Tuesday, July 26, 2011

Why financial planners tout high deductibles, and why that may not be in your best interest…

A lot of financial planners out there like to tout high deductibles as a way of helping you save money on your insurance premiums so you can invest that extra money towards retirement. This is sometimes a business tactic by them to free up some extra money for you to invest in their proposed plan. While this is a good idea for some, it’s probably not a great idea for the average consumer.

In my experience, most people who have a $1,000 deductible or higher haven’t really given it much thought. They want to get the cheapest possible price on insurance, and they don’t really think about the possibility that they might have to file a claim. Next thing you know, they are in a car accident resulting in $1,200 damage to their car, and they are responsible for $1,000 of that bill. If they had purchased a $500 deductible, or even $250 or $100, they would have much less to pay out-of-pocket for the damages. Their insurance premium would have been higher, but probably not by a huge amount.

Most of the time, comprehensive coverage is very inexpensive. The price difference between a $500 and $100 comprehensive deductible is often only a few dollars per month. Having a $100 comprehensive deductible means, among other things, that if you need a new windshield, the insurance company will pick up most of the cost. Some companies offer ‘full glass coverage,’ which means that even if you have a $500 or $1,000 comprehensive deductible, they will waive it for glass claims. This is typically an endorsement that you have to add to the policy that costs extra.

Collision coverage is more expensive then comprehensive coverage, which is why people often purchase a low comprehensive deductible, with a higher collision deductible. This is very common and not a bad idea, but again, it’s important to look at all the price options, and then think about what makes the most sense for you.

On homeowners policies, people very often purchase a $1,000 deductible. Their thinking is that if their house ever burns down, they can afford to pay $1,000 of the damage if the insurance company is covering the other $200,000. However, they don’t think about the small claims that arise, such as theft, a flooded basement due to sewer backup or broken pipes, and vandalism. These claims can be anywhere from $800 on up.

The most important thing is to think about possible scenarios when purchasing your insurance policy, and ask yourself: “would I file a $1,200 claim, or pay it myself?” If you think you might file smaller claims, then a $1,000 deductible is probably not right for you. It would be worth it to pay a little bit extra for a lower deductible. However, if you are handy around the house, know how to repair cars yourself, or simply don’t mind paying the smaller claims out-of-pocket, then consider a higher deductible.

Make sure to talk to your agent about all the different deductible options on your insurance policies so you can make an informed decision on your deductible.


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  2. When you say that comprehensive coverage is very inexpensive, isn't it inexpensive because it's rare that it costs the insurance company a lot of money? I don't think there's a free lunch here. It seems that since the insurance industry is a for-profit enterprise, then the less we rely on them, the better (i.e., self insure for everything except what you can't handle). It depends on the person, of course, but it seems that people could usually handle a $500 sudden expense once in a blue moon.

  3. Levi, I agree with you, and $500 isn't that much, but for most people, myself included, $1,000 is a lot of money to have to pay. If I can lower to a $500 deductible and pay less then $100 extra per year, I think it's worth it. The problem is that a lot of young people don't think they'll ever file a claim. I see it all the time on comprehensive coverage on auto insurance. The main point I'm trying to make, and probably didn't do a very good job, is for people to understand what they are purchasing and not just go for the best possible price. Also, when you insurance companies are a 'for profit enterprise', I don't quite get your point. So are auto-dealers, fiancial brokerage firms, mechanics, plumbers, etc... Does that mean you shouldn't by or lease cars, invest your money, get your cars repaired, etc...? I think you just want to make sure you're getting the best deal possible, right? That's all I'm trying to say. Financial planners that recommend a high deductible are trying to free up money (which you may or may not need later) for you to invest with them so they can make more money. I'm just saying not to take their advice as gospel because they are "experts."

  4. I agree, $1000 is a lot of money, and it sucks to pay it, but you CAN pay it without a problem. In 12 years of driving I've never needed comprehensive insurance, even if my deductible had been $0. Have you? For whatever reason, I'm of the mindset that we should insure against things that we can't readily pay. I mentioned that they're for-profit because using our own $1000, rather than theirs, would save us the fees we pay for protection. When you have enough money, you just insure yourself and you don't need the company, as you wouldn't use the other companies you mentioned if you didn't require their service. I do agree that if you raise your deductibles to $1000 (and/or drop collision) then you better have a decent stash of cash, but I think it'd be a wise thing to do. Just don't do it, though, because you're gonna give the insurance savings to a broker.