Get an Insurance Checkup: Part 2

Car insurance
Insurance companies constantly buffet (no pun intended) consumers with television ads urging them to change to another company. Car insurance does have a wide range of rates offered by different companies, so this can indeed save some money. However, what will definitely save you money on car insurance is choosing the exact coverage that you need, and acknowledging that your needs will change over time.

With new cars, many people choose to get full coverage so that if anything happens, they won't have to put up more money soon after buying the vehicle. If you're one of these people, consider the deductibles you choose. If you live paycheck to paycheck and don't have an emergency fund, you may need a low deductible to make sure you can get your car fixed after an accident. However, if you can afford to put up $500 or $1,000 out of pocket, you can often save a substantial amount.

With older cars, a lot depends on what kind of car you have. Because most cars depreciate quickly, collision insurance becomes less valuable over time, as most insurance companies will pay no more than the depreciated value of the car at the time of the accident. Once your car is paid off and is old enough that if something were to happen to it, you'd probably be more inclined just to get a new car, you should strongly consider dropping your collision insurance.

Also, regardless of how old your car is, you should make sure that you aren't paying twice for the same thing. For instance, a number of insurance companies offering towing coverage if you're in an accident. However, if you are also a member of AAA or a similar auto club that offers towing, then you already have that need covered.

On the other hand, one area in which you should consider additional insurance is under your liability coverage. As your assets grow, you have more to lose if you get into an accident that's your fault. Accident victims who might settle with your insurance company if you had less money could instead decide to try to reach into your personal deep pockets and see if they can get even more. By making sure your liability coverage is high enough to cover any foreseeable circumstance, you take a big step toward protecting your personal assets.

Umbrella insurance
Despite the name, this insurance isn't for if there's rain within 24 hours of getting your car washed. Rather, it refers to a type of insurance policy that provides unusually high amounts of coverage for a host of potential claims against you. In essence, the umbrella policy covers you when other types of insurance you may own have already paid as much as their policy limits require.

For people with significant wealth, umbrella insurance may provide an additional layer of protection against lawsuits. As the volume of lawsuits increases, wealthy people face a higher risk of losing personal assets in the event of a major accident. Few things are more uncomfortable than thinking that your insurance company is taking care of defending you against a lawsuit, only to find out that a bad result exceeds your policy limits and that you will need to make up the difference yourself. Umbrella insurance gives you not only higher policy limits but potentially another party interested in your defense.

One thing to keep in mind, however, is that some of your assets may already be protected from claims. State laws vary on what kinds of property are protected, but in some states, assets like retirement plans, your personal residence, and other types of property may be protected from lawsuits. However, if you choose to rely on this protection, make sure you know the requirements for retaining that protection if you choose to sell or withdraw from a protected asset.

Health insurance
The wide variety of different types of health insurance coverage makes it exceedingly difficult to generalize about it for planning purposes; depending on exactly what coverage is available to you, your answer may differ significantly from someone else in a similar situation but with different coverage options.

However, if you are fortunate enough to have coverage provided to you by an employer, you may have options that allow you to save money. For instance, many employers offer differing levels of coverage, with different deductibles and maximum out-of-pocket expense limits. Some employers allow you to shift from level to level on a periodic basis, usually once a year. This election allows you to make changes if you foresee your need for medical services increasing or decreasing. For instance, if you anticipate higher medical expenses in the coming year, then it may make sense to move to a higher level of coverage; even if it costs more in premiums, the increased coverage may more than offset the cost. Although it is obviously impossible to predict accidents and unforeseen medical problems, some major medical expenses -- such as having a child or getting an elective medical procedure -- are somewhat foreseeable.

On the other hand, if you're the type who is generally healthy, and you're sick of seeing all your health insurance premiums disappear, you may want to consider a high-deductible health insurance policy in conjunction with a health savings account, or HSA. High-deductible policies provide no coverage until you pay a significant deductible, often ranging from $2,500 to $7,500. After you meet the deductible, the policy often pays 100% of any expenses above that.

Although the high deductible requires that you have adequate funds to cover your own expenses, there are two ways you save. First, the policy costs are usually significantly lower, sometimes costing less than half of what a traditional policy would cost. Second, money you deposit into a health savings account is deductible on your income tax return. The HSA resembles a flexible spending plan that many employers offer; you can withdraw from the HSA for medical expenses. However, unlike a flexible spending plan, the HSA does not require you to use all of the money you deposit within a given year; you can retain any unused amount for future medical expenses.

Insurance is a tricky subject, rife with complexity and confusing language and concepts. If you remember that your main goal in buying insurance is to reduce your own risk, it's easier to evaluate exactly what risks you have and therefore what sort of insurance you really need.

Continue your checkup with these related articles:

Fool contributor Dan Caplinger welcomes your comments.


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