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Wednesday, September 17th, 2014


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Every Penny Counts: Understanding Insurance

When you’re losing money in the stock market and your 401k is looking more like a 201k, don’t be discouraged.  Use this as an opportunity to make sure the rest of your financial plan is strong and stable.  When you think about managing your money and stretching the value of your dollar, you need to look beyond just investing and what’s in your retirement accounts.  Realize that financial planning is a comprehensive process, which means the stock market is just one piece of the puzzle.  When the market is experiencing sharp losses like it is today you need to make sure the rest of your plan is in perfect shape. 

It’s during difficult times like these that a traffic accident, a house fire or a medical crisis could devastate your financial plan if you’re not careful.  That’s why it’s important today, more than ever before, to make sure your insurance coverage is adequate.  There are three lines of insurance you need to have (at a minimum) to protect yourself and those are auto, renter’s/homeowner’s and health insurance.  Fortunately, there are money saving strategies you can use for all three types if you know where to look and what questions to ask.

Choosing The Right Insurance Company
First, you need to know how to pick the right insurance company.  Or if you’ve already chosen a company you need to make sure it’s still able to meet your needs.  There are six factors you should consider when evaluating an insurance company and they are:
 
1. Adequacy of policy limits
2. Cost                                                                               
3. Potential gaps in coverage
4. Quality of service
5. Carrier’s financial stability
6. Carrier’s claim settlement procedure

Ask your current or potential insurance agent to discuss each of these factors with you as a way to test his ability to work with you.  If the agent isn’t willing to answer your questions now, just think how helpful he’ll be when you get in an accident and need to file a claim!

Premiums and Deductibles
Once you’ve select a company you’ll then need to work with your agent to purchase the policy that’s right for you.  That means you’ll have to decide what your premium and deductible should be.  Each year you’ll have to pay a premium to the insurance company to keep your policy in force.  In return for your premium payment, the insurance company promises to cover you in case of an accident or loss.  Premiums work alongside deductibles.  A deductible is the amount of money you need to pay out-of-pocket if you file a claim before the insurance company will pay you any money.  A good deductible to have is $500 for auto and renter’s/homeowner’s insurance.  This means that if you file a claim you’ll have to pay the first $500 out-of-pocket and the insurance company will pay the rest.  Deductibles can go as low as $100 or even $0, but choosing a low deductible will make your premium payment much higher.  Remember, the lower your deductible the higher your premium.

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Auto Insurance
Auto insurance can be expensive, especially if you’re on a tight budget or have been in a recent accident.  But the good news is you may be eligible for auto discounts you never knew about.  Don’t be surprised if your insurance agent never mentions these discounts to you.  You’ll have to pick up the phone and ask for these, and you should.

Auto insurance discounts are issued for:
• Having air bags, daytime running lights, anti-lock brakes, or an anti-theft device
• Being claim free
• Having your car and home insured with the same company (the multi-line discount)
• Having multiple cars insured with the same company (the multi-car discount)
• Having a favorable vehicle injury rating
• Driving low miles per year
• Being a good student
• Being a long-term customer

Renter’s/Homeowner’s Insurance
Renter’s or homeowner’s coverage is important if someone is injured on your property, something is lost or stolen, or fire occurs.  Just like with auto insurance, you may be eligible for renter’s and homeowner’s discounts you never knew about.

Renter’s/Homeowner’s insurance discounts are issued for:
• Having a home protective device
• Being claim free
• Having your home and car insured with the same company (the multi-line discount)
• Having smoke detectors
• Living within 1,000 feet of a fire hydrant
• Living within five miles of a fire department
• Living in a new home
• Being a long-term customer

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Health Insurance
You should never go without health insurance.  Even if you’re healthy it’s a risk you can’t afford to take.  There are many different companies that offer health insurance and it can be difficult trying to select one.  Try contacting your local hospital, pharmacy or clinic and asking what health insurance companies they recommend.  Then call the insurance companies you were referred to and ask them to explain the different options available to you.  You should consider health insurance policies that offer one or two free doctor visits each year along with an annual checkup.  Having prescription drug coverage is also important.  But, the more features you add to your health insurance the more expensive it will be. 

Choosing a health insurance deductible
Just like with auto and renter’s/homeowner’s insurance, one of the biggest decisions you’ll need to make is what your health insurance premium and deductible should be.  Remember, the lower your deductible the higher your premium. 

A good strategy to select a health insurance deductible is to add up your medical expenses over the last three years and find the average amount you spent per year.  This average could be used as your current-year deductible if you want to be aggressive and expect to have reduced medical expenses in the upcoming years.  If you want to be more cautious, follow the same method but divide the number in half and make that your deductible instead.

Aggressive Strategy                                         Conservative Strategy

Year            Medical Exp                                   Year            Medical Exp
2006           $500                                                2006           $500
2007           $1,500                                             2007           $1,500
2008           $1,000                                             2008           $1,000

Average = $1,000                                           Average = $1,000
Deductible = $1,000                                     Deductible = $1,000/2 = $500
Result: Lower Premium                              Result: Higher Premium

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