5 Insurance-Buying Mistakes to Avoid

Buying insurance can be confusing, but when the unexpected happens – a house fire, a fender bender or a broken bone – it’s a relief to know that some of those financial losses will be covered. But how do you know how much coverage you need? And what questions should you ask before buying a policy? Many consumers aren’t sure. Insurance coverage is far from one size fits all, so here’s a look at mistakes some consumers make when buying insurance.

1. Assuming insurance is out of reach. The U.S. Census Bureau reports that 48 million Americans had no health insurance in 2012. And about 30 percent of U.S. households have no life insurance, according to LIMRA, a worldwide research and consulting organization for insurance and financial services. In some cases, consumers skip insurance because they think it’s out of their budget. Often, that’s not the case, according to Marvin Feldman, president and CEO of the LIFE Foundation, a nonprofit organization that educates consumers about financial planning and insurance. The LIFE Foundation collaborated with LIMRA on the 2013 Insurance Barometer Study, which found that the average consumer thinks life insurance is three times more expensive than it actually is. “[Consumers are] not researching it to determine what the cost is,” Feldman says.

When buying health insurance or property and casualty insurance, ask about potential discounts. “Two-thirds of consumers don’t realize they can get financial help if they buy their own health insurance, and they can get financial help if they go and buy in these health insurance marketplaces,” says Lynn Quincy, senior policy analyst with Consumers Union, a division of Consumer Reports. “You may be way overpaying if you don’t investigate this possibility.” While health insurance discounts are often income-based, homeowners and auto insurers offer discounts for everything from being a member of groups like AARP, to being a good student or a good driver, to having a home security system.

[Read: Is Your College Student Properly Insured?]

2. Relying on assumptions or outdated figures. Changing economic conditions mean you might need more insurance coverage than you had in the past. Take life insurance. In the past, consumers might have based their life insurance coverage on their current income, but “if something happens and you’re no longer around, you need more capital at work to provide the same income [to your beneficiaries],” Feldman says. Disability and long-term care insurance are even more complicated than traditional life insurance. “For disability, do you want coverage that lasts forever? Are there health issues in your family?” Feldman asks. “That’s where you need to speak to somebody to get some guidance.”

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In the case of homeowners insurance, your home could be underinsured if you’ve renovated or if the cost to build a home has increased due to higher material costs or other factors. That’s why experts recommend reviewing insurance coverage once a year to make sure it still fits your needs. Talk to your insurance agent if you’re unsure.

3. Shopping on price alone. Comparing insurance policies can be confusing, but resist the urge to simply choose the policy with the lowest premium. Consider the company’s reputation and the coverage you’d get for that premium. “As a general rule with health insurance, the higher the premium, the lower the amount you pay when you go to the doctor,” Quincy says. Private health insurance plans must provide coverage examples showing what your estimated out-of-pocket costs would be for, say, having a baby or managing Type 2 diabetes. Some examples might not apply to you, but they can help you compare plans and see how much you might pay in coinsurance and copays.

“Make sure you’re shopping apples to apples and getting quotes based on the same coverage that you have,” says Lori Conarton, a spokeswoman for the Insurance Institute of Michigan. Your property and casualty insurance may not cover things like food spoilage in the event of a power outage or stolen electronics worth more than $1,000, so you may want to purchase extra endorsements to cover those possibilities, she adds.

[See: 10 Costs Homeowners Insurance Doesn’t Always Cover.]

With disability or long-term care insurance, prices can vary depending on the length of the elimination period – the amount of time you must wait before coverage kicks in – and whether the policy includes inflation protection, so consider these factors, too.

4. Glossing over the details. Make sure you understand what your insurance policy covers. For health insurance, it’s cheaper to see doctors who are in-network and buy prescription drugs covered by the formulary, so Quincy suggests checking to see if your doctor is in-network and if your prescription drugs are covered before you buy a policy. Otherwise, you could get an expensive surprise.

Read your insurance policy and contact your insurance agent if anything is unclear. “Unfortunately, a lot of people don’t find out what coverage they should have had until they have a loss,” Conarton says. “Here in Michigan, we’ve had a lot of winter weather, and some people don’t know that flooding is not covered under a regular homeowners insurance policy.” However, you can usually buy a separate flood insurance policy. Many people also assume that drain and sewer backups are covered by insurance, but often they’re not, Conarton adds.

[Read: How to Get Your Insurance Claim Paid.]

