I'm Happy to Overpay for Insurance. Here's Why

When I bought my homeowners insurance, I paid more than I needed to in order to get covered. I did the same for my auto insurance.

It may seem silly to overpay for insurance, but there's a very good reason I decided to do so. In fact, I'm happy to have the extra money come out of my bank account. Here's why. 

Overpaying for insurance just makes sense

Overpaying for insurance makes a lot of sense to me because I purchase more than the minimum required coverage.

My state -- like most states -- only requires liability auto insurance, not collision or comprehensive coverage. I could easily opt to purchase only the minimum required protection and opt out of other types of auto insurance. But, if I did that, I would have no coverage for theft of my vehicle or for anything that happened to go wrong with my car that wasn't caused by another driver. That would leave me financially vulnerable. 

Not only did I buy additional kinds of auto insurance that were not required, but I also opted for higher policy limits than my state requires. In other words, I bought more of the required coverage. The mandated coverage is for such a small amount that I feared I'd find myself paying for losses out of pocket that were above and beyond what the insurer would cover.

See, if someone doesn't have enough liability insurance and harms someone or damages their property, the victim could pursue a claim against the responsible party's personal assets. Liability coverage would only pay up to policy limits, creating a significant risk of out-of-pocket losses. 

I wanted to pay more for my auto insurance to make sure I wouldn't lose money whether my own car was damaged or I accidentally damaged someone else's. It was worth it to me to pay higher premiums to transfer more risk.

The same was true with home insurance, as lenders only require coverage for the house that serves as collateral -- but additional protections are important as well, such as:

• Good liability coverage
• Personal property coverage (which pays to replace or repair damaged property)
• Loss of use coverage (which pays for costs associated with not being able to live in the house due to a covered event) 

I bought all this extra coverage that wasn't mandatory because the risks of not doing so were too great.  

Don't put your assets at risk with too little insurance coverage

I'm happy to overpay for insurance, or pay more than the minimum, to get the benefit of more protection for my assets. And most other people should do the same. 

The goal of insurance isn't to pay the least for a policy. It's to make sure that a covered disaster doesn't result in financial devastation. It's well worth paying the premiums necessary to put the right coverage in place and transfer an appropriate level of risk. 

To decide how much insurance to purchase, don't look at what's required. Instead, think about what losses could be easily paid for without insurance. Unless the costs associated with a loss could easily be covered without emptying a bank account, get the insurance needed to transfer the risk to the insurer that can cover it.  

This will pay off big time in the end if and when a disaster strikes.