Twenty-Five Secrets to Buying Insurance

INSURANCE

Philip Moeller

Decision Center

ditor's note: Chances are you squander hundreds, perhaps thousands of dollars a year on insurance. How? You pay too much for coverage you need, and then waste even more money buying coverage you never needed in the first place.

We asked Philip Moeller, our premium policy pundit and founder of Insurance News Network, 25 tough questions about insurance. His answers should send you pouring over your policies, looking for savings. They are there, trust us.

1. Abusive sales practices seem the norm in life insurance. How come?

Three reasons: commissions, commissions, commissions. So long as the agents who sell insurance are compensated by front-loaded commissions, abuses will continue.

Within five years, most experts predict the commissions will be replaced to a large extent by a fee structure.

2. Why has it taken so long for insurance to be available over the Internet?

Online insurance sales are tough. How do you prove you are who you claim to be? (Digital IDs still have a long way to go.) How do you legally agree to the terms of the policy? (Digital signature laws have only been enacted by about a dozen states.)

Other impediments include lukewarm consumer interest and a conservative insurance industry. You can window shop and find what you want on the Internet, but at some stage paper still has to be exchanged.

3. Why can't I have all my personal insurance needs handled in a single policy?

It would be great if consumers had that leverage. But the problem lies with the states. They insist that distinct pools of funds (auto, home, life, and so on) be available to pay claims.

Co-mingling these coverages is practically impossible for existing companies. But you can still realize savings by taking out different kinds of coverage with the same carrier -auto and home, for example.

4. Do I have to have auto insurance?

Practically speaking, yes. However, a few states still have old laws on the books that permit you to avoid insurance, usually by posting a bond. Forget it.

5. What identical product can cost as little as $200 or as much as $2,000?

Consumer ignorance, a myriad of policy variations and poor public disclosure rules result in huge variations in auto insurance.

It really pays to shop around. But when you've found the cheapest rates, make sure to check out the company with your state insurance department. You want to make sure that rates aren't low for the wrong reasons.

6. Why is my car worth more dead than alive?

Call this one the Big Tow Job. Replacement-cost coverage doesn't apply to car insurance, meaning you lose big when your car is totaled. The insurer doesn't, however.

You get the market value of the car, which is a lot less than its replacement cost. Your insurance company gets the car and often recoups much of its market value when it sells it.

It's thus often cheaper for the company to declare the car a total loss than to pay for it to be fixed.

Consumers need to push really hard to avoid a big tow job when their cars suffer substantial damage.

7. OK, once and for all, should I buy extra insurance when I rent a car?

No. Your personal insurance coverage (including liability safeguards) applies to a rented car.

But there are exceptions, and it's worth 15 minutes on the phone some day to see if they apply to you. Many states have made such extra coverage unnecessary. But not all. So you should check with your insurance agent and/or state insurance commissioner's office, particularly if you live in a so-called "no fault" state. Also, if you're renting the car for business use, your personal policy won't cover you.

If it's a long-term rental (more than a few weeks), you may need supplemental coverage. Lastly, if you have a high deductible on your collision policy, or no collision at all, don't act surprised when your rental company comes looking for money if you crack up its car.

8. Will I always have to subsidize the guy in the big Explorer?

Have you ever seen an accident involving a passenger car and a sport-utility vehicle? It's usually pretty ugly on the car. Sports vehicles are heavier than cars and their bumpers tend to hit above the cars' bumpers, where there is little structural protection. There are 15 million of them on the road today, so the odds of running into one are increasingly likely.

Yet drivers pay the same in insurance. While the logic of raising premiums seems clear to many, it would be extremely unpopular to make one set of vehicle owners pay extra dollars because of damage they do to another set of vehicle owners.

Nonetheless, Farmers Insurance Group, the third-largest auto insurer in the United States, and Progressive Corp. already have begun changing the way they figure liability premiums for owners of sport-utility vehicles. Other insurers, including Allstate, Nationwide, Geico and USAA, are considering similar rate changes.

