These Insurance Mistakes can Cost You Thousands – Here’s What to Avoid

In this episode of Friends Talk Financial Planning, John and Bridget talk about insurance mistakes that can cost you thousands, and how you can avoid them. There’s health insurance, life insurance, renter’s insurance, home insurance, auto insurance, umbrella insurance, and more. How do you decide what types of insurance you need and how much of each type of insurance is enough? Tune in for key insights that can help you choose insurance and avoid costly mistakes!

Resources:

- Alliance of Comprehensive Planners: https://www.acplanners.org

- John's firm website: https://www.trinfin.com

- Find us on Facebook: https://www.facebook.com/friendstalkfinancialplanning

TRANSCRIPT:

Bridget: John, we see three big mistakes that people make when they're thinking about and purchasing insurance. And so today is a great day to talk about insurance mistakes. And let's get going with it. So the first big insurance mistake is not having insurance. And we need to break that down a little bit, because there're different types of insurance that maybe you'll decide you want to skip and different risks associated with that. So the first type of insurance that you might decide to skip is medical insurance. Let's talk about that. What are your thoughts?

John: Don’t. It’s like that old Bob Newhart skit. Stop it. There are some things that are legitimate to skip. And as you were saying that, Bridget, I was thinking it's the narrower the focus. If I'm on a trip to Europe in the third week of June and something happens, then maybe that's the sort of insurance I don't want to have. But big picture things like health insurance are really important. And there's a lot of talk these days about how subsidies are at least scheduled to go away and prices have changed.

I've seen things change at least on the exchange price and just the actual price going up by a third. Maybe some people are in a spot where they go, “Geez, I just can't afford this. I'll go without.” And to me, that's just a huge mistake. And from an insurability standpoint, it goes back to what I was saying about scope. If I break my left foot while I'm walking on a sidewalk, then I get covered. What’s the likelihood of that? And what's the damage that gets done to me? And, man, if you're in a car accident, you have a heart attack, that’s a big deal.

We all know stories about what the costs are of being in the hospital for a week before insurance. That can be so damaging to somebody's financial situation, like damaging to the point where you could never recover from it. You know what? You have to have some coverage. and maybe not full coverage for every little thing, but definitely for catastrophic things. Hey, if I'm in the hospital and I need a $300,000 surgery, I'm covered.

Bridget: Yeah. This reminds me of a theoretical principle. Nobody likes theory, but it can be very helpful. When I took an insurance class, we learned insurance theory. In insurance theory, the things you definitely want to cover are things that have a low risk of happening, but a high cost if they do happen. So having a catastrophic accident or stroke or that kind of stuff, if you’re young, there’s a low chance of it happening, but it would be potentially very high cost.

So that's the sweet spot for insurance. And so, getting some sort of insurance just for the major stuff, even if you want to pay as little as possible for medical insurance, that's the way to go. I remember when I was out of college, I went to Europe for a while, and so I was up between jobs. I didn't have any medical insurance, and so I got a cheaper policy. And I think these things are still available. It wasn’t ideal; it would cover only if a major emergency happened.

And they don't even do underwriting. Sure, we'll insure you. They don't do underwriting until after you have an accident. So it's cheap. That makes it cheaper. They won't have to do anything. But then, and we'll talk about this a little later, they might be looking at that claim if you actually have one, so you want to make sure that you're aware of that when you go ahead and buy it. But having something was much better than just going without.

John: That's right.

Bridget: So that's, health insurance. What about life insurance?

John: Well, yeah, you talk about things that are low probability, especially when you're younger, but very high cost. And we're thinking here about things like if you have a family, especially with young kids. You have to raise kids for the next 20 years, especially if you're the sole breadwinner in the family. Or if and your spouse are 50/50, can you live on half your income? And again, it’s low likelihood that it happens, but people get in accidents, people have health conditions that come up and a giant need.

The cost of raising a family for the next 10, 15, 20 years is a huge cost if something happens to you. And it's not just life insurance; it's also disability insurance if it affects your ability to earn an income. If I'm dead, I can't make money. That's really clear. But also, what happens if I have a stroke and can't think. A lot of us don't like paying for insurance. I want to keep those costs down. I totally get it. We talked about health insurance. Do I have to pay for life insurance? But man, the risk to your family is so huge that the answer is, yeah, you have to have some.

Bridget: But that's a very specific category. And here's something that I personally resent. I see a lot of commercials for people that are my age or older saying, “Oh, honey, do you want some life insurance? This is this great policy. You can get $100,000 without any underwriting and blah, blah, blah.” And I'm not saying that you would need that or never want that, but that's totally optional.

That's not something you need as far as I'm concerned. Unless again, you have people who are dependent on you for their income. So that's when I don't think there's a debate. That's when it's definitely necessary. But there're times that you might want life insurance because it'll make life easier if you do pass away. But it's a different situation than when you have dependents.

John: Right. We used to say back when I was in that world, you need life insurance if you love somebody or if you owe somebody. Hey, I want to pay off the mortgage if I die or love somebody really means if somebody's dependent on my income. We're both retired. We're not depending on my income. Health insurance. Make sure you get health insurance. You can't go without that. Life insurance. If somebody depends on you, you need to do that. The other thing I'll throw out there is renter’s insurance. It seems like, “Geez, do I really need this?” A lot of people renting will say, “I don't have that much stuff.”

