HOW TO SHOP FOR INSURANCE

Buying insurance should be no different from making any other major purchase, such as a car or house. Before making the purchase, you should determine what features you really need. This is important to assure that you get what you expect at a reasonable cost.

Insurance is a risk management tool. You should first determine what risk you are managing. Also, determine how much of the risk you can assume yourself, in order to keep insurance premiums low. For example, if you bought a house and have a substantial mortgage, you might want to insure the value of the house against loss due to fire, flood, or other catastrophic events since you would be responsible for the mortgage balance even if the house were destroyed. On the other hand, if you bought a jalopy car for a few hundred dollars cash, it might not make sense to insure it against loss, because its value is so low. With tangible assets, it is easy to see the relationship, but with intangibles, it is difficult, but not impossible. If your gross family income were $50,000 per year and you wanted to insure against the risk of loss due to a disability, for example, you would need to determine how much of that income was at risk. Table 1 shows an example of family income at risk:

Table 1: Income at Risk if Disabled

Only the income from work is at risk for loss due to disability. After deducting taxes, the net income at risk is only $32,000. This might be the amount of disability insurance to purchase. In shopping for insurance, first determine what you are insuring against and how much insurance you need.

Find the insurance companies that have the kind of insurance you need. Not all insurance companies insure all risks. You will need to find the right insurance companies for the kinds of risks you are insuring against. Some insurance companies handle more than one line of insurance, but they are usually related lines. Property and casualty insurance companies usually provide automobile, homeowner/renter, and personal liability lines of insurance. Life insurance companies usually provide life, accident, and disability insurance. Many agencies try to provide "one stop shopping" by offering several different kinds of insurance; however, you may find it more economical to shop for insurance from companies that specialize in one or two lines only. You may need to find an insurance agent who understands your specific needs and who can direct you to the insurance provider that is best for you. You can purchase insurance directly from some companies, but you need to do your homework first. What you save in commissions may be spent in your time and effort. Some insurance is available only to groups, such as employee groups, unions, professional associations, or religious and fraternal organizations.

Compare features, benefits, and premiums. The cost of insurance is more complex than the premium alone. When shopping for insurance, be sure to read the fine print. An insurance policy is a legal contract. The language is exact and definitions are very important. If you do not understand the language, have a trusted advisor explain it to you. When comparing two policies, do not let price be the overriding factor. A more expensive policy may not be better (or worse) than a less expensive one. Some policies may provide different benefits or risk coverage riders (benefits). Be sure the policy you buy provides all the coverage you want and need. Save money by avoiding policy riders you do not want or need.

Most states require insurers and their agents to provide you with an "insurance buyer's guide." Ask for one and read it carefully.

Insurance is an important financial planning tool and should be purchased wisely.