A classic tip for those looking to lower their cable television bills or their credit card interest rates may work in the world of auto insurance. I was reading a Consumerist post about USAA’s website technical issues and their response to, for a few hours, “losing” a woman’s IRA when I saw this little gem in the comments:

xspook: I had their auto insurance for many years. I decided to shop around and found a much cheaper (over $600 a year savings) policy elsewhere. When I called to cancel, they offered to lower my policy, but couldn’t match the price I got elsewhere. That actually pissed me off, because, as a 10 year loyal customer I should’ve been getting the best price. Now that I tell them I’m leaving, they reward my loyalty with a lower price. Adios USAA. (emphasis mine)

Insurance is a tricky business that I know only a little about. In reading the Berkshire Hathaway Letters to Shareholders, the traditional payout on insurance premiums always seems to be in the 90’s (they make money by investing the float between when premiums are collected and claims are paid). That confirmed something I’ve always believed, that a large component of my car insurance premiums were dictated by risk. Riskier car? Higher premiums. Some accidents or speeding tickets? Higher premiums. Fair enough, that’s why I get insurance, to protect me.

But this little anecdote showed that threatening to leave your car insurance (or any insurance provider) can lower your premiums. I imagine the game that gets played is that all the organizational discounts, good driver discounts and such are up for grabs if a CSR can get you to stay. Who knows?

Either way, shop around for insurance and try twisting some arms to see if you can get a better rate.

When I first started driving, I was amazed at how much car insurance cost. I, like many other newly-minted drivers clutching our licenses, was put on my parents’ car insurance policy, which I’m sure made my parents nervous, and didn’t really feel the full brunt of new-driver-car-insurance-rates. However, when I finally left the nest and had to insure myself, I finally started hoping that 25 would come sooner because everyone says that car insurance rates drop significantly after you turn 25. (I spent all my <21 years waiting to be 21, then my <25 years waiting to be 25... now I'm waiting for retirement... the waiting never ends!)

A few years ago, when I turned twenty-five, I had a great opportunity to test a few car insurance myths empirically and I'm happy to report the 25 year old rate drop myth is in fact very true.

Myth #1: Rates Drop Significantly After 25

This myth is true.

I requested car insurance quotes before I turned 25 and after I turned 25. The results were a little mixed but Geico, my current car insurance company, dropped my rate by about 15% after I turned 25. However, in each year after my 25th birthday, my insurance rates have been going down by a significant amount as well. While there were other factors involved (perhaps Maryland drivers became cheaper to insure, I hadn’t gotten into any accidents, etc), I believe each year after 25 is marked with lower premiums as long as you stay out of trouble. It just so happens that 25 is the first of the big drops, which explains its top billing.

Myth #2: Married Couples Pay Less Insurance

This myth is true, but probably not for the reason you expected.

The logic behind this myth is that once the male in the married couple gets married, he’s a safer driver and thus cheaper to insure. However, when I got married earlier this year (and told Geico), our rates dropped more so because there was a safer driver listed on my account. When I added my wife as a driver, the average riskiness of the driver went down and thus the premiums went down. In fact, I couldn’t even indicate marital status in my profile… they didn’t care. (there is also a component of the multi-car discount mixed in but I added her as a driver before I added her car)

Myth #3: Females Pay Lower Pemiums

This myth is true.

All other characteristics being equal, a female paid 18.8% less than a male in my car insurance quote study. The logic, on the part of insurance companies, behind this is that women are safer drivers and that men are reckless. Is that true? Who knows, but male drivers pay their premiums as if it were true!

(Odd factoid: Going to college lowers your premiums by about 7%, though it’s something that I doubt any company will verify, but don’t go too far… a Ph.D or an M.S. won’t give you more of a discount over B.S.)

Myth #4: Comprehensive Claims Don’t Affect Premiums

This myth is partially false.

