10 Costly Insurance Myths
Many people, I'm convinced, think about insurance in the wrong ways. They operate based on certain myths about insurance, and those myths can cost them -- big time. They either buy too much or not enough. They don’t develop a trusting relationship with their agent. They get blindsided by huge increases in their premiums. They get mad about insurance, instead of getting smart. Here are the myths and the realities you should be thinking about instead:
Myth #1. Insurance is a rip-off. Buy only the minimum required.
People's suspicion of the insurance industry can be so profound they'll put themselves in real financial danger. Where it's scariest is when people skimp on liability insurance. This pays for the damage you do to other people or that they do to themselves on your property. If you're held responsible for an auto accident in which somebody is paralyzed, you can be on the hook for that person's medical expenses, lost income and care for the rest of his or her life. Injure more than one person, and the cost goes up exponentially. If you don't have liability insurance, or you're carrying too little, most of what you own could be at risk. You could be sued and lose just about everything you've spent a lifetime working and saving to accumulate, plus perhaps your future earnings as well. All this because you wanted to save a couple of bucks on your premiums. A smarter choice is to get enough liability coverage at least to equal your net worth. (Your net worth is everything you own minus everything you owe.) If your net worth is $250,000, for example, boost the liability coverage on both your auto insurance and your homeowners insurance to at least $250,000. You can get more coverage for not much more money, and that's an especially good idea if you might be a lawsuit target: a doctor, a lawyer or a public figure of any kind. Since most auto and homeowners policies have an upper limit on how much liability coverage they provide, you might need to buy an additional policy, called a personal liability or umbrella liability policy. These are typically fairly cheap: $200 to $300 for $1 million of coverage.
Myth #2. If someone driving my car causes an accident, I won't be held responsible.
It's possible you'll be financially responsible for an accident — even if someone else is driving your car. In most states, the insurance policy covering the vehicle is considered the primary insurance, which means that the insurance company for the vehicle must pay for damages caused by an accident. If you live in a state where the insurance on the vehicle is primarily responsible for damages in an accident,it's still possible that the driver's insurance company could be responsible for some of the damages. Why? If the vehicle's insurance limits are too low and don't cover all the damages, the driver's insurance may be next in line to pay for the remainder of the damages. Since policies and laws differ by state, knowing how your state's insurance system works could influence who drives your car.
Myth #3. Comprehensive or collision coverage will pay for car rental while my car is being repaired.
No, it doesn't. As examples, if the driver were to hit a snowbank or if a tree limb fell on the car, the damaged car would need extensive repairs. The car owner might need to rent a car during the repair period, and that rental cost is not covered by standard collision or comprehensive coverage. The policyholder must buy additional coverage in order to be reimbursed for rental car expenses.
Myth #4. Bundling insurance coverages always results in a cheaper car insurance rate.
Buying more than one product, such as auto and homeowners insurance, from the same company doesn't always mean you're getting the best rate available. Often, you can save money by purchasing different products from different insurance carriers. An Independent Agent has the ability to find the best value for all of your policies by comparing prices and coverage with multiple companies.
Myth #5. I don’t need flood insurance.
Homeowners' insurance does not cover flood damage. Federal flood insurance, purchased through your insurance agent or company, is the only guaranteed flood insurance available for your home. Federal Emergency Management Agency (FEMA) disaster aid is only available during presidentially declared disasters. Federal aid is often in the form of a loan from the Small Business Administration (SBA) that you must pay back with interest. Flood insurance policies pay claims whether or not a disaster is declared. More than 25 percent of the National Flood Insurance Program (NFIP) claims are for structures outside identified floodplains, in low to medium risk areas. Floods can occur anywhere. An area that is near a levee or a dam is at risk of the levee or dam breaking. People who face even moderate flood risks should get insurance, which can be purchased for as little as $136 per year.
Myth #6. If I buy a term policy and find that I still need protection when the term ends, I can always renew the policy.
Term policies are quite popular with many young families, and for good reason: they typically offer the greatest coverage for the lowest cost. Term insurance provides protection for a specific period of time (the 'term'), and can be ideal for people who feel they have temporary needs, such as a mortgage or a child's education. However, many families realize that even after the kids are gone, their need for insurance continues - to provide income for a surviving spouse, eliminate debts, pay taxes, etc. Because premium rates increase with age, renewing your policy when the term expires can be prohibitively expensive. Moreover, poor health may make renewal impossible.
Myth #7. I only need life insurance when my kids are young and my financial obligations are the greatest.
There is no question that insurance needs are great when your children are young, what with college planning, mortgage payments and the costs involved in raising your kids. But for people with insurance needs later in life, permanent insurance is often a good choice. In addition to providing the opportunity for lifelong protection, permanent policies build cash value that can be borrowed against or withdrawn, though doing so may affect the death benefit and have tax consequences. Although permanent insurance premiums are generally higher than term premiums when first purchased, they typically do not increase over time and can stop completely later in life, even as your coverage continues.
Myth #8. I can get a better rate of return if I invest my money elsewhere.
While the first and foremost reason for any life insurance purchase is to provide protection for your family, permanent insurance policies, such as whole life or universal life, offer other features that many people find attractive. Specifically, permanent policies provide a cash accumulation value that grows over time and can be borrowed against. And contrary to what many people believe, long- term rates of return on the cash value are generally comparable to relatively low risk investment products. Because understanding rates of return is often difficult, the best way to find the right products for your needs is with the help of an insurance agent or other financial advisor.
Myth #9. I have life insurance through my job. I don’t need any more insurance coverage.
The truth is your life insurance coverage through your work may not be protecting yourself and your loved ones as much as you think. Review how much your employer-paid insurance provides and calculate whether this is enough to keep your family comfortable through the difficult times if you’re not around. What’s more, when you leave your job for any reason, including retirement, your coverage usually stops.
Myth #10. I'm the breadwinner in the home, so only I need life insurance.
Have you seen the cost of childcare lately? Add that along with housekeeping, food preparation, home accountant, and school transportation. From that list alone one can see how much a spouse really contributes to the household budget. It is estimated a non- working spouse contributes at least, but usually more, the equivalent of a full time job. It is important to buy life insurance for everyone in the household if the absence of their income would cause a financial hardship.