Insurance can seem boring, but at the same time it is important, complex and the cost of premiums adds up quickly. Even though there is a bit of standardization among policies and insurance companies, typically policies are difficult to compare, and normally have many exclusions and complex terms. Another important consideration is the financial stability of the insurance company. Also it normally is not cost effective to switch a single policy to another insurance company, as insurance companies often offer discounts for bundled policies such as auto, property and life.
Here are a few principles to follow:
- Keep insurance and investing separate. The purpose of investing is to grow your assets in order to meet your financial goals and to ultimately be financially independent. One of the purposes of insurance is to protect these assets. Building wealth with insurance may often lead to unnecessary costs being incurred.
- Insure only for what you cannot afford to lose, and self-insure for the rest. A typical example of self insuring would be to forgo collision insurance on an older vehicle.
- Be sure to keep an eye on “premium creep” and shop around. As insurance is such a high ticket item, comparison shopping can often pay off with large premium savings. An individual with a high credit score or a business with a low risk profile may likely save big by finding an insurer hungry for the business.