Insurance has been in existence before currencies, banks or even nations were born. In ancient times, merchants would pay a sum (premium) to insure themselves against the risk of losing their ship and wares on the high seas. Many people think of insurance as a necessary evil- something that they have to get. But the fact that insurance has existed for so long and that so many people still use it, proves that insurance is not only necessary, it is desirable.
How does insurance work?
In its rawest form, insurance is nothing but the distribution of risk. If you need to really understand something, it is best to look at it from the perspective of a seller. Imagine you are an insurance company which sells homeowner’s insurance. You have a bunch of customers and you calculate that every year, you will receive about $50,000 worth of claims that you have to honor. Now the premium that you should charge for all your customers combined is going to be $50,000 plus your expenses and profit margin. Divide this by the total number of customers and you get the insurance premium! The only real challenge here is to anticipate what the claim amount is going to be – predict something too low and you will suffer a loss. Now that we have an understanding of how insurance works from the point of view of the insurance seller, we can have a better understanding of how they think and how you can protect yourself. After all, the first step to having a great customer experience is researching the product!
With that in mind, let’s have a look now at some typical insurance mistakes that people make and how to avoid them.
1. Not searching for the best price
How much insurance premium you pay depends on the risk. In the example above, we simply divided the risk equally amongst all the customers, but in reality, insurance companies use complex algorithms to determine the risk of each individual customer. In fact, there is an entire field of study dedicated to measuring this risk, called actuarial science. You can generally use common sense to determine the risk factors, like:
Having an old home or living in an earthquake prone area means a higher risk for homeowner’s insurance.
Your age, the car you own (did you know Cadillac’s are in high demand in the black market?), your neighborhood and daily commute time can all affect the probability of an auto insurance claim and therefore affect the cost of auto insurance.
Your lifestyle, history of ailments, eating and drinking habits, etc. will affect health insurance costs and so on.
The most common mistake here is not correctly assessing your own risk profile. You need to spare some thought as to what is the most likely risk given your profile and then seek out an insurer that specializes in covering that peril and can provide you the best rate for it.
2. Not paying your premium on time
If you don’t pay your premium on time, you lose your insurance cover. There is usually a grace period (check your policy), but think of that as the last warning before the policy is cancelled. Having a cancelled policy would make it harder to get insurance in the future.Remember that insurance companies do share your track record via systems like the Comprehensive Loss Underwriting Exchange (CLUE) which records claim types, dates and amounts paid.
3. Not maintaining good credit
Insurance premiums are not only based on your insurance claims history and risks but also your financial credit score. Many insurers use your credit score to determine your premium since a high credit score statistically has a positive correlation with good insurance behavior – meaning that people with a good credit score, make fewer claims and thus get lower insurance premiums.
4. Not doing enough research
The insurance premiums can add up to a large amount over time. It is best to do some research and find a plan that is best suited for you, covers everything that you need and is priced fairly. You can most likely save a bit if you do some research and it does not take long.
5. Not asking enough questions to your agent
When it comes to insurance, being inquisitive really pays off. Ask everything that comes to your mind and don’t hold back. There is no wrong question and it’s the agent’s job to ensure that the customer is fully aware of the features of the product that is being sold to him. Ask about things that affect the premium, what is covered and what is not, how much coverage do you need, how to file claims, how claims affect your policy, what is the redressal mechanism, what is the claim history of the company and so on.
6. Not knowing what’s covered
Not everything is covered in every insurance policy. For example, most insurance policies don’t cover earthquakes or floods and special coverage has to be bought for such perils. The uninsured losses from Hurricane Katrina amounted to an estimated $100 billion compared with insured losses of $34 billion. It’s better to be prepared for such eventualities in advance by paying a little bit to insure against a crippling loss.
7. Not knowing that something could have been covered!
Remember this statement: “You insure what you cannot afford to lose.” If you think that there is something valuable enough that you cannot afford to lose, chances are you can get it insured. Like for example, if you rent a place, you can buy renter’s insurance to cover your belongings (this is not covered under the landlord’s policy). You can even get wedding insurance to protect yourself from things like venue closing or injuries.
