Last time, we continued looking at the average American family budget, going through each category and examining how one could trim the cost of typical expenses in that category. Here’s the “average American family budget” that we’re looking at, along with links back to the earlier entries on those specific areas:
Housing – $10,080
Transportation – $9,004
Taxes – $7,432
Utilities – $7,068
Food – $6,602
Insurance (including things like pensions) – $5,528
Debt Payments – $5,252
Healthcare – $3,631
Entertainment – $2,564
Cash Contributions – $1,834
Apparel and Services – $1,604
Education – $1,138
Vices – $775
Miscellaneous – $664
Personal Care – $608
TOTAL – $63,784
Today, we’re going to take a look at insurance spending. As you can see from the budget above, the average American family spends $5,528 per year on insurance. That averages out to about $450 per month. Remember, however, that this “average American family” includes single adults, married couples without children, and families with children, too. In other words, a single person is probably coming in below that, whereas a large family (like ours) is probably coming in above that.
Insurance can be a tricky budgetary area to look at because there are so many different types of insurance for people with different needs. Rather than digging into the specifics of various types of insurance, I’m going to stick to some of the main insurance types that people spend their money on – health insurance, life insurance, homeowners insurance, auto insurance, and renters insurance.
Exercise #12 – Trim Your Insurance Spending
The rest of this article consists of a long list of specific tactics that you can use to trim your insurance costs. As with the other savings articles in this series, it’s important to remember that everyone lives a somewhat different life and thus some of these tactics are going to seem useful and sensible to you, while others will seem like a stretch to you, and still others won’t apply at all. That’s okay. Ignore the ones that don’t apply. Make an effort to adopt the most sensible ones.
Remember, your overall goal is to cut back hard on the areas of life that are less important to you – the shallows – so that you can afford the “deep” areas of your life both today and tomorrow. Keep that in mind as you read each tip. Is this tip cutting back on something that’s really important to me, that amounts to a core life value? If not, why not cut it so that I can afford those things that really matter?
Let’s dig in.
Shop around. Always. Here’s the truth about every kind of insurance: Different insurance providers price things differently. Some are simply more expensive than others, for various reasons (advertising, service, or just a bigger profit margin). Some offer discounts for various reasons, while others don’t offer the same discount. Some simply evaluate risks differently than other ones.
Because of all of that, you’ll sometimes get very different prices from different insurers on what amounts to the same insurance. The only way you can find the best prices is by shopping around and getting quotes from a bunch of different providers.
It’s simple. For each type of insurance you buy, contact a bunch of competitors and get quotes on the policies they offer. If it’s less expensive, switch. Don’t just stick with the first offer you get. This is particularly important if you’re buying for the first time.
Choose insurance with a high deductible. Most types of insurance can be compared in terms of cost by looking at two numbers: the premium and the deductible. The premium is how much you have to pay each month/quarter/year, while the deductible is the portion of the cost of an insurance event that you’ll have to pay out of pocket. For example, if your car suffers $8,000 in damages and you have a $1,000 deductible, the insurance company will pay the $7,000 and you’ll be responsible for that $1,000.
Virtually always, insurance policies with a higher deductible have substantially lower premiums, and unless you turn in insurance claims on a regular basis, the money you save on lower premiums will be substantially greater. Thus, try to choose insurance policies with a high deductible (especially if you have an emergency fund in the bank… which you should anyway).
Look into bundling different policies together, such as home and auto insurance or renter and auto insurance. Many large insurance providers offer a number of different types of insurance all under the same roof. Because of that, those insurance providers can use bundling as a way to offer a lower price to consumers and attract more customers. They simply offer multiple types of coverage to the same customer and make a somewhat lower profit on each policy but make a little bit more overall because they’re selling two policies.
What does that mean for you? If you get two (or more) types of insurance from a single provider, you’re usually going to get a better deal on each policy. So, when you’re shopping around for one type of insurance, shop around for other types at the same time and see what kind of discount an insurance provider can offer you if you’re giving them the opportunity to sell you multiple policies at once. Chances are you’ll be saving money.
Ask your insurer for specific steps you can take to lower your insurance premiums. Many different types of insurance will offer discounts to their customers if their customers take steps to reduce the likelihood of an insurance claim. For example, many homeowner insurance policies offer a discount if you install a home security system, and many health insurance policies offer discounts if you get regular checkups or participate in certain fitness programs.
It’s easy to find out about such programs. Just pull out the documentation for each of your insurance policies and give your insurers a call. Ask them about steps you can take that can reduce your insurance premiums and then assess whether or not they’re cost effective for you. You may find that the steps are quite simple and the savings are quite large.
Keep your credit clean. Many insurance providers rely on the credit rating of their customers in order to make a general assessment of that customer’s trustworthiness and likelihood of making insurance claims. The better your credit, the more likely you are to be playing by the rules and the less likely you are to engage in behavior that would increase the likelihood of claims.
Again, this one’s easy. Just keep your bills paid and don’t keep a big balance on your credit cards. If you do that, your credit will be solid at the very least and you’ll see a positive impact on your insurance costs.
Review your policies at least once a year and ask if they still make sense. At least once a year, you should take a look at all of the insurance policies that your family is responsible for and make sure that they still make sense.
For each policy, ask yourself a few tough questions. Do you still need this policy? Could you raise the deductible on this policy? Have I recently shopped around for a better price on this policy? Simply asking these questions can reveal avenues for trimming your insurance and thus trimming your expenses.