1. Why is No Fault often No Help in an accident?

Some states with "no fault" laws do not extend this protection when the insured driver takes his or her vehicle out of state. So if a car with out-of-state tags hits you, or you have an accident while driving out of state, you may not be covered.

Given the large percentage of drivers with no insurance or too little insurance, people living in "no fault" states should consider supplemental insurance to protect them in accidents with uninsured motorists (UM) or underinsured motorists (UIM).

10. Generic, schmeric; do I care what parts are used to fix my car?

Original manufacturers' parts usually cost more than generic parts because they are better.

But once your vehicle is more than a few years old, most policies permit the use of generic parts. Only newer cars are more likely to qualify for original equipment manufacturers' (OEM) parts. Check your policy language for details. The important thing is to make sure the repair shop isn't charging OEM prices for generic parts.

11. How can I get the same rates the Volvo drivers get?

Drive a Volvo. Drivers of Volvo station wagons get great rates, in part because Volvos do a good job of protecting occupants in accidents. Another reason: These sober, sensible folks have fewer accidents.

On the flip side, you'll pay a lot more than average if you drive a Chevrolet Camaro.

According to the Insurance Institute for Highway Safety, between 1992 and 1996, the Camaro had the highest driver death rate of the 141 passenger vehicles listed by the institute - almost three times the average.

Among the other vehicles with high death rates were the Geo Tracker, the Pontiac Firebird and the Hyundai Scoupe.

12. Why are "average" cars stolen more often than more expensive models?

For the parts. Car thieves especially like Hondas and the Toyota Camry. They're very popular models and there's a ready market for their parts.

13. What's the price of earthquake protection in Beverly Hills, 90210?

Only $750 a year for $300,000 in coverage, provided your home was built after 1979. Thank the California Earthquake Authority - which is not in business for profit. But you still must have basic homeowner's insurance to qualify.

14. What invisible home insurance can millions of Americans do without?

Private mortgage insurance, or PMI. It's usually required when you buy a home if you don't put down at least 20 percent. It doesn't even protect you but instead protects the financial institution that holds your mortgage.

As you make mortgage payments, the need for PMI is reduced and generally disappears once you own more than 20 percent of the house.

15. Can your dog "eat" your insurance?

You bet, if it's a Rottweiler. If you have one, and your home insurer finds out, don't be surprised if your coverage is canceled. Never mind that they were bred as guard dogs.

Without the benefit of a public hearing or any widely available information, many insurers have decided they don't want to cover households with Rottweilers around. And they are within their rights to do so.

16. Why are disasters not covered in my normal homeowner's policy?

Three basic reasons:

Insurance rates are based on the statistically-known likelihood that an insured event will occur. By definition, disasters cannot be so defined.

Disasters have a huge impact on a relatively small number of people. Those not affected by the disaster shouldn't have to pay for it in their basic insurance rates, so supplemental coverage makes sense.

State regulators are reluctant to permit insurers to charge rates high enough to really protect the insurers from a big disaster. So states like California, Florida, Texas and others with frequent storm or seismic damage have opted to support supplemental coverage options.

17. Are there any "fine print" alerts on the horizon for homeowners?

Yes. Many home insurers say they will begin to limit full replacement-cost policies.

In their place, you may find less extensive protection that places a cap on you recoverable losses. Because home insurance is renewed annually, you should pay careful attention to any notices from your home insurer. And you should inspect your actual renewal policy to make sure you're aware of any changes in your coverage or your premium.

18. How much life insurance do I really need?

Here's a rough way to determine the amount. Begin with $50,000 to cover the basic costs of your family's adjustment to your death. Subtract your children's ages from 25 and multiply the answer by 10.This gives you the protection, in thousands of dollars, that you need for your kids.

If you have a working spouse who can continue earning money if you are gone, then reduce the protection by 50 percent. (Note: This answer does not address estate considerations and related capital preservation concerns.) Example, for three children ages 5, 9 and 11 with a non-working spouse: $550,000 (50 + 200 + 160 + 140).

19. Should my kids have life insurance policies?

No.

20. What do Alex Trebek and Ed McMahon know about life insurance?

That it pays to sell it. The life policies they advertise on television for Colonial Penn sound great, but make sure you read the fine print. And check what's available with other carriers before you sign up for any insurance product being peddled by celebrities.

