By Richard A. McGrath, CIC, LIA
Like writing or singing, buying insurance is something that everyone does, but few do well.
Consumers make mistakes and, as a result, they may be at risk of not having coverage when they need it. Conversely, they sometimes pay more than they should for insurance, because they fail to take advantage of discounts or they buy coverage they don’t need.
Consumers may think that all insurance is alike and, as a result, look for the lowest price without being aware of what they’re buying. They may not find out that they have inadequate coverage until they file a claim, and by then it’s too late.
But what are the most common mistakes consumers make?
1. Buying insurance based solely on price. When buying insurance, there’s a difference between getting the best deal and getting the lowest price. The policy with the lowest price may not provide adequate coverage and it may not come from a reputable company that you can trust to pay a claim.
Insurance that doesn’t cover your claim may be available at the lowest price, but it is, of course, the most expensive insurance. The best deal comes when you pay the lowest amount possible for insurance from a quality carrier providing the coverage you need.
2. Not having an insurance plan. Consumers often buy auto insurance from one agent, home insurance from another and life insurance from a third.
Ideally, your insurance needs should be reviewed cohesively, so that an overall protection plan can be developed. You may also be eligible for a discount when you “bundle” multiple policies and purchase them from the same carrier.
Your agent should develop a plan for you based on the information he’s gathered about your needs. The information-gathering process can be time consuming. When you first meet, your agent should take the time to get to know you and get to know what you need.
If your agent has finished gathering information in 10 minutes, you have the wrong agent. It should take about an hour and a half to gather all of the information about your insurance needs.
If you don’t have a plan, you will be in danger of not buying adequate coverage or the right coverage. You need to be an informed consumer and understand not only what you need, but what you’re buying and why you’re buying it.
3. Neglecting to tell your agent about life changes. Consumers jeopardize their coverage when they fail to report important changes, such as moving and renting out their home or letting a young driver operate their motor vehicle.
Insurance is underwritten based on your circumstances at the time you purchase the policy. If those circumstances change and you fail to notify your agent, you may not be covered when you file a claim.
Your insurance needs will always change over the course of your life. When you marry, when you have children, when they move away from home and when you retire are just a few events that will affect your insurance needs. Keep your agent informed of these changes.
4. Failing to insure valuable property. When you purchase anything of value, you risk losing its value if you fail to insure it. Whether you own expensive jewelry, a boat or other water craft, antiques or a rare stamp collection, you should insure it. Otherwise, it can be stolen or damaged and you will have no recourse to collect your losses.
5. Underinsuring. Especially in today’s economy, we all want to save money. Some people are trying to save money by reducing their insurance coverage. Unfortunately, if you underinsure your home and end up filing a claim, you may have to pay a co-insurance penalty. It costs less to be properly insured in the first place.
If you need to save money, ask your agent for advice. For example, for consumers who are unlikely to file a claim, having a high deductible is one way to save money.
6. Filing an unwarranted claim on your homeowner’s policy. Some homeowners file claims for small damages to their homes – then wonder why their insurance premiums are going up. It is often better to pay for minor repairs out of pocket, instead of filing a claim, since underwriters will take your claims history into account when you renew your insurance.
Conversely, don’t overlook a claim when it’s warranted. Contact your insurance agent and discuss the damage. Your agent should provide the professional advice you need so that you can decide whether a claim in warranted.
7. Failing to insure your home for its replacement cost. In today’s housing market, many homeowners have reduced their insurance coverage based on falling market values.
But a home’s market value is not the same as its replacement cost. Not insuring your home for its full replacement value – especially if it exceeds the current market value – can be risky. Homeowners need to have a complete understanding of replacement costs, so that they can make an informed decision.
Market value is determined by supply and demand. It is the price at which a home can be bought or sold at a specific time, based on its location, condition and other factors. Replacement cost is based on an estimate of what it would cost to rebuild a similar structure on the same site with the same kind and quality of materials. Rather than being based on the price the home would bring in today’s market, it is based on the cost of building materials and labor, and the use of equipment.
8. Not having an independent agent. Insurance is complex. Few consumers understand the difference between competing products and few can determine what they need to be adequately protected.
Those who buy insurance online are likely not getting the coverage they need. Those who buy insurance from a captive agency that sells insurance from only one carrier are not getting competitive pricing and they may not be buying the best insurance for all of their needs.
An independent insurance agent should identify your insurance needs, develop a plan for you, obtain competitive pricing and keep you informed of any regulatory changes as they take place. An independent agent should also keep you from making the mistakes cited in this article.
Richard A. McGrath, CIC, LIA is President and CEO of McGrath Insurance Group, Inc. of Sturbridge, Mass. He can be reached at email@example.com.
This article is written for informational purposes only and should not be construed as providing legal advice.