Insurance Mistakes That Could Cost You Thousands

Buying insurance might naturally feel like another mundane task you can check off your list. You pay your premium, put your documents away, and assume you are fully protected from the worst things life can throw at you. But being insured does not mean you are protected financially.

Many consumers make mistakes, big and small, when buying and maintaining their insurance. These mistakes, combined with things like life changes and not reviewing your policies, mean that insurance never provides the protection it is supposed to. You face out-of-pocket expenses that your insurance is supposed to cover. Losing insurance coverage for a moment can mean losing the years of savings you worked so hard to build.

This article aims to show the most common insurance mistakes and why they are a threat to your financial stability. We will explain how to assess your assets, the truth behind why the cheapest policy doesn’t provide the best value, and take a look at the consequences of not reviewing your policies for years. Identifying and correcting these mistakes can build a sturdy financial safety net for your future.

You Forget to Shop Around Every Year

Insurance loyalty isn’t rewarded. Price optimization relies on insurance companies to steadily raise prices hoping customers don't notice. If you have a single insurance company for a decade, you’re probably paying a lot more than you should. Changing your insurance policies will require providers to compete for your business. Luckily, thanks to online insurance platforms, checking your insurance every year is quick. You can compare your insurance to new offerings and coverage. With a little effort, you can save hundreds.

Buying the Least Expensive Coverage

The appeal of saving money is universal. But when it comes to insurance, that appeal has a potential dark side. It is common to look for the insurance quote you will you the least each month, but that is one of the worst decisions you can make as a consumer.

Deep discounts from insurance companies are a warning sign. It means the insurance company has reduced its liability to maximize its potential profits. There are trade-offs, and it is likely that your coverage is highly limited. You will spend hundreds, if not thousands of dollars, to cover the gaps in your insurance.

The High Deductible Trap

An insurer usually raises your deductible in exchange for a lower monthly bill. The deductible is the amount of money you bear before the insurer will start to pay the rest. While higher deductibles mean lower premiums, you take on more financial responsibility to pay for claims.

Let's say you agree to a $2,500 auto insurance deductible to pay $20 less every month. The question is, do you have $2,500 in cash? The answer is likely no. For example, if you have a minor accident that results in a $2,000 loss, your insurer will pay not a cent. The entire bill will be your responsibility. Therefore, deductibles should be reasonable enough to cover at a moment’s notice.

Skimping on Liability Limits

The minimum auto insurance liability requirements in every state are not enough. If you're at fault for a major accident that damages another driver’s brand new car and causes some injuries, a basic driver’s policy will be insufficient. There will be a limit to your policy and the injured victim will sue you for the remainder.

To cover the additional damages, the court will take money out of your paycheck and can even seize your property. For your financial wellbeing, it’s critical to raise your liability limits at a minimum. You will spend a little more each month on premium, but you will have financial security and legal protection well into the millions.

Don't Insure for Less Than What You Own

There are lots of things you can underestimate when you are choosing coverage for your home. One of the most common mistakes homeowners make is assigning coverage to their home as if it were a fixed price. Their home has a price associated with it. That price is tethered to the housing market. That price is not a coverage answer in case the home gets burnt to the ground or damaged by a huge storm.

Market Value is not Equal to Replacement Value

A home in the real estate market has a price attached to it. That price covers the structure, and it covers the land that has not been burnt or destroyed. What that price does not account for are the costs to rebuild that structure. Those costs fluctuate. Often times, they increase.

Value is not a consideration when looking at coverage for the home. The coverage needs to ensure that if a home is destroyed, it can be rebuilt. Those prices are the only prices that are important. Otherwise, you find you have very limited coverage by a market value standard.

Neglecting Policy Riders

In the case of most unfortunate events that cause damage, homeowners and renter policies can be too restrictive and can lead to losing value. Home policies can be especially frugal when it comes to expensive and valuable items. To use the coverage on expensive things, policies operate at a very minimal expense.

Most regular policies limit claims for jewelry to $1,500. In order to protect jewelry from claims caps, you must add scheduled personal property riders to your policy. They are cheap and do require appraisals, but you will be able to recover full values if your items are lost or damaged.

Not Updating Policies with Significant Life Changes

Life changes quickly and your insurance requirements must adjust with your new needs. Many people's insurance coverage is setup once, and forgotten for years. This creates enormous gaps in your financial coverage.

Having Children, Getting Married, Income Changes

Life's huge milestones change your risk profile. New marriages often mean financial partnership and joint home ownership. Having children increases the need for life insurance because you have new dependents.

When you have a significant promotion, you are wealthier and more litigation prone. Protective measures such as umbrella insurance are needed to protect your newfound wealth. Review your coverage frequently to ensure you are protected based on your current life, not the life you had 5 years ago.

The Cost of Unreported Home Improvements

If you remodel your kitchen or replace the roof, the value of your home increases. If your insurance company is not informed of such changes, the policy will only cover the home how it was originally.

What if you spent $50k renovating your dream kitchen, only to lose your home in a kitchen fire? And if you never updated your coverage? Then your insurance would only return value for your old, outdated kitchen. This is why, for new renovations, you should always inform your insurance agent.

Misunderstandings of the Exclusions & Fine Print

Believing your insurance covers everything is a dangerous misconception. There are always exclusions in every insurance policy specifying what is not covered. Not reading these means you'll be unprepared for the unpleasant surprise of a claim denial.

Flooding & Earth Movement

A typical homeowner's policy does cover fire, theft, & wind damage, but does not cover flooding and earth movement. Many homeowners are forced to learn this fact while standing in a foot of muddy, water-filled living room.

If you live in a low-lying area or near a body of water, it's not only important to have flood insurance because it protects your home from a few inches of water which can lead to massive damage, but it is also vital even if the lender does not require it for the mortgage.

Negligence of Maintenance

Insurance is designed to protect against sudden, unintentional losses, not unplanned home maintenance. If a hidden slow pipe leak rots your floorboards over six months from a leak and you chose not to do anything about it, the leak will be ignored by insurance.

You must maintain your property for your coverage to remain valid. Repairing minor plumbing problems, checking your roof, and cleaning your gutters before an incident is key to reducing your losses in an insurance claim.

Conclusion

Having insurance is more than handing a company your money. Insurance requires careful consideration and active participation. You can’t continue paying a small premium for insurance that will cause you a large financial loss.

Protecting yourself should be done in advance. Your auto, home, and life insurance policies should be reviewed this weekend, especially the declaration pages. Your deductibles, replacement costs, and liability limits should be confirmed in relation to your net worth. Any changes to your life and home should be covered in insurance as well. The most common mistakes people make are the fixable ones. With these in mind, you will be ensuring that your financial future is safeguarded from the unexpected.