009, When it Rains, It Pours

Look at the above picture closely. That’s my back yard getting pelted by hail. Not just little pea sized hail either. You can see the big splashes in the pool. It did over $30,000 damage to my roof, damaged my fence, and destroyed those globes on the lights. It also did over $9,000 to my vehicles. Good thing I had insurance!

Insurance limits your financial risks. It is there to help smooth out the ups and downs of accidents, incidents, and emergencies. Insurance helps spread the risk across a large number of people using statistics to define the risk probability. Once the insurance company can accurately define your risk, they come up with a premium to charge to ensure they can make money and cover any of the expenses from insurance claims.

Insurance shouldn’t be what you solely rely on to get you through a claim. You also have to take into account how much you can afford to pay quickly to get out of a situation like a crashed car. When your car is damaged, you have to decide how much your deductible should be. If you are going to select a low deductible, you’ll pay a high premium because the bank will have to process more claims and pay out more money. If you get too high of a deductible, you will have to come up with a large sum of money for a major claim and pay out of pocket for all but major claims. So, you need to find the balance between a deductible that is low enough to only be slightly painful for you to pay and the premium you can afford. Remember in personal finance, insurance is supposed to help prevent major financial catastrophes like bankruptcy, getting kicked out of your home etc. Insurance is not there to pay for every little unexpected thing. So, find the balance of what you can afford as a deductible with the right amount of coverage.

For example, when your car is financed and it gets totaled would be a time to have appropriate insurance. You are a major risk to the bank who lent you the money. In fact, insurance is a requirement from the bank on a financed car. Remember, it’s not really your car until you pay off the bank. The car is really the bank’s car. That’s why they demand that if they lend you money for a car, the car must be insured so they would get their money back if the car is totaled. They have been burned too many times by people who think they can pay, but can’t or don’t. So, now it’s required. If you really owned your car, you would be free to not insure it if you felt you could replace it if you like. That’s called self insured and it’s free dollars to self insure per month.

For example, my old green Dodge truck had a ton of miles on it, was pretty beat up, and not worth much. So, when it came time to make a decision on how to insure it, I only insured it for liability, not comprehensive or collision. That means that the insurance company would pay for someone else’s expensive car to be repaired if I crashed my old truck into it. But they wouldn’t pay to replace my truck. If it was stolen, totaled against a tree etc I would be out the truck. I would have to come up with the money to replace my truck. I could absorb the loss without a major financial impact. So, I saved money over the years because my monthly insurance premium was lower. The money saved was invested so whenever I had to replace the truck, I could.

Now take the wife’s vehicle. It’s valued at a lot higher. It would cost more than I’d like to pay if her vehicle was totaled. So, in that case, we decided on full coverage. But even then, I still evaluate it from time to time. Sooner or later, even that vehicle will decrease in value to a point that it would not be as significant of a financial impact if it needed to be replaced. Remember vehicles are depreciating assets? When appropriate, we’d adjust the insurance to start savings on the premiums.

Similar to the post on the two hail claims on our house, you’ll get better at this as you learn. The first deductible on the hail damaged roof was $10,000. The second one was $5,000 because I changed my deductible level. Both checks were somewhat painful to write, but not nearly as painful as if I had to write two checks totaling about $70,000. The $10,000 check wasn’t extremely painful. But when going through the claim process, I realized that I could lower my $10,000 deductible to a $5,000 deductible with very little cost increase. So, for just a few dollars more per year, I was able to only pay $5,000 on the second hail claim. It was definitely a good move on my part. I guess my point is that neither deductible would be catastrophic. But, it was worth it for me to pay a few more dollars a year than write another $10,000 check. The $5,000 check is half as painful, but didn’t cost twice as much. Overall, it was a better value for me.

To summarize, insurance isn’t supposed to isolate you from any financial responsibility or even prevent all financial spikes. It’s there for the major or catastrophic things so you aren’t devastated. If you are going to abuse the insurance by having very low deductibles and filing lots of claims, you’re going to pay top dollar every time. The reason you are paying top dollar is because the insurance companies have to pay for your many claims and still make a profit. If you take care of the small stuff, you’ll only pay for the replacement of the items and not paying for the profit to keep the insurance companies profitable.

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