Finally, a somewhat false myth! Conventional wisdom states that if you file a comprehensive claim, your insurer won’t increase your premiums. That part of the myth is true. The part that’s false is that if you ever leave that insurer, the new insurance company will charge you higher premiums for coverage. Is that fair? Probably not, but that’s how it works. In my car insurance quote study (near the end), I found that a vandalism claim increased rates by 8% and a vehicle theft or loss of belongings totaling more than $10k was a nearly 14% increase.

Myth #5: Your Credit Score Affects Your Premiums

This myth is true.

You might be wondering, why the heck does my credit score affect my car insurance premiums? The answer is more subtle than you might think. The reality is that not every claimable event is claimed (how many times have you been in an accident and someone pleaded to keep the insurance company out of it?) and insurance companies realize this. So they not only want safe drivers but also those who aren’t going to submit claims - a higher credit score usually indicates more sound financial footing, thus more money to pay for expenses out of pocket. Sneaky huh!?

Here are all the referenced articles:

• Effects of Changing Coverages on Premiums
• Effects of Changing Personal Insurance Details on Premiums
• Auto Insurance & The 25 Milestone
• Does Marriage Affect Car Insurance Premiums?
• Car Insurance Premiums & Credit Scores

(Photo: afagen)

Three years ago my wife, then my girlfriend, quit her job in New Jersey and moved down to Maryland. In doing so, she also gave up her employer sponsored health insurance, which was a big deal.

Why is employer subsidized/sponsored health insurance so important? There are two reasons why an employer subsidized or sponsored health insurance plan is always emphasized, practically everywhere. The first is that your employer often defrays a significant portion of the plan’s premium payments. The second is that the insurance company agreed to insure all employees as a single class, meaning they can’t pick and choose. If someone has a poor medical history, the insurance company is required to insure that person (of course they can raise the premiums across the board the following year). This is very important for someone with a poor medical history because as an individual they stand a much smaller chance of getting affordable coverage.

Option 1. COBRA Coverage

If you recently left or lost your job and your former employer had health insurance coverage, they are required by law to extend COBRA coverage. COBRA is both the coverage and an acronym for the bill that created it, the Consolidated Omnibus Budget Reconciliation Act of 1985. In fact, I created a mini-site devoted to discussing COBRA called Understand COBRA that may be of value (All part of my “learn something by blogging about it” mentality). Either way, this will give you some coverage as you seek out independent health insurance.

Option 2. Use A Broker

eHealthInsurance is a health insurance search engine that has been referenced by major sites like Yahoo! Finance but I’ve never personally used them to do anything except research rates (they are owned by eHealth, Inc., which have been in business since 1997). There are many others but some strike me as spammy and eHealthInsurance lets you get a quick ballpark quote using only your zip code, age, whether you smoke, and student status. From there you will be presented with a list of options.

My first option was CareFirst Blue Choice $0 deductible HMO $30 PCP/$40 Specialist starting at $137 a month. The second was CareFirst Blue Cross Blue Shield $2,500 deductible Indemnity starting at $70 a month. There were maybe a dozen options in total. From there you’ll have to create an account for more information (you will need to provide further personal details including your social security number, current primary care physician, etc.).

Option 3. Join An Organization

Regardless of the quote you get via eHealthInsurance, you should check out the rates made available to you through various organizations in your area. If you can join a local Chamber of Commerce, oftentimes members have access to group rates for health insurance. You could also consider the Freelancers Union and see how much insurance would cost through their partners (they have health, dental, term life, and long term disability). I’m sure there are more out there that offer insurance to their members, but those two are probably the easiest to join.

Option #4. Marry for Insurance

This one is very tricky and can easily come back to bite you since marriage is both a religious/spiritual and a legally binding agreement. Ignoring the religious/spiritual issues, the legal issues step primarily from the tax perspective. While you may be getting health insurance, you may also come under fire from the marriage penalty when it comes to income taxes. If you opt to go this route, consult a tax professional (or do some math) to see how the various filing scenarios affects your taxes.

This is a good option for those who have serious medical issues that preclude them from getting insurance on their own. If an employer offers health insurance, they cannot, by law, exclude an employee’s spouse from the insurance plan.

Option #5. Move To A Country w. Universal Health Care

The last and final option for someone who has exhausted all other options is to move to a country that offers a national/universal health insurance program that would cover them. I’m afraid I don’t know much about the health insurance coverage internationally but this Wikipedia page on universal health care should offer a good start if you’re considering this option.

Everyone’s been focused on brokerage failures and bank failures lately, wondering what happens and who backs them in the event of a failure… that is until we learned that AIG (American International Group) was in serious trouble. This begs the question very few have asked before, what happens if my insurance company fails? The quick answer is that most states have a guaranty that will back the fund up to a certain dollar amount.

State Guaranty Associations & Funds

Unlike banks and brokerages, which are protected by FDIC insurance and SIPC insurance respectively, insurance companies are often backed by “guaranty associations” or “guaranty funds” at the state level. In Maryland, the Maryland Life & Health Insurance Guaranty Corporation insures life and health insurances while the Property and Casualty Insurance Guaranty Corporation insures auto, homeowners, rental, and other insurances. The limit of the coverage is $300,000 in life insurance death benefits, $100k in life insurance cash surrender/withdrawal, and $100k in present value of annuity benefits. I didn’t look up the Property and Casualty insurance limits but it’s generally $300,000.

For more information, visit the National Conference of Insurance Guaranty Funds as they have lots of information on the subject. If you would like to learn more about the guaranty association or fund in your state, the NCIGF has a directory of each state’s Department of Insurance where you can get specific state information. Finally, there are several publications that may be of interest to you.

(Photo: thetruthabout)

We’ve made it through four of the seven deadly sins of personal finance and touched on many good topics so far. The first few were easy - have an emergency fund, don’t raid your retirement, budget, and plan and project for the future. We’re starting to get into a bit of the hazier areas of personal finance, where the answers are quite so clear cut and where much of it depends on you and your specific situation. You could argue that failing to budget isn’t so bad a sin, the reality is that math will do the budgeting for you if you decide you don’t want to. When you run out of money, you’ve hit your budget.

I doubt anyone can argue against today’s deadly sin…

Being Improperly Insured

The reality is that insurance is a very difficult subject to tackle because it provides you protection against the unknown. Since you’re protecting against the unknown, it’s difficult to know how much protection you’ll actually need. Insurance is also very temporal. When you pay the premium for the month or the year, that protection is gone once the insured period passes. I’ve been driving for nearly five years and never once made a claim. That’s five years of auto insurance premiums gone. (I’m not complaining, I consider myself very lucky!)

But you can’t look at insurance that way and many people do. Insurance is a hedge against unknown events that could potentially bankrupt you and it’s a way for you to purchase peace of mind. So, how do you ensure you have the right amount of insurance? How do you avoid getting too much coverage or too little? Sadly, it’s mostly a judgment call but here’s how I approach it.

My approach towards insurance is that it should protect against catastrophic events. Not everyone is like that and that’s certainly not the “right” or “best” way to approach it, I don’t know what the “right” or “best” way is (or if there even is one). My tolerance of risk is such that I’m comfortable with assuming some self-insurance (high deductibles) in order to pay lower premiums.

How should you approach it? I can’t answer that other than to say that you have several factors that will affect how you adjust your coverages and deductibles:

• Assess your financial situation. If you have a fully funded emergency fund, consider increasing it and self-insuring through higher deductibles. If your current automobile insurance has a deductible of $500, increase it to $1000 and put the premium savings into your emergency fund. If you work in a volatile industry or have irregular income, consider adjusting your insurance so that any negative events don’t cause extreme financial distress.
• Known your own “riskiness.” If you’re a bad driver who is prone to accidents or mishaps, lower your deductible. There’s no sense in being prideful and making the wrong financial decision by increasing deductibles or removing certain coverages. If you live in a dangerous neighborhood, lower your homeowners deductible so that you’re better covered in the event of a break-in or fire.
• Know the statistics. Some cars are burglarized more than others, some neighborhoods are rougher than others, and some ethnicities are more prone to some medical problems. Be aware of these statistics, many of which can be found online, and use them to adjust your coverages.
• Your tolerance towards risk. If peace of mind is priceless to you, adjust your insurances so that you obtain that. You can’t quantify stress and all we know about its effects are that it’s bad on the body. Paying a few extra dollars so you can sleep better at night and prevent a few gray hairs is money well spent. Frugality is important but your health is more important.

I’m sure there are actuaries who know insurance backwards and forwards who would disagree with me, if you are such an actuary I invite you to let us know what you think.

When it comes to insurance, my approach is that insurance protects you against catastrophic events that would otherwise leave you broke. It’s for covering your car against being totaled, covering your home against that one big earthquake or fire or tornado that’ll level it, and for covering the unforeseen medical emergency where your life depends on you pulling out all the medical stops. It’s like the backstop or net at a baseball game. The ball has to get past the batter, catcher, and umpire before it’ll hit the backstop. In most games it’ll never gets that far, but for the one time it does, I bet those fans are glad that net is there.

How does this affect my insurance policy decisions? High deductibles. The deductible on our cars is $1000 (eagle eyed readers will note that my own car has no deductible because I don’t carry comprehensive or collision insurance). The deductible on our house is $2,500 the value of the home, the maximum allowed based on the value of the home (in the state of Maryland). This doesn’t really affect our medical insurance though, but I’d raise the deductible on those if it proved to be cost beneficial.

This isn’t a good approach for everyone. For example, if I lived in the city of Baltimore I would have comprehensive insurance on my car. The incident of vehicle theft and vehicle break-ins is significantly higher in Baltimore than it is out in the suburbs. That’s not to say we live in a peaceful, crime-free, idyllic utopia but it’s, in general, safer out in the suburbs (fewer people spread farther out is one contributing factor). The actuaries know this, of course, because the premiums for comprehensive coverage in Baltimore are more expensive than out in the suburbs, but you are buying peace of mind.

This also forces us to boost our emergency fund. The standard advice for emergency funds, which can range from 3 months of expenses to a year, exists for the standard situation. If you plan on self-insuring, which is what you’re doing with a high deductible, you need to account for the added risk. If you shifted your auto insurance deductible from $500 to $1000, pad your emergency fund with an extra $500. One good way start is with your insurance premium savings.

I’m not advocating any particular approach to insurance. We each have our own risk tolerances and varied life situations. In our particular situation, given our financial picture, a high deductible self-insuring plan works for us. Perhaps in a few years that will change.

What’s your insurance philosophy? Are you more of a “stop the headaches and the heart-attacks” kind of person that relies on insurance for the small and the large? Or you in my camp of high deductibles?

(Photo: branditressler)

When I was younger, I always thought that there were two things that really made a big difference in your insurance premiums:

• Turning 25,
• Getting married.

Everyone always told me that my premiums would drop when either one of those things happened because they were strong indicators of safety. Right before I turned 25, I recorded my premiums and then compared them to the premiums after I turned 25. I discovered that my premiums fell by a whopping 20% just for turning 25.

So, when I got married to the most wonderful woman in the whole wide world this year, I thought my insurance premiums would fall as a reward for making her an honest woman. As I went to make adjustments to my policy last week, I discovered there was no field for marital status! I’m not a rocket scientist but something says that I won’t be getting another insurance discount because I can’t even tell Geico I got married.

I went to Kanetix, where I did a series of comparisons to see how personal details affected your premiums, and that form had marital status (quite detailed options too) so I’m surprised Geico didn’t care. Is this true for other insurers as well or was I looking in the wrong place?

Over a year ago, I wrote about how we were going to get my lovely wife’s engagement ring appraised and insured that weekend. Well… ha ha, as all things are, it took a little longer than anticipated but we finally got it appraised in May and insured last week (yeah yeah, over a year later).

We eventually had it insured through Jewelers Mutual Insurance, recommended by the appraiser at Edward Arthur (where the piece was appraised). I had called up Traveler