SMART MONEY: Ways to Prevent Overspending on Insurance
By Space Coast Daily // July 9, 2018
It seems like, nowadays, you can’t watch the news or read a newspaper without coming across some instance of theft, shootings, or some form of violence or loss. It comes as no surprise then that a lot of people tend to protect themselves and their belongings by buying insurance.
In fact, many people regard insurance as an investment. And it is a great way to save, but only if you don’t overspend on insurance. While it is easy to buy the most expensive insurance policy and think that it provides you with the best coverage, it may not always be the case.
More so, if you have more insurance policies than you need, it could be a sign of not being able to budget properly. Like with anything in life, insurance is also about finding the right balance. You want to protect yourself but it is important not to get carried away by extra features you may not really need.
Lucky for you, there are ways to prevent overspending on insurance. Here are 5 ways to prevent such a situation:
Do Your Research
When you decide to buy an insurance policy it is extremely important that you do your research. Do not buy the first policy that your insurance agent asks you to. This is because most insurance agents get a commission for every policy they successfully sell.
Go online and read the policy brochure and exclusions carefully. This way you will have a fair idea of what exactly the policy does and does not cover. You could also check online forums and see which policies other people like you have found helpful. Remember, that with insurance policies it is never a one size fits all. You can get an insurance policy that suits most of your needs and is within your budget as well. All it takes is a little bit of time and some extensive research!
Buy Your Policy Online
As mentioned previously, most of the time insurance agents earn a commission for every policy that they sell. And while some may be extremely ethical and are telling you the truth about the policy, you can never really know for sure. Which is why it’s a good idea to buy your insurance policy online.
In fact, with insurance comparison website, you can compare features and the premium payable on different policies. This way you will be able to get a better understanding of the policy you intend to buy. Moreover, some sites may offer exclusive online deals that you can benefit from.
While this option currently works well with travel insurance policies, it could also work for car insurance after the mandatory year of using the insurance plan that is tied to your car dealership.
Understand the Probability of Risk
It should come as no surprise that we tend to overestimate the risks that we may face in life. It is this fear of risk that makes us spend more on insurance than we ideally should. Take for instance life insurance policies that provide coverage for terrorist attacks or hijackings.
Most people tend to attach more significance to these events than required. This may be due to the fact that people tend to see such stories on a daily basis and they think these events are likely to happen with regularity. If you fall under this bracket, then you will end up buying a policy that provides coverage for all of these situations. Which is great because you feel safe. But a closer look at the statistics will tell you otherwise.
The truth of the matter is, the probability of dying in a terrorist attack is around 1 in 20 million, and dying in a plane crash is 1 in 4.7 million.
A little calculation will go a long way in preventing you from buying a policy that provides coverage for events that have a very low probability of occurrence. This will ultimately reduce the amount you end up paying as a premium every month.
Understand Your Cash Flow
It would be fair to assume that most people have expenses that they incur every month such as installments payable on a car loan or a home loan, as well as utility bill payments and credit card bill payments. Not to mention other living expenses. What remains after you have made all of these payments is your free cash flow.
Cash flow is extremely important since it provides you with a certain degree of flexibility while managing your money. So, if in a particular month your credit card bill is higher than usual, you always have some extra money to comfortably make the payment.
Insurance policies are fixed investments. This means that you have to pay the premium every month or every quarter as per your policy. Failing which, your policy will lapse. So, if you have S$200 as free cash at the end of the month and you purchase a policy whose premium payment is S$150 per month, you are cutting down on your cash flow by 75%! This means that there are now greater chances of you missing out on either a loan installment or a premium payment, both of which come with their own set of consequences.
Understanding how much you have left every month and giving yourself the flexibility to spend will ensure that you end up purchasing a policy you can afford.
Understand the Difference Between Investment-Linked Policies and Other Forms of Investment
For years all of us have been told that insurance is a financial planning tool. And it is. But only when used correctly. Let’s say that your monthly salary has increased. As a result, you now have S$500 extra each month which you have decided to invest. Your insurance agent tells you that you should consider an investment-linked policy.
He tells you that the premium that you pay doesn’t just provide you with coverage, a part of the payment is also invested in specific investment funds. This does seem like a great idea, doesn’t it? And for the most part, it is. But as we have mentioned earlier, insurance policies are fixed investments. As a result, to receive all the benefits you have to ensure that you do not miss a premium payment. So, what happens if you move jobs or decide to start your own business? What if your salary isn’t enough to cover this payment?
A solution to this problem does exist. You could invest any extra money that you have directly via low-cost exchange-traded funds (ETF) or you could invest the amount in Singapore Savings Bonds. This way, you can invest when you have the money and stop the investment when you don’t have the money. Moreover, it gives you a greater degree of control over your investments since you can decide which fund you would like to invest in.
Don’t Double Insure
Your insurance agent just told you about this great new home insurance policy that even provides medical coverage! How great is that? Not so much. As a Singaporean, you are already provided with basic health insurance coverage in the form of MediShield Life.
And if you are looking for more comprehensive coverage, you can purchase an Integrated Shield Plan (ISP). So, this home insurance which provides medical coverage amounts to double insuring. You are paying a higher premium for protection that you already have. Moreover, you can’t make a claim from multiple insurance companies for the same event. An insurance claim for an illness that requires hospitalization can be made only from one policy provider.
To ensure that you don’t end up making this mistake, you could always do a quick check of the coverage that the policies you currently have an offer and check for any redundancies. This way you won’t end up buying something you don’t really need.
At the end of the day, you should remember that overspending on insurance doesn’t translate to you saving more. In some cases, it is just a sign of financial planning gone wrong. So, the next time you decide to buy an insurance policy, go through these 5 tips to make sure that you aren’t overspending.
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