3 costly myths about insurance

By Liz Pulliam Weston

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 get blindsided by huge increases in their premiums, or they get dropped by longtime carriers. They get mad about insurance, instead of getting smart.

Here are the myths and the realities you should be thinking about instead:

Myth: Your benefits should roughly equal the premiums you've paid

Many people feel cheated if they aren't "using" their insurance -- in other words, if they pay premiums for years and never make a claim.

That, however, is exactly what you want to happen with most types of insurance.

Sound insane? It's really not. Most of the time, insurance should be thought of as your protection against true financial catastrophe, not as a buffer against the normal ups and downs of daily living.

You want your homeowners insurance to be there if your house ever burns down, for example, because you probably don't have enough savings to rebuild your home or pay off your mortgage otherwise. On the other hand, you can easily swing the cost of replacing a pane when Sally down the street knocks a line drive through your window.

So why pay extra for a policy with a low deductible, just so you can get your insurance company to cover a cost you could readily handle on your own?

Opting for deductibles of $500 to $1,000, instead of $100 to $250, can save you as much as 35% on your premiums.

Myth: Insurance should cover disasters that are likely to happen

More than 80% of California homeowners don't have earthquake insurance. That figure often stuns people from out of state, because of the widely held notion that the Golden State is a bowlful of geological jelly.

Californians, however, know that serious earthquakes are pretty rare. Most are mild, and almost all are very localized. So, the chances of your own home getting totaled in one are actually pretty slim. That excuses Californians from buying coverage, right? Hardly. Similarly, you may not be off the hook if you don't have flood or windstorm insurance.

• Video:Save money on home insurance

Remember, insurance is meant to protect you from financial catastrophe -- disasters from which you could not easily recover on your own.

Some people ignore this advice, figuring the federal government will come through for them in a disaster. You should know, however, that typically this help isn't free. Most help comes in the form of low-interest loans.

One look at the wake of Hurricane Katrina should make you wary of relying on government help. Even with such aid, many people lost their homes in the 1994 Northridge quake in California. They found they couldn't simultaneously pay their mortgages and afford places to live while their homes were being rebuilt.

So, if you don't have enough cash saved up to rebuild your home or pay off the mortgage, and you live in an area where natural disasters are a distinct possibility, you need appropriate coverage.

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