8. Not getting insured in time
The whole point of insurance is to protect yourself from unforeseen misfortune. It would be silly to think that you can predict the future. Some people think that they don’t need health insurance now because they are young (and hopefully they won’t), but insurance is designed to help you in your hour of need. Trying to predict when you need insurance and when you don’t, defeats the entire idea of insurance itself. In fact, it is cheaper to get insurance when you are younger and healthier and you can build a good track record as well. Similarly, cancelling insurance with the intention of getting it back later on would most likely backfire as companies frown upon this practice and it will be reflected in your track record.
9. Not performing periodic reviews of your coverage needs and costs
With time, your insurance requirements as well as the policies available in the market will both change. In case of a major life event (like getting married), you would probably need to perform a comprehensive review of your insurance needs. Even in the general course, you should review your policies even so often to see if there is something that you have missed or something that you can cover in a better way. For example, you might decide to club your policies together with the same insurer and get a discount.
10. Not filing the claim properly
The vast majority of problems with insurance claims (excluding the fraudulent ones), are due to problems in filing the claims. It’s generally preferable to spend a few hours to study your policy and arrange for all the necessary documentation beforehand, rather than to go back and forth with the insurance company and waste time. Be sure to include anything which can support your claim. It is generally a good idea to keep records of all your belongings along with the receipts.
11. Making too many claims
Insurance is for those rare, critical moments when you really need a helping hand. If you claim too often (even for small amounts), your premiums will go up and you will, in all likelihood, end up paying more in the long run. In some cases, insurance companies can even cancel your policy if your claim frequency is higher than average.
12. Not using any special benefits that are available to you
You might qualify for insurance coverage from your employer at a much cheaper rate. Some companies provide comprehensive insurance for free as well. Programs such as the Affordable Healthcare Act have provided health insurance to an estimated 4.2 million Hispanics in the United States. If you have not done so already, head over to healthcare.gov to have a look.
13. Not using deductibles to reduce your premium
The insurance deductible is the amount that you have to pay first before an insurance claim can kick in. The intention is to discourage trivial claims. The insurer wants to participate in your risk but they want you to bear a small portion of the liability yourself too. So if your deductible is higher, the insurance company can rest assured that you will not unnecessarily make claims since you have a financial stake in it as well. If you increase your deductible, you can save a lot on premiums and it would almost always leave you financially better off.
14. Not spending a bit to reduce your risk and save on premiums
There are some simple and easy ways to reduce the risk to you or your property which will not only make you safer but reduce your insurance costs as well. For home insurance, it could be simple things like installing a burglar alarm, a smoke detector, protection against flooding and so on. For health insurance, it could be quitting bad habits like smoking, getting some exercise, maintaining a healthy weight and so on. This might seem unreasonable to do just to save a bit on insurance, but it also makes you healthier. This is perhaps one of the great things about insurance – the insurer does want you to be as safe and as healthy as possible!
Insurance is nothing but the spreading of risk. You pay a premium every month or year in order to cover yourself financially when something big does happen which can leave you with a large expense or bill. Whenever you purchase or use insurance, just think about it from the point of view of the insurance company. The idea here is that when you know what the other party is likely to do, you can prepare in advance and not be caught off guard.
For example, if you ask a lot of good questions to your insurance agent, even if you know the answers already, you are likely to come off as an expert and be treated more fairly. Similarly, when filing a claim, imagine yourself as the insurance representative. Wouldn’t he be more likely to quickly approve your claim if all the documentation is perfectly filled and he is being spoken to politely? Finally, as an insurance company, wouldn’t you want your customers to install a smoke detector in their kitchens which costs only a few dollars but can save the company thousands? Once you cover all the bases from the point of view of the customer as well as the insurance company, you can be sure of not being caught off guard ever.