When I work with clients, one of the first things I do is review their current insurance coverage with two big questions in mind:
- Do they have enough coverage to meet their needs?
- Are they overpaying for any coverage they don’t need?
And while my clients are awesome and are already doing a lot of things right, insurance is a confusing world and as a result I often see a lot of the same mistakes being made.
Today I’m going to talk about some of those common insurance mistakes so that you can either fix them yourself or avoid them altogether.
1. Making insurance a low priority
Insurance isn’t exciting. It’s not fun to think about. And it can be a bit of a hassle to get in place.
So it’s tempting to put other more exciting goals first. Things like investing, paying off debt, and saving for a house are often a lot more fun to work towards and may even feel more urgent.
But in my opinion, insurance is actually one of the first things that needs to be handled.
I recently laid out a financial order of operations, which is essentially a rule-of-thumb checklist you could follow to prioritize your financial to-dos. And in that list, health insurance is listed as the #2 priority, life insurance is #5, and disability insurance is #6.
The other top items are all related to financial security as well (emergency fund, wills, etc.), with the more exciting steps further down the list. And the reason is simply that protecting your family is usually priority #1.
2. Assuming that your work coverage is enough
If your employer offers insurance, it’s often an easy and inexpensive way to get some basic coverage.
And while your employer coverage can be a great start, it may not provide your family all protection it needs.
There are many reasons for this, and I covered them in detail in a previous post, so I won’t go into them all again here. But it’s worth doing the extra work of evaluating how much insurance you actually need, whether your employer-provided insurance meets those needs, and finding extra insurance on your own to fill in any gaps.
3. Jumping at the lowest rate
You certainly don’t want to overpay for insurance if you don’t have to. We’ll talk about a few ways to avoid doing just that below, and in my own life I made the mistake of overpaying for life insurance before smartening up and finding a cheaper way to do it.
But if the real goal of insurance is to protect your family, then the quality of the insurance needs to be the primary factor. And in some cases, it can make a lot of sense to pay more for better coverage.
A good example here is with disability insurance. Different policies will have different definitions of “disability” (that is, what conditions they actually cover), and those with a more narrow definition will have smaller premiums. That smaller price tag might be attractive, but it also means the policy is less likely to pay out when you really need it.
The key here is really to understand first what kind of protection you need and to prioritize that. From there, you can find the lowest-cost policy that provides that protection.
4. Paying too much for health insurance
On the opposite end of the spectrum it’s also possible to pay for coverage you don’t really need, and health insurance is a prime example.
There are three big numbers that people often look at when it comes to health insurance:
- Premium – Your monthly payment for the coverage.
- Deductible – The amount you have to pay out-of-pocket for certain types of care before the insurance will start to chip in.
- Out-of-pocket max – The maximum amount you will have to pay out-of-pocket in any given year (this doesn’t include your premium payments).
In general, a higher premium will lead to a lower deductible and lower out-of-pocket max, and vice-versa.
What’s important to remember is you are guaranteed to pay the premium month after month, even if you never see a single doctor. But your deductible and out-of-pocket max could be thousands of dollars and you may never even pay them, or only pay a small part.
So while it really depends on the specifics of your medical needs and your health insurance options, it can often make a lot of sense to go with the higher deductible and higher out-of-pocket max in favor of lower premiums, especially if you have an emergency fund or other savings in place that could handle the cost of any big bill that came up. It reduces the amount of money that you’re guaranteed to pay.
I’ve written about my own family’s thought process around this very decision, and even included some specific numbers so you can see exactly how it might play out. Here it is: The 6 Biggest Factors We Considered When Choosing a Health Insurance Plan.
5. Buying whole life insurance
Almost every single week, I have someone reach out to me who was inappropriately sold whole life insurance. It’s frustrating to say the least.
Very few people have an actual need for whole life insurance and your money can typically be used much more effectively elsewhere. Here are a few posts that go into this in detail:
- The New Parent’s Guide to Life Insurance
- Why Whole Life Insurance Is a Bad Investment
- No One Wears a Bulletproof Vest Hoping to Get Shot
6. Forgetting about disability insurance
For some reason, disability insurance is the one that rarely gets talked about. And it’s too bad because it’s incredibly valuable, whether or not you have kids.
Really, anyone who doesn’t yet have enough money to live on for the rest of their life should probably have disability insurance.
Almost every client I work with has a gap in their disability insurance protection that we work on filling, so it’s probably worth double-checking your own coverage to make sure it’s meeting your needs.
Are you making any of these mistakes?
I’ve made almost all of these insurance mistakes at different points in my life. I didn’t have disability insurance for the first several years I was working. I bought more life insurance than I needed for more than I needed to pay. Heck, I barely thought about insurance at all before I found out I was going to be a dad.
So there’s no shame in making any of these mistakes yourself. What’s important is to recognize them for what they are and to start taking steps to either avoid or correct them.
By the way, I don’t sell insurance (since I’m a fee-only financial planner) but I do regularly help my clients get the insurance they need and avoid the insurance they don’t. If you think you might want some help with any of this, I would be happy to talk things over with you. Feel free to set up a time to talk here: https://momanddadmoney.com/jump-start.