But man, if you think about, if you lose everything you own, that’s a lot of money. I mean, not too long ago we bought a mattress. Man, those things are expensive. And that’s not including the frame that it goes on and the dresser and the couch and the list goes on. I mean, it adds up. And you go listen, for a few hundred bucks, you can save a lot. Just to know that if there was a fire, you’re safe. Again, it’s low probability, but when it happens, it is hugely damaging. We see a lot of people without that, but that's just one it just doesn't make sense to go without as far as I'm concerned.

Bridget: I agree. Okay, so now here's the second category and that is not having enough insurance. And the first one I want to talk about is auto insurance. Sometimes people want cheap policies, but then when you look at the coverage, it's basically the state minimum, which is okay for people without a lot of assets, but if you have some assets, you're going to want to be able to have a higher deductibility.

Typically, there's a minimum which is like $50,000. The next level is $100,000 and then the next level is $250,000 for incident and $500,000 for the total thing. And so, depending on where you're at in your life, if you're just starting out, $50,000 can be okay, but once you have more than $50,000 in the net worth, then move up to the $100,000 and same with the $250,000 and $500,000.

John: Yeah. And I'll expand that to just liability in general. Car is the big one. We're out there driving our cars on a consistent basis. I remember my dad saying when I first started driving, “A car’s like a 2,000-pound missile going down the street.” You got to be careful. And that's where we have to take a lot of risks. But then there are other places related to having enough liability coverage: on the car is the big one, on the house, or general liability coverage. Again, we talk about low probability of a seriously damaging accident in those fashions but very high damage if you're responsible for things.

And so, having enough liability with those car insurance limits, get those up in the $250,000 and $500,000 range. And then having a big umbrella policy to go over the top of that to protect all the stuff you've built. It feels weird. Do I really need this much? And the answer is, yeah, get enough. As we talked about before. Get some and have enough. I hate paying for extra insurance, but when you are the person that's in an accident and you're getting sued, knowing that you have enough just makes such a big difference.

Bridget: And just on the umbrella policy, I know it's a little jargony to even call it umbrella policy, because it's not like you're insuring your umbrellas, although they are included. But it covers everything. A lot of people I talk to don't know what those are. And it's just the basic overall coverage for if I get sued. And you usually have to have your home and auto at the same insurance company, not always, but often because those are your two main areas of possible risks. But it covers the other stuff too, not professional liability, but it will cover your other personal liability.

John: Yeah.

Bridget: All right.

John: The other thing about having enough coverage is on the life insurance side. You’ve got to have some, especially if you have small kids or a young family. And a million dollars sounds like a lot of money, and it certainly is if you win that in the lottery. But a million dollars isn't that much money to raise two kids for the next 20 years. If you think about things in those terms, you go, “Holy mackerel. If my income's not here, there would be big challenges.” And so oftentimes people need more life insurance than they think.

Bridget: Right.

John: A couple hundred thousand dollars doesn't get the job done. And again, what are the chances you need it? Low probability. But back in the old days when I was in the insurance business, I had to deliver some checks. And knowing that you have enough when you need it, you can't put a price on that. So make sure you get enough on that life insurance as well.

Bridget: Right. I'll move on to last mistake: lying on forms. When you get these insurance forms, you want to be honest with them, and you can read the fine print and make sure you're really answering the question that they're asking. But you don't want to exclude things because then if you're trying to actually collect on this policy, they might come back and say, “Hey, this is what you said. This is what we insured you for, and this is not the case, so we don't want to cover it.” Oh, but then they'll give you a refund of how much you paid in premiums, but not actually what the policy amount was.

John: Yeah, you explained a little bit about that when you were talking about that trip in Europe. And it's just being honest. It sounds so dumb. Oh, tell the truth of these things. But it's tempting to exclude things. Do you smoke cigarettes on your life insurance application or health insurance application? Well, not that many. That sort of thing. And do you have this in your house or your car? Or do you drive your car for work? No, I don't. Well, except for when I go here and there to a client.

And then I'm in an accident and the insurance company comes back and says, “Oh, that's not covered under your personal insurance. That was a business trip.” And you mentioned that some of these insurance policies that have little to no underwriting up front so that it's easy to get, but then what happens on the back end? And it can be frustrating. When you work with good companies, they do their homework up front. Why are they asking for all this information?

Bridget: Right.

John: Well, on the other end, if I need a million dollars of life insurance to protect my family after I have some kind of crazy stroke or develop some kind of goofy cancer, I don't want them going back and ordering the doctor's records. I haven’t had a lot of them, but I had one case I can remember. I had helped a client get some life insurance back when I was in that world. He was in perfect health. Everything looked great. But nine months later, he didn't wake up one morning. And they ordered 10 years’ worth of doctor's records. I remember piles of paper that we had to send in after the fact.

And it turned out that, no, it was just one of those things. But do you really want them to do that homework after the fact then deny your claim. If I need a million dollars of coverage, I want to know that I got that. Same thing with the rest of your coverage. Be honest. And you actually want a company that does all that work up front, even though it's a hassle, so that when you need the stuff, when you’re stressed, whether it's a car accident, a home fire, somebody dies, you’re set. That that's not the time you want to be going through all that.

Bridget: Very good. So this is a great place to wrap it up. I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois.

John: And I'm John Scherer. I've got a fee-only financial planning practice in Middleton, Wisconsin. Both Bridget and I are taking on new clients. We'd love to hear from you. But if you like what you hear on our show and would like to find an advisor who thinks similarly to us, we're both members of the Alliance of Comprehensive Planners. And you can find an advisor in your area by checking out acplanners.org.

Bridget: And don't forget to subscribe.

At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation.  We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.