November 30, 2012

Insurance – Crucial Do’s and Don’ts

Insurance is what you buy as a safety net against the unthinkable. However, typically when you file an insurance claim you feel you’ve got much less than you deserved. “All those premiums over the years gone to waste” you sigh! Here are some common insurance pitfalls you can avoid so that you can get the right value for money on your insurance.

Life Insurance:
• Your life insurance policy is not a savings account, don’t turn it into one. Do not buy a cash value life policy when what you actually need is a term life policy. If you need to invest money long term for retirement planning, 401(k) is a much better option any day!
• Don’t delay buying life insurance policy and don’t underinsure. A rule of thumb is to consider at least ten times your annual income as the amount you would want your dependents to have. Remember, the main purpose of a life insurance plan is to provide financial support to your dependants when you are no longer around to do it yourself.
• Do not let your agent decide what’s good for you. Make sure you understand the implications and fine print of every word of your insurance policy.
• Do not treat the purchase of your life insurance policy as a one-time-activity. Remember, needs change over time.
• Instead of buying just an Accidental Death / Travel Accident insurance, it makes much more sense to buy a complete life insurance policy, which might look more expensive initially but will turn out cheaper in the long run.

Home Insurance:
• Never make the mistake of confusing what you paid for your house with its rebuilding costs. Land is mostly indestructible and including land in your estimate to rebuild your home structure just makes you spend more on premiums without getting corresponding returns. When you claim, you are paid to rebuild / renovate the structure.
• Comb your home insurance policy word for word. Do not assume anything. Chances are, if you’re living in a disaster-prone area, prone to earthquakes or floods, either you might need to buy a separate coverage for these, or your policy may have a separate deductible for claiming any damage arising out of these major disasters.
• Make sure you check the insurance requirements of an area before buying a house there. After Hurricane Katrina, many large home insurance companies pulled out of that area. Check companies, coverages provided and rates prevalent in a location before you buy a property there.
• Ensure you update your home insurance company as soon as you make any modifications/ additions to your original home structure at the earliest. Not updating your insurance company about changes is one of the biggest reasons for home owners’ claims being rejected.
• If you live in a group housing or condominium scheme, check what is covered under the group housing insurance plan so that you do not buy duplicate coverage for the same structure. It’s a better idea to add on to the policy to cover everything.

Car Insurance:
• It’s not a very good idea to insure your auto to only comply with the basic liability insurance requirements mandated by your state. Keep liability amounts much higher. For example, minimum state mandated liability for AZ auto insurance is 15/30/10. However if you are at fault in an accident and your bill from the aggrieved party exceeds this, you will have to pay from your own pocket. What if you hit a doctor, or worse still a car full of kids. Can you imagine the financial implications?
• While it’s never a good idea to underinsure, many make the mistake of over insuring their car. Keeping collision and comprehensive on a very old car with little resale value doesn’t really get you much if you were to total your car. Typically drop collision coverage once your car is 7 years and comprehensive coverage once it is older than 10 years.
• Before making any modifications in your car, check if your insurance company is ok with them. Most insurance companies do not cover engines which have been modified.
• Make sure you are aware what the blue book value of your car is, while filing a claim for your totaled vehicle. A good idea is to look at the purchase value of at least five similar cars in your area and then average out their cost. That’s what your car insurance company should be paying you for your totaled vehicle unless it had been insured at an agreed value.
• People realize how expensive insurance on a car is, after buying it. Check the records of cars of different models to see which one is cheaper to insure before buying your car. You save big $$ and disappointment later on.

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