Rule 1: Buy Insurance Only for Financial Risks You Can't Afford to Bear on Your Own



The purpose of insurance is to cover catastrophes that would devastate you or your family. Don't treat insurance as a chance to cover all your losses no matter how small or insignificant, because if you do you'll fritter away money on insurance you really don't need. For example, if your house caught fire and burned down, you would be glad you had homeowner's insurance. Homeowner's insurance is worth having, because you likely can't—and you certainly don't want to—cover the cost of rebuilding a house. On the other hand, insuring an old clunker is a waste of money if the car is only worth $800. You would be throwing away money for something you could cover yourself if you had to.

Rule 2: Buy from Insurers Rated A or Better by A.M. Best

Insurance companies go bust, they are bought and sold, and they suffer the same economic travails that all companies do. Between 1989 and 1993, 143 insurance companies declared bankruptcy. You want to pick a reliable company with a good track record.

A.M. Best is an insurance company monitoring service that rates insurance companies on reliability. Look for insurers rated A or better by A.M. Best, and periodically check to see whether your insurer is maintaining its high rating. If your insurer goes down a notch, consider finding a new insurance company. You can probably get A.M. Best's directory of insurance companies at your local public library, and you can find A.M. Best on the Web at www.ambest.com.

Rule 3: Shop Around

There are many, many, many kinds of insurance policies, and insurers don't advertise by price. You need to do some legwork to match your needs with the cheapest possible policy. Talk to at least two brokers to start with. Look for no-load insurance companies—companies that sell policies directly to the public without a broker taking a commission—since they usually offer cheaper prices.

Rule 4: Never Lie on a Policy Application

If you fib and get caught, the company can cancel your policy. If you lie on an application for life insurance and die during the first three years you hold the policy, the company will cancel your policy, and your beneficiaries will receive nothing. Health, life, and disability insurers run background checks on applicants through the Medical Information Bureau, so you can get caught lying. The medical examination you take for life insurance can also turn up a lie. For example, if you smoked tobacco in the previous year, it will come up in the test.

Rule 5: Don't Buy Specific-Risk Policies—Buy General Policies Instead

When it comes to insurance, you want the broadest coverage you can get. Buying insurance against cancer or an uninsured motorist defeats the purpose of having an insurance policy. If you have ulcers, your cancer insurance will not help you. Get comprehensive medical coverage instead.

Uninsured motorist insurance is supposed to protect you if you get hit by someone who doesn't have car insurance or doesn't have adequate car insurance. But, in my opinion, you don't need it if you have adequate car insurance yourself, as well as health, disability, and life insurance. I should point out that some attorneys advise you to carry uninsured motorist insurance because, by doing so, you may be able to recover damages for “pain and suffering.”

Rule 6: Never Cancel One Policy until You Have a Replacement Policy in Place

If you cancel a policy without getting a replacement, you will be uninsured for however long it takes to get a new policy. And if disaster strikes during this period, you could be financially devastated. This rule goes for everyone, but especially for people getting on in years, since older folks sometimes have trouble getting health and life insurance.

Rule 7: Get a High Deductible

You save money by having insurance policies with high deductibles. The premium for high-deductible policies is always lower. Not only that, but you save yourself all the trouble of filing a claim and needing to haggle with insurance company representatives if you have a high deductible and you don't need to make as many claims.

People who buy low-deductible policies usually do so because they want to be covered under all circumstances. But the cost, for example, of a $400 fender-bender is usually worth paying out of your own pocket when compared to the overall cost of being insured for $400 accidents. Statistics show that most people have a fender-bender once every ten years. The $400 hurts to pay, but the cost of insuring yourself for such accidents over a ten-year period comes to far more than $400.

One other thing: If you have a low deductible, you will make more claims. That means you become an expensive headache for the insurance company. That means your rates will go up, and you don't want that to happen.

Rule 8: Use the Money You Save on Insurance Payments to Beef Up Your Rainy Day Account

While you can save money on your insurance premiums by following the rules mentioned earlier, it's probably a big mistake to use that money for, say, a trip to Hawaii. Instead, use any savings to build a nice-sized rainy day fund that you can draw on to pay deductibles. A big enough rainy day fund can cover both periods of unemployment and your insurance deductibles.