7 Insurance Mistakes That Will Cost You (And How to Avoid Them)
Insurance is one of those things that most people set up once and forget about. That's a mistake. The insurance decisions you make - or fail to make - can mean the difference between financial security and financial ruin. Here are the seven most expensive insurance mistakes we see, and exactly how to avoid them.
Mistake 1: Being Underinsured on Life Insurance
The average American family is underinsured by $200,000. People pick round numbers without calculating their actual need. Use the DIME method: add your Debt, Income replacement need, Mortgage balance, and Education costs for children. For most families with young children, that number is $750,000 to $2 million. If your coverage is significantly less, you're underinsured.
Mistake 2: Choosing Medicare Advantage Without Understanding the Trade-offs
Medicare Advantage plans have $0 premiums, which makes them look attractive. But they have networks, prior authorization requirements, and out-of-pocket maximums of $3,000-$8,000. If you develop a serious condition and want to switch to Medigap, you may be denied. Many people choose Medicare Advantage based on the premium and regret it when they actually need care.
Mistake 3: Skipping Disability Insurance
One in four Americans will become disabled before retirement. Yet most people have life insurance but no disability insurance. Your ability to earn income is your most valuable asset. A 35-year-old earning $75,000/year has $2.25 million in future earning potential. Protect it.
Mistake 4: Buying the Wrong Type of Life Insurance
Whole life insurance is frequently sold to people who would be better served by term insurance. If you're buying life insurance to protect your family during your working years, term is almost always the right choice. Whole life makes sense for specific estate planning situations - not for most families.
Mistake 5: Not Reviewing Coverage After Major Life Events
Marriage, divorce, birth of a child, home purchase, job change - each of these events should trigger an insurance review. Your coverage needs change dramatically over your lifetime. A policy that was right at 30 may be completely wrong at 45.
Mistake 6: Buying from a Captive Agent
Captive agents work for one company and can only sell that company's products. Independent agents work with dozens of carriers and can find you the best coverage at the best price. For most insurance products, working with an independent agent results in better coverage at lower cost.
Mistake 7: Not Reading the Policy
Most people never read their insurance policies. This leads to unpleasant surprises at claim time. The most important sections to read: the definitions section (especially the definition of disability for disability policies), the exclusions section, and the claims process. If you don't understand something, ask your agent to explain it in plain English.
Frequently Asked Questions
How often should I review my insurance coverage?
Review your insurance coverage annually and after any major life event: marriage, divorce, birth of a child, home purchase, significant income change, or retirement. Your needs change over time, and your coverage should change with them.
What is the most important type of insurance to have?
For most working Americans with dependents: health insurance first (medical costs are the leading cause of bankruptcy), disability insurance second (protects your income), and life insurance third (protects your family if you die). Homeowners and auto insurance are also essential if you own a home or car.
How do I know if I have enough insurance?
Work through the DIME calculation for life insurance, calculate your monthly expenses for disability insurance, and compare your health plan's out-of-pocket maximum to your emergency fund. If any of these gaps are significant, you're underinsured.
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