Consider using an HMO instead of a PPO for your health insurance. Many people, particularly those who get health insurance through their employers, have a choice between an HMO plan and a PPO plan. To put it simply, HMO plans require you to use a network of doctors selected by the insurance company, while a PPO generally allows you to see your choice of doctor.
Naturally, a PPO plan is going to be more expensive, but is the flexibility you get from that plan going to be worth the additional cost? If you’re healthy and don’t have an established primary doctor or medical team, a HMO plan makes a lot of sense.
If your health insurance includes a HSA, take advantage of it. Many health insurance plans that come with a high deductible are coupled with a HSA – a health savings account. A HSA is much like a savings account, but with a few nice features that can end up saving you money. For starters, money you put into a HSA is pre-tax, which means that it typically comes directly from your paycheck, but every dollar you put in means your paycheck only goes down by about $0.75 or so.
Now, here’s the nice part – you can spend money from that account on health-related expenses without ever having to pay taxes on that money. It’s like your health insurance gives you an opportunity to pay for all of your health care costs at a discount.
If your plan includes a HSA, use it. Put money in there. It’s going to save you money on health care expenses whenever they come up, even if it’s far down the road.
Make absolutely sure you need life insurance. Many people buy into the idea that they need a life insurance policy when it makes no sense. Unscrupulous insurance salespeople often encourage this, convincing people with investment plans and all sorts of scenarios.
The question you need to ask yourself is this: What purpose does this insurance really serve? The purpose of life insurance is to leave behind money for people who will need it in the event of your untimely death. That’s it. It’s not an investment product or a magic solution or anything else. Now, does anyone actually need that money? Would you be leaving behind money that wouldn’t fill a need? If the answer is no, you probably don’t need life insurance.
If you do need life insurance, choose a term policy at an appropriate amount. What if you do decide you need life insurance? Maybe you’re leaving behind children, or perhaps a spouse who would be struggling with a very low income for a while after your passing. Your life insurance should address that problem specifically and not try to solve other problems at the same time.
Many life insurance packages incorporate investments and other unnecessary features along with your life insurance. Honestly, you don’t need any of that stuff. Skip all of it. All you need is a term policy – a life insurance policy where you pay a certain amount per month (or year) and it only pays out in the event of the insured person’s death. Such policies are the best bargain in life insurance – you’re only paying for what you actually need and nothing else.
- Related: Term Life Insurance: The Basics
Be very careful about life insurance for your kids. Many people reflexively buy life insurance packages for their children. The idea comes from a good place – you want your children to be insured and a whole life package “grows” with your child – but the truth is that unless you would actually need financial assistance if your child were to die, life insurance for your child probably isn’t worth it.
Why not a “whole life” policy, though? If you want to put aside money for your child’s future, do it in a more cost-effective way and start a 529 college savings plan for them. The money in that plan can be used for educational expenses and it comes without the fees and commissions that are baked into a whole life policy.
When buying homeowners insurance, think about the cost to rebuild, not the value of what you have. The value of your home as it sits is higher than the cost of building an identical home in a similar area. Why? You have to wait for that home, and many people are impatient.
However, imagine your life if your home were suddenly destroyed. You’d have almost no possessions, so living in an apartment while your home is rebuilt makes sense. It’s not going to cost as much to build that home as your current home is worth if you were to sell it, so you should focus on the cost to build and replace what you have, not to buy it. In other words, tone down the benefit of your homeowners insurance a little bit and enjoy the savings; you’ll still have plenty to rebuild and buy the possessions you need.
As I said at the beginning of this article, it’s important to remember that everyone lives a somewhat different life and thus some of these tactics are going to seem useful and sensible to you, while others will seem like a stretch to you, and still others won’t apply at all. That’s okay. Ignore the ones that don’t apply. Make an effort to adopt the most sensible ones.
31 Days to Financial Independence: The Complete Series
- Day 1: The Shallows and the Deep
- Day 2: Finding Direction in the Deep End, and Cleaning Up the Shallows
- Day 3: Finding Daily Direction and Meaning
- Day 4: Figuring Out Your True Hourly Wage – and What It Means
- Day 5: A Living Budget
- Day 6: The Big Boost
- Day 7: Cutting and Minimizing Debt
- Day 8: Trimming Your Spending — Housing
- Day 9: Trimming Your Spending — Transportation
- Day 10: Trimming Your Spending — Utilities
- Day 11: Trimming Your Spending — Food
- Day 12: Trimming Your Spending — Insurance
- Day 13: Trimming Your Spending — Healthcare
- Day 14: Trimming Your Spending — Entertainment
- Day 15: Trimming Your Spending — Apparel and Services
- Day 16: Trimming Your Spending — Education and Miscellany
- Day 17: Integrating Cost-Cutting Measures Into Your Life
- Day 18: Improving Your Income at Your Current Job
- Day 19: Getting Promoted at Your Current Job
- Day 20: Finding a Better Job
- Day 21: Starting a Side Business
- Day 22: Using ‘the Gap’ and Avoiding Lifestyle Inflation
- Day 23: Investing for Retirement
- Day 24: Investing and Saving for Education
- Day 25: Investing and Saving for Other Goals
- Day 26: Considering Insurance
- Day 27: Handling a Crisis
- Day 28: Handling the Long Valley
- Day 29: Handling Changing Goals
- Day 30: Getting Your Family and Friends on the Same Page
- Day 31: Bringing It All Together