This Effort to Save on Insurance Costs Could Backfire Big Time

Buying insurance is important, even though it feels like there are a lot more fun things to spend money on. Since having insurance premiums coming out of a bank account can feel like a financial burden, many people want to get the lowest-priced coverage possible.

While it absolutely makes sense to shop around and try to find ways to reduce insurance costs, policyowners should avoid one particular method of reducing their premiums. Here's what it is.

Reducing premiums this way could be a big mistake

Policyholders could reduce their premiums by choosing a low policy limit.

The policy limit is the maximum amount that the insurer is going to pay for a covered claim. For example, a car insurance buyer could choose to purchase just $25,000 in bodily injury liability (assuming this meets their state's minimum insurance requirements).

Choosing such a low maximum limit would allow the policyholder to pay a lot less for insurance coverage than if they had opted for a policy providing more protection. After all, an insurer won't charge a driver as much if the insurance company knows the maximum they would have to pay out per person is $25,000 after the policyholder causes an accident that results in injuries.

If the policyholder had instead opted for $250,000 in liability insurance coverage, the insurer faces the risk of having to pay out 10 times as much, so the company would understandably charge a lot more for this protection.

The issue is, the low premiums resulting from low coverage limits seem attractive -- but when something goes wrong, the policyholder is tremendously vulnerable to devastating financial loss. If the policyholder caused a car accident that resulted in someone facing $100,000 in medical bills and other injury-related costs, the policyholder could be sued directly for the other $75,000 if they had just $25,000 in insurance coverage.

Those who buy insurance and who set low policy limits need to really consider whether the premium savings are worth taking on the risk of financial ruin if a major loss happens.

Here are some better ways to save on insurance coverage

Instead of gambling their future financial security on the hope that no major covered losses will occur, buyers should look into other ways to save on insurance.

Shopping around among different insurance carriers to compare prices is one of the best ways to get the lowest possible prices on coverage. This is easy to do online as it's possible to quickly get insurance quotes from multiple companies to make sure the premiums are fair.

It's also worth taking advantage of any discounts insurers may offer, such as good driver discounts for auto insurance or discounts for bundling home and auto insurance coverage. Insurance buyers should ask companies about how they can find opportunities to save without reducing their policy limits.

By taking these steps, it will hopefully be possible to get the appropriate level of coverage at an affordable price rather than cutting costs by taking a dangerous gamble.