5. Setting your deductible too low. Setting a low deductible typically means higher premiums, and in the case of property and casualty insurance, a greater likelihood of small claims that could ultimately raise your premiums. Insurance is designed to protect against losses you could not cover yourself, so if you can afford to pay the first $500 or $1,000 in losses yourself, you may not need a lower premium. “Consider your own financial situation,” Conarton says. “How much of the risk are you willing to assume before you make a claim and the insurance company pays on your claim? You really have to think about how much of that loss you could pay yourself.”

Employees Are Paying A Bigger Chunk Of Health Insurance Costs

High deductible health plans are the new normal.

Just over half of employees this year have a health insurance policy with a deductible of at least $1,000, according to a survey of employers from the Kaiser Family Foundation.

It’s the continuation of a multiyear trend of companies passing more of the costs of employee health care back onto workers.

Overall, health insurance premiums for a family covered by an employer health plan rose an average 3 percent this year to $18,142. Of that, employees pay an average of $5,277.

Historically, that’s not much of an increase. But it still outpaces the rate of inflation, so it takes a larger chunk of worker income and employer profits.

“There’s been a gradual sea change in what insurance is for most Americans, from more comprehensive coverage to skimpier coverage,” says Drew Altman, president of the Kaiser Family Foundation.

Covenant Care, a Pensacola, Fla.-based hospice and home health care nonprofit, is one organization that has made the switch. About 450 of its 600 workers now have high-deductible health plans.

“At Covenant, we pay 80 percent of the costs of the plan and even at that point, there are some business decisions that need to be made regarding what we can afford to do,” says Pat Holtman, senior manager of human resources.

She says the company offsets some of that deductible by putting cash into accounts that workers can use for health care costs. And if employees participate in wellness programs, they get points to pay even more.

That includes doing a health risk assessment at the beginning of the year. “If they go online and do a wellness assessment, they can accrue points that way,” Holtman says. “If they’re non-tobacco users there are a certain number of points that are accrued there.”

Premiums have risen 20 percent since 2011, the Kaiser survey released Wednesday shows. They rose 31 percent in the previous five years and 63 percent in the five years before that.

With the continuous increases, companies like Covenant are getting creative, Altman says.

“Your typical employer is using everything in the toolkit to control their premiums,” he says. They use those wellness programs. They try to help workers manage their chronic illnesses.

“But if you want to bring down the premium increase quickly in any given year, the immediate step you can take is to increase deductibles and other forms of cost sharing,” Altman says.

Employers can lop about 20 percent off insurance premiums simply by raising deductibles from $200 to $1,000, says Dave Anderson, CEO of HealthNow Inc., which runs BlueCross BlueShield of Western New York.

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Anderson says companies do think hard before they bump up deductibles because employees don’t like it.

“I would say no one goes there lightly,” he says. “Many employers have felt like they just had to go in that direction. They had to fix premium costs in some way.”

BlueCross BlueShield of Western New York offers its own employees a high deductible plan. And like Covenant in Florida, it encourages its workers to participate in wellness programs to knock down their share of the cost.

The company will pay $500 toward a $1,000 deductible if employees undergo a health risk assessment each year. Anderson says the risk assessment will help employees embrace more healthy behavior and stick with exercise and nutrition plans.

“We believe we’ll have that kind of overall reduction in our health care costs,” he says.

But Anderson says high deductibles raise troubling issues as well.

“And that is whether it is inherently disadvantageous to lower-income employees. And we struggle with that,” he says. “A $1,000 deductible if you’re making $100,000 is no big deal. If you’re making $30,000 a year, a $1,000 deductible is a big deal.”

In the future, Anderson says, he expects employers and insurance companies will have to address that inherent unfairness by offering health plans with deductibles indexed to workers’ income.

4 Kinds of Insurance That Can Save Your Retirement

Enjoying a secure retirement means more than just hitting your investment goals. It also requires planning ahead for certain financial obstacles that could potentially make your later years a little less golden.

Having the right kinds of insurance can go a long way toward helping you combat potential blips on the radar. The difficult part is figuring out which type of coverage you need and how much is enough.

Understanding the problems each insurance policy is designed to protect against can help you decide where they fit in the financial picture. If you’re not sure which kind of coverage is best, here are four policies you may want to consider.

Start with life insurance. Life insurance is designed to cover burial expenses and pay off any debts owed by your estate when you die. If you’re married, however, it can serve a different purpose.

Rather than having to draw down savings you leave behind, your spouse can use the proceeds from a life insurance policy to cover basic expenses and maintain their standard of living. That would leave any retirement nest egg the two of you have saved intact until it’s actually needed.