21. What life insurance products do the pros recommend?

Universal life and variable universal life policies have valuable tax-deferral and investment build-up options. If you make good money, you ought to check out these policies with a financial adviser.

22. Can you tell me the dirty little secret behind long-term care insurance?

Although the policies cover senior citizens, the real market for this coverage is their children. No one wants to come right out and say it, but long-term care coverage protects the children from the loss of their inheritances, in case of huge medical expenses in their parents' declining years.

23. Variable annuities are just mutual funds with an insurance wrapper, right?

No. Variable annuities are similar to mutual funds but are legally distinct because the insurance features of the variable annuities require the funds to be kept in distinct reserve accounts.

Although mutual fund families often give similar names to their variable annuity sub-account products, in many cases, these sub-accounts make different investments than their so-called clone mutual funds. And so they have different results.

Variable annuities also carry higher fees and steeper withdrawal penalties, and, unlike mutual funds, their proceeds are normally taxed as ordinary income instead of capital gains.

Of course, annuities carry other benefits and, should the annuity holder die, any insurance proceeds are exempt from taxes. However, the once-shining allure of variable annuities has faded badly in recent years.

24. When does burial insurance make sense?

Burial insurance is not a good idea for individuals with enough resources to afford traditional life insurance products.

However, it can be an appealing "peace of mind" product for those on low incomes or for elderly people whose health prevents them from qualifying for other life insurance.

25. What's a better deal, flight insurance or the lottery?

If you have to ask, the odds are you'll buy both anyway. But the lottery is a better deal.

What types of insurance do I need?

Articles

Understanding Your Overall Insurance Needs
The Raging Debate Over Term vs. Whole Life
How to Find Affordable Health Insurance
Auto Insurance: Buy More Than the Minimum
Homeowner's Insurance Protects More Than Your Home
Umbrella Policies Plug Holes in Your Coverage
Finding the Right Individual Health Plan

Next Steps

Go to Money's Lifetime Planner

			INSURANCE

			Twenty-Five Secrets to Buying Insurance Philip Moeller Decision Center

			ditor's note: Chances are you squander hundreds, perhaps thousands of dollars a year on insurance. How? You pay too much for coverage you need, and then waste even more money buying coverage you never needed in the first place. We asked Philip Moeller, our premium policy pundit and founder of Insurance News Network, 25 tough questions about insurance. His answers should send you pouring over your policies, looking for savings. They are there, trust us. GENERAL 1. Abusive sales practices seem the norm in life insurance. How come? Three reasons: commissions, commissions, commissions. So long as the agents who sell insurance are compensated by front-loaded commissions, abuses will continue. Within five years, most experts predict the commissions will be replaced to a large extent by a fee structure. 2. Why has it taken so long for insurance to be available over the Internet? Online insurance sales are tough. How do you prove you are who you claim to be? (Digital IDs still have a long way to go.) How do you legally agree to the terms of the policy? (Digital signature laws have only been enacted by about a dozen states.) Other impediments include lukewarm consumer interest and a conservative insurance industry. You can window shop and find what you want on the Internet, but at some stage paper still has to be exchanged. 3. Why can't I have all my personal insurance needs handled in a single policy? It would be great if consumers had that leverage. But the problem lies with the states. They insist that distinct pools of funds (auto, home, life, and so on) be available to pay claims. Co-mingling these coverages is practically impossible for existing companies. But you can still realize savings by taking out different kinds of coverage with the same carrier -auto and home, for example. AUTO 4. Do I have to have auto insurance? Practically speaking, yes. However, a few states still have old laws on the books that permit you to avoid insurance, usually by posting a bond. Forget it. 5. What identical product can cost as little as $200 or as much as $2,000? Consumer ignorance, a myriad of policy variations and poor public disclosure rules result in huge variations in auto insurance. It really pays to shop around. But when you've found the cheapest rates, make sure to check out the company with your state insurance department. You want to make sure that rates aren't low for the wrong reasons. 6. Why is my car worth more dead than alive? Call this one the Big Tow Job. Replacement-cost coverage doesn't apply to car insurance, meaning you lose big when your car is totaled. The insurer doesn't, however. You get the market value of the car, which is a lot less than its replacement cost. Your insurance company gets the car and often recoups much of its market value when it sells it. It's thus often cheaper for the company to declare the car a total loss than to pay for it to be fixed. Consumers need to push really hard to avoid a big tow job when their cars suffer substantial damage. 7. OK, once and for all, should I buy extra insurance when I rent a car? No. Your personal insurance coverage (including liability safeguards) applies to a rented car. But there are exceptions, and it's worth 15 minutes on the phone some day to see if they apply to you. Many states have made such extra coverage unnecessary. But not all. So you should check with your insurance agent and/or state insurance commissioner's office, particularly if you live in a so-called "no fault" state. Also, if you're renting the car for business use, your personal policy won't cover you. If it's a long-term rental (more than a few weeks), you may need supplemental coverage. Lastly, if you have a high deductible on your collision policy, or no collision at all, don't act surprised when your rental company comes looking for money if you crack up its car. 8. Will I always have to subsidize the guy in the big Explorer? Have you ever seen an accident involving a passenger car and a sport-utility vehicle? It's usually pretty ugly on the car. Sports vehicles are heavier than cars and their bumpers tend to hit above the cars' bumpers, where there is little structural protection. There are 15 million of them on the road today, so the odds of running into one are increasingly likely. Yet drivers pay the same in insurance. While the logic of raising premiums seems clear to many, it would be extremely unpopular to make one set of vehicle owners pay extra dollars because of damage they do to another set of vehicle owners. Nonetheless, Farmers Insurance Group, the third-largest auto insurer in the United States, and Progressive Corp. already have begun changing the way they figure liability premiums for owners of sport-utility vehicles. Other insurers, including Allstate, Nationwide, Geico and USAA, are considering similar rate changes. 1. Why is No Fault often No Help in an accident? Some states with "no fault" laws do not extend this protection when the insured driver takes his or her vehicle out of state. So if a car with out-of-state tags hits you, or you have an accident while driving out of state, you may not be covered. Given the large percentage of drivers with no insurance or too little insurance, people living in "no fault" states should consider supplemental insurance to protect them in accidents with uninsured motorists (UM) or underinsured motorists (UIM). 10. Generic, schmeric; do I care what parts are used to fix my car? Original manufacturers' parts usually cost more than generic parts because they are better. But once your vehicle is more than a few years old, most policies permit the use of generic parts. Only newer cars are more likely to qualify for original equipment manufacturers' (OEM) parts. Check your policy language for details. The important thing is to make sure the repair shop isn't charging OEM prices for generic parts. 11. How can I get the same rates the Volvo drivers get? Drive a Volvo. Drivers of Volvo station wagons get great rates, in part because Volvos do a good job of protecting occupants in accidents. Another reason: These sober, sensible folks have fewer accidents. On the flip side, you'll pay a lot more than average if you drive a Chevrolet Camaro. According to the Insurance Institute for Highway Safety, between 1992 and 1996, the Camaro had the highest driver death rate of the 141 passenger vehicles listed by the institute - almost three times the average. Among the other vehicles with high death rates were the Geo Tracker, the Pontiac Firebird and the Hyundai Scoupe. 12. Why are "average" cars stolen more often than more expensive models? For the parts. Car thieves especially like Hondas and the Toyota Camry. They're very popular models and there's a ready market for their parts. HOME 13. What's the price of earthquake protection in Beverly Hills, 90210? Only $750 a year for $300,000 in coverage, provided your home was built after 1979. Thank the California Earthquake Authority - which is not in business for profit. But you still must have basic homeowner's insurance to qualify. 14. What invisible home insurance can millions of Americans do without? Private mortgage insurance, or PMI. It's usually required when you buy a home if you don't put down at least 20 percent. It doesn't even protect you but instead protects the financial institution that holds your mortgage. As you make mortgage payments, the need for PMI is reduced and generally disappears once you own more than 20 percent of the house. 15. Can your dog "eat" your insurance? You bet, if it's a Rottweiler. If you have one, and your home insurer finds out, don't be surprised if your coverage is canceled. Never mind that they were bred as guard dogs. Without the benefit of a public hearing or any widely available information, many insurers have decided they don't want to cover households with Rottweilers around. And they are within their rights to do so. 16. Why are disasters not covered in my normal homeowner's policy? Three basic reasons: n Insurance rates are based on the statistically-known likelihood that an insured event will occur. By definition, disasters cannot be so defined. n Disasters have a huge impact on a relatively small number of people. Those not affected by the disaster shouldn't have to pay for it in their basic insurance rates, so supplemental coverage makes sense. n State regulators are reluctant to permit insurers to charge rates high enough to really protect the insurers from a big disaster. So states like California, Florida, Texas and others with frequent storm or seismic damage have opted to support supplemental coverage options. 17. Are there any "fine print" alerts on the horizon for homeowners? Yes. Many home insurers say they will begin to limit full replacement-cost policies. In their place, you may find less extensive protection that places a cap on you recoverable losses. Because home insurance is renewed annually, you should pay careful attention to any notices from your home insurer. And you should inspect your actual renewal policy to make sure you're aware of any changes in your coverage or your premium. LIFE 18. How much life insurance do I really need? Here's a rough way to determine the amount. Begin with $50,000 to cover the basic costs of your family's adjustment to your death. Subtract your children's ages from 25 and multiply the answer by 10.This gives you the protection, in thousands of dollars, that you need for your kids. If you have a working spouse who can continue earning money if you are gone, then reduce the protection by 50 percent. (Note: This answer does not address estate considerations and related capital preservation concerns.) Example, for three children ages 5, 9 and 11 with a non-working spouse: $550,000 (50 + 200 + 160 + 140). 19. Should my kids have life insurance policies? No. 20. What do Alex Trebek and Ed McMahon know about life insurance? That it pays to sell it. The life policies they advertise on television for Colonial Penn sound great, but make sure you read the fine print. And check what's available with other carriers before you sign up for any insurance product being peddled by celebrities. 21. What life insurance products do the pros recommend? Universal life and variable universal life policies have valuable tax-deferral and investment build-up options. If you make good money, you ought to check out these policies with a financial adviser. OTHER 22. Can you tell me the dirty little secret behind long-term care insurance? Although the policies cover senior citizens, the real market for this coverage is their children. No one wants to come right out and say it, but long-term care coverage protects the children from the loss of their inheritances, in case of huge medical expenses in their parents' declining years. 23. Variable annuities are just mutual funds with an insurance wrapper, right? No. Variable annuities are similar to mutual funds but are legally distinct because the insurance features of the variable annuities require the funds to be kept in distinct reserve accounts. Although mutual fund families often give similar names to their variable annuity sub-account products, in many cases, these sub-accounts make different investments than their so-called clone mutual funds. And so they have different results. Variable annuities also carry higher fees and steeper withdrawal penalties, and, unlike mutual funds, their proceeds are normally taxed as ordinary income instead of capital gains. Of course, annuities carry other benefits and, should the annuity holder die, any insurance proceeds are exempt from taxes. However, the once-shining allure of variable annuities has faded badly in recent years. 24. When does burial insurance make sense? Burial insurance is not a good idea for individuals with enough resources to afford traditional life insurance products. However, it can be an appealing "peace of mind" product for those on low incomes or for elderly people whose health prevents them from qualifying for other life insurance. 25. What's a better deal, flight insurance or the lottery? If you have to ask, the odds are you'll buy both anyway. But the lottery is a better deal.
			What types of insurance do I need?
			Articles \|

			Understanding Your Overall Insurance Needs The Raging Debate Over Term vs. Whole Life How to Find Affordable Health Insurance Auto Insurance: Buy More Than the Minimum Homeowner's Insurance Protects More Than Your Home Umbrella Policies Plug Holes in Your Coverage Finding the Right Individual Health Plan

			Next Steps \|

			Go to Money's Lifetime Planner Copyright 1998 Microsoft Corporation