Financial Peace University #6: The Role of Insurance

Insurance is one of those things that we love to hate on. Seriously. It’s a pain to pay for car insurance every month, when you (hopefully) don’t have to actually “use” it often. Every year, we get a bill in the mail for the homeowner’s insurance premium, though we might not have filed a claim in years, or ever! However, insurance is something we are glad to have when we need it, but we sure hate paying for it in the meantime.

When I was in a car accident 10 years ago, I hadn’t ever had to navigate an auto insurance claim before. Dealing with the initial claim, talking with my agent, the insurance adjuster, the hospital, making sure the responsible party was being billed, taking time off of work, taking time out of my workday to speak to the insurance company, and dealing with the fact that the person that hit me was not insured, was a huge pain. And, I was on painkillers. The whole ordeal was more work than any individual should have to put forth to settle an insurance claim for an accident that wasn’t their fault.

But how glad I was to have had that insurance coverage. It could have been a lot worse without it. Yes my claim had to go down as an uninsured motorist claim, because the person that hit me didn’t have any insurance and was driving a car he didn’t even legally own (This is code for: My insurance premium went up after all was said and done). I didn’t quite understand how the insurance process worked, and should have petitioned for “lost wages” benefits as part of my claim; instead, I used used some of my PTO time at work for recovery. The repair bill for my car, the medications and follow up visits, and even some of my chiropractic treatments were all covered. Thank goodness I had sufficient coverage for this accident.

But when we think of insurance as sort of a burden, it becomes this non-tangible thing that we just keep paying money out for and sometimes don’t even utilize. Understanding insurance coverage, learning what the appropriate types of insurance are for your situation, and planning for those catastrophic things that can happen in life, were all discussed in our FPU class this week.

Of course we know there are some insurances that we pay for that we sort of don’t have a choice in the matter on: Auto insurance, for example, is required as part of the law, if you own and drive a vehicle. Where you have control, however, is the agency or company you pick, the amount of coverage you have, and what your deductible is.

Dave explained insurance in some simple terms that allowed me to think of insurance in a new light during this lesson. He explained that the purpose of insurance is to transfer risk. Now, majority of that risk is being transferred to the insurance company just by having the policy. For instance if you have a health insurance policy, and you get sick and need to go to the doctor for medicine or treatment, most likely you will pay a copay for your visit and a copay for your medicine, but with most insurance plans, you won’t be paying hundreds of dollars for this service and that drug. Majority of the “risk” in this situation is transferred to the insurance company, because you pay insurance premiums on a regular basis, allowing you to get away with a smaller copay for your doctor visit and your medication, and then moving on with getting better.

So think about your deductible. Ugh, deductibles: One of those insurance terms that can be difficult to understand. What’s a good deductible amount and what’s a bad one? How do you know which one is right for you? Well Dave also had a way of explaining deductibles in an easy to understand method that allows you to decide what the right deductible is for your situation. He stated that we should think of the deductible as a way of transferring more or less of the risk of the loss to ourselves. Back to our health insurance example, if you have a higher deductible on your policy, you will be paying more out of pocket for those copays and that medication. On an auto policy, if you have an accident, theft, etc. – you will be paying your deductible out of pocket for your claim, of course, a higher deductible is more out of pocket for you, but you can figure that you are handling more of the risk in the event of having to file a claim.

So Dave recommends handling more of the risk by having a higher deductible, only if changing to a higher deductible has a good cost break-even point on it. If changing your auto insurance deductible from $500 to $1000 only changes your premium by $50 a year, well you might as well keep the lower deductible and payout less in the event of a claim.

Another way to look at this type of situation, is that if you do have to file an insurance claim and need to pay a deductible, have your deductible set at an amount that is comfortable for you to cash flow or dip into your emergency savings for. Remember our $1,000 starter emergency fund from Week 1? An insurance claim because your car was totaled certainly qualifies as a life emergency, right? Pretty sure Dave didn’t build that in as a coincidence 😉

Homeowner’s insurance, disability insurance, long-term care insurance (which I’d never heard of before listening to Dave Ramsey, but it’s actually a great product for those needing nursing home care or who are projected to in the coming years), identity theft protection, and life insurance were all topics discussed in this lesson. Basically, our homework for the week is to review all of the insurance policies we have and make sure we have adequate coverage amounts for what Dave recommends, and also shop for the policies that we are lacking. My husband and I have already applied for term life insurance and are in the application and medical exam process now!