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The challenge is deciding how much coverage you’ll need. Eric Meermann, a certified financial planner with Palisades Hudson Financial Group’s Scarsdale office, outlines two ways to approach it.

“The first option is the income replacement method,” Meermann says.

In this scenario, you’re creating a lump sum figure that represents how much you expect to earn over the rest of your life, assuming a normal life expectancy.

The second method focuses on what’s needed to maintain a specific standard of living.

“Rather than looking to replace every dollar you would have earned, you look at the lifestyle you want to provide for your beneficiaries after you’re gone,” Meermann says.

The goal is to make sure your policy provides your spouse with enough money so that they can still enjoy a comfortable retirement even when they no longer have your income.

Death isn’t the only eventuality you need to plan for. While the possibility of dying before you’ve had a chance to build up a sizable retirement fund is less than encouraging, a disability has the potential to be just as devastating.

If you become temporarily or permanently disabled, your ability to work may be hindered.

That’s what makes disability insurance so important, particularly for someone who’s rearing a family, says Robert Chewning, head of wealth insurance services with Wells Fargo Private Bank.

“Your paycheck is what pays the mortgage, puts food on the table, contributes to a 401(k) and pays for a college education,” Chewning says. “Disability insurance is meant to insure against a disability preventing you from working and earning a living.”

If you’re planning to get disability coverage, it isn’t something you should put off until you’re older, says Nahum Daniels, a certified financial planner and independent wealth advisor in Stamford, Connecticut.

“Disability insurance is something anyone under 65 years of age should strongly consider,” Daniels says. “Having this coverage could mean the difference between financial survival and financial catastrophe.”

Long-term care insurance can shield against high medical costs. Poor health can present a substantial threat to retirement savings if you require long-term care.

The U.S. Department of Health and Human Services puts the average cost of a nursing home stay in a semi-private room at $6,235 month. That’s more than $72,000 per year that could siphoned away from your retirement accounts. Long-term care insurance is designed specifically to help you avoid having to spend a lifetime of savings on medical care.

Jimmy Lee, a certified fund specialist and CEO of Las Vegas-based Wealth Consulting Group, says that long-term care insurance is critical to maintaining your retirement lifestyle, especially for married couples.

“This insurance provides money to pay for home health, assisted living and nursing home care,” Lee says. “I’ve seen people who care for their sick spouses lose years on their retirement trying to take care of their loved ones.”

[See: 7 Pharma Stocks and the Prognosis for Profits.]

Daniels cautions people to remember that long-term care services aren’t covered by Medicare or disability insurance. Because of that, he believes long-term care insurance is extremely important for most retirees.

“You need to ask yourself, ‘If my spouse were to need care for 18 months, would there be any money left for me when I’m finished paying for that care?'” Daniels says.

Insuring yourself against personal liability is also important. It seems silly to think that a car accident could send your retirement skidding out of control but depending on where you live, it could be a reality.

In a handful of states, California most notably among them, individual retirement accounts aren’t protected against creditor lawsuits to the same degree as a 401(k) would be. If you’re sued following an accident, it’s possible that some of your retirement savings could be attached to satisfy a judgment.

Purchasing an umbrella liability insurance policy can insulate you against big losses, says Timothy G. Wiedman, a now-retired associate professor of management and human resources at Doane University in Crete, Nebraska.

“Imagine being the only driver who receives a traffic ticket after an accident in which several people are injured,” Wiedman says. In the worst-case scenario, he says, a million-dollar lawsuit could be a possibility.

According to Wiedman, the typical coverage in an automobile policy wouldn’t provide nearly enough to cover the claim, which means your personal assets would be at risk to make up the difference.

An umbrella policy could be a lifesaver if the liability limits of your homeowners or automobile policy are exhausted after an accident.

Be clear about what you need and what you don’t. Insurance can be an ace in the hole but it not’s the right fit for every situation, says Lee.

“If someone has enough assets to replace lost income in a long-term disability or premature death situation, then they’re self-insured,” Lee says.

Chewning suggests asking yourself the right questions as a means of gauging what your insurance needs truly are.

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“Have you considered the financial impact if your parents don’t have long-term care? How important is it to leave a legacy to your children and grandchildren?” Chewning says. “Have you created wealth that’s exposed to estate taxes and transfer costs? Have you built a successful family business you hope will stay in the family? These are just some of the milestones in many people’s lives where proper insurance planning may mitigate the financial impact of real-life events.”

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