The following is a post by MPFJ staff writer, Derek Sall. Derek is the owner of the blog, LifeAndMyFinances.com, where he teaches people how to get out of debt, save money, and become wealthy.
In my opinion, insurance is a necessary evil. Many of us shell out thousands of dollars a year for that ‘just in case’ disastrous moment, and it might never come. All those payments seem like a waste, but we all know that without it, we could be devastated in a moment. For this reason many of us have a wide variety of insurance policies, and it makes us feel responsible and secure in our everyday lives. However, so many of us are overpaying these insurance companies that it’s flat out ridiculous. Just last year I discovered I was overpaying, and I bet you might be too.
How I Made My Discovery
A wise man once said that ‘you can’t get to where you’re going if you don’t first know where you are.’ I mean think about that. If you wanted to drive to Chattanooga, Tennessee, but you didn’t know if you were currently in Cleveland, Ohio or St. Louis, Missouri, you’d have a pretty tough time finding your way wouldn’t you?
The same is true with your insurance. If you don’t know how much you’re paying in each month or what your coverage details are, then how on earth can you expect to save money on your insurance? I never thought about this until I actually started budgeting last year. By budgeting, I was forcing myself to look at all the dollar figures and gain an understanding of why each expense was the amount it was. To say the least, this was an eye-opening experience.
Escrow
When I first dug into the numbers, I discovered that a portion of my house payment was going toward an escrow account that was set up by my bank. This is simply an account where the bank stock-piles your money for your property tax payments, which means that you don’t get hit with a hefty bill once a year. And, it gives the bank the assurance that you’ll have the funds to pay the tax and continue to make your mortgage payment rather than defaulting on your loan.
The whole set up sounds well and good, but many of these banks take a small cut to manage this escrow account for you. Plus, this means that a portion of your money (often to the tune of thousands of dollars) is inaccessible by you for an entire year. Finally, to cover their butts, the banks often overcharge you each month to make sure that the account has enough money when tax time rolls around. It’s something that no one really thinks about, but it’s quite the raw deal for you, the customer.
To get out of your escrow (which means you’ll have to budget and save for your taxes on your own), many banks require you to own at least 20% of your home. When you get to this point, you can simply make a phone call to the bank, have them close the account, and then mail you a check for the account balance. In my experience, this small move saved me about a hundred bucks a year.
Private Mortgage Insurance
Private Mortgage Insurance (PMI) is another way that the banks cover their butts. They’ll allow you to take out a loan by paying only 10% down (or less) on your house, but by paying less than 20% of your home’s value, you’re allowing the bank to charge you extra as an insurance policy to your default. In other words, they’re trying to get as much money out of you now because they’re not so sure that you’re going to pay them all that you promised. If you end up defaulting on your loan, then they hope that your PMI will cover the expenses of them repossessing the house and reselling it to the public.
Want to stop paying PMI? It’s simple. Just pay off enough so that the bank owns less than 80% of your home’s value. Then, let them know it and by law they need to stop charging you for private mortgage insurance.
Auto Insurance
Everyone has auto insurance, but very few of us shop around regularly. I even admit that I went a couple of years before considering another insurance company to cover me and my Honda Civic. When I looked at my monthly bill and realized that in one year, I was paying nearly half of my car’s value just for insurance, I quickly searched around for something else. Sure enough, I was getting screwed. By getting just two quotes, I was able to reduce my payment of $85 a month down to $55 a month. That was an easy annual savings of more than $300, just with a few minutes of my time.
Home Owners Insurance
Home owners insurance is pretty standard and is typically paid once a year. Asking around for quotes is simple, but if you still have an escrow account, switching insurance providers can be a pain in the butt (which is another great reason to just pay your tax bills yourself) since you have to coordinate the switch with more than one entity. First ditch your escrow, then see what kind of deal you can find out there.
Life Insurance
If you don’t have a spouse or kids or anyone that depends on you or your income, then you don’t need life insurance. If you are married with no kids and both you and your spouse work, then you probably still don’t need much life insurance. So when do you need it? The answer to that is simple. If someone would be financially impacted upon your death and would have a difficult time surviving if you were gone, then you likely need life insurance.
The next question is typically, “What type of life insurance should I get?” Almost always, the answer is, “Term Insurance.” At this point in my life, I’m 30 years old and have a spouse. We both earn enough to take care of the bills on either one of our incomes and therefore wouldn’t be financially strapped if one of us tragically passed away. Therefore, there’s no need for us to have insurance.
If however, we had two kids, then the answer changes. If I passed away, my wife would still have to work, but she would also need to put them in daycare while she was away during the day. Due to this expense, I might take out a 20 year, $300,000 term insurance policy to take care of those many years’ worth of expenses.
To reduce your insurance costs severely, do your best to put yourself in a position where you don’t need it – either by living cheaply or by having a large net worth.
Medical Insurance
Everyone should have medical insurance, but how much should one be paying for it? Just like in the auto insurance example, you should choose the type of coverage that works best for you. If you have a bunch of money stashed away for a rainy day and you are never sick, then get the high-deductible insurance. You’ll almost certainly save yourself money in the long run and you might even get the benefit of some HSA funds from your company.
If you’re constantly sick or have a history of medical problems, then you might want to get some better coverage and pay a little extra per month. It can sometimes be tough to save money on your medical insurance, especially if you only have the option of one company through your workplace, but you can still alter the deductible to attempt to save some money here and there.
The Extras
Having a lot of stuff can be expensive. Not only does it cost more in maintenance, payments, and storage, but it can also cost you in insurance! That boat, snowmobile, and sports car are adding to the amount of money that you’re throwing away in insurance. The more stuff you own, the more expensive and stressful life can get. Sometimes it’s best to wait on all the toys until you’re actually wealthy and can afford it. That’s what we’re doing, and let me tell you, it’s allowing us to get wealthy quite quickly.
How about you all? Have you saved money on your insurance costs lately? What did you do?
Share your experiences by commenting below!
***Photo courtesy https://www.flickr.com/photos/pictures-of-money/17307624302/
