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Myth: Insurance is a rip-off; buy only the minimum required
This idea occasionally surfaces on the Your Money message boards and in e-mails I get from readers. People's suspicion of the insurance industry can be so profound that they'll put themselves in real financial danger -- the old cut-off-your-schnoz-to-spite-your-face response.It's scariest 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.
Say 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.
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Because 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 policy. These are typically fairly cheap: $200 to $300 for $1 million of coverage. The next million usually costs about $75, and it's about $50 for every million after that.
3 ways to keep costs low
Now that I've talked you into buying more coverage, how can you keep your total insurance tab out of the five-figure range? Higher deductibles are one good way. Here are others:- Shop around. You've heard this one ad nauseam, but if you saw how widely premiums can range for the same coverage, you'd pay attention. One insurer can charge hundreds of dollars more for an auto policy than another, for example. So call. Use the Web. Talk to a broker. Spend a little time doing your research. The payoff could be huge.
- Get every discount you can. This is another piece of oft-repeated, and oft-ignored, advice. Think about the things you've done to reduce your risks on your own, and see if your insurer agrees they're worth giving you a break. A home or car security system, a good-driver course, not smoking -- all of these can lower your insurance costs.
- Be prudent. It may not seem very exciting never to exceed the speed limit, maintain your car and keep your home in good repair, but such Dudley Do-Right behavior pays off in the insurance world. Insurers know that prudent people have fewer claims, so they get the best rates. (You also might want to pay your bills on time, while you're at it. More insurers are using credit scores to help set rates, figuring that people who are prudent about credit are also prudent about managing other risks.)
Video: How to save money on home insurance
Most of all, try not to get emotional about your insurance. It's no fun to think about all the bad things that can happen or to write those big checks every year. But once it's done, you can rest easier knowing that you're well and properly covered.
Liz Pulliam Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "Your Credit Score: Your Money & What's at Stake." Weston’s award-winning columns appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.
Updated Sept. 15, 2009
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