measurement of your comfort taking on risk to increase return. It’s important to keep in mind that risk and reward do not have direct correlation; increased risk does not lead to increased returns nor decreased risk mean decreased returns. However, a good assessment makes it easier for individuals to make good decisions about their money and avoid over-insurance which can be equivalent with dumping money into a trash can.
For example, a 20-year old will have more flexibility in saving than an elderly person since they have so many more options in investment due to the length of time they have available (a longer time horizon). Also, some of the ways in which we over insure are through retirement accounts, where we only withdraw a small percentage each year. It is not necessarily a bad thing to have a certain level of retirement savings that you do not touch, but it is definitely over-saving to have more than you need which can lead to under-investment.
Over-insurance tends to go hand-in-hand with under investing, simply because the extra money is readily available for more spending when there are other alternatives for investment.
So if you’re currently over-insuring yourself and looking into options for investment, remember that an overabundance of funds is just as much of an issue as not having enough.
The verdict is that you should not get yourself over-insured. But what to do with your extra money?
Well, save it up and keep saving until you save a reasonable amount of money to start a business or invest in the financial market. Or you can apply your extra money to pay off debt or lower monthly expenses.
The bottom line is that over expenses are not necessary and you can avoid them – you should immediately avoid them with no hesitation.
Even if your goal is not to get rich, cutting out unnecessary expenses is a good practice. And avoiding such an unnecessary expenditure is one of the best ways of properly saving money, instead of dumping it in a trash Can.