Stop buying that unnecessary insurance

Hot spots for over-purchasing

When it works as intended, insurance is an extraordinarily effective method of spreading risk among many people. But more often the purchase of insurance is fraught with misunderstandings. While not having enough coverage can lead to financial ruin, purchasing too much insurance wastes money. "Many people would say, 'How can you have too much insurance?'" says Mark Pauly, co-author along with Howard Kunreuther and Stacey McMorrow of Behavioral Economics. Pauly says the answer is this: When you buy insurance as opposed to being uninsured and paying for the loss yourself, the insurance company ends up keeping some of your money so, on average, you'll end up spending more to have insurers pay for your loss than if you bore the cost yourself. Insurance isn't a smart buy if it costs too much for the protection you're going to get. That's what's meant by "too much insurance." Why we buy too much insurance One reason people buy insurance that's not a good value for their money is a mistaken assumption about how likely it is that they'll make a claim. They overestimate the probability of collecting money. Another reason: People like security. It makes them happy to feel protected. "What's wrong with that?" asks Pauly, even though there are better ways to spend your money. "It's a taste for protection -- no matter what the cost." If you like plenty of insurance, you probably hate deductibles. Whether it's your homeowners insurance, your auto collision coverage or your health insurance, people seem to want to avoid deductibles. Pauly explains this as "deductible aversion." Even though in many cases you can save on your premium by buying a higher deductible policy, people still opt out of the higher deductible. Because you're not certain to have a loss, you'll end up paying out additional premium in order to avoid a larger deductible that you probably could have financed yourself. "When someone comes to us with the lowest liability allowed in the state and they get into an accident, sometimes that won't even cover the damage to the other car," notes R.J. Weiss, a certified financial planner with Weiss Insurance Agencies in Wayne, Illinois. In a study in the Journal of Economic Psychology, researchers found that people who didn't know much about insurance underestimate the cost benefits of a policy with a deductible. Study participants didn't want to buy deductible policies because they thought they were overpriced. However, they didn't take into account the slim chance of paying the deductible. So what have we learned here? The much more grievous error is to not buy essential insurance when you should have it, such as health, term life insurance, and disaster protection from floods and earthquakes. "We think a much more serious failing of consumers in insurance markets is underinsurance not over-insurance," notes Pauly. Weiss recommends first making sure you have enough coverage for essentials, and then cut back on extraneous policies.

News Source :  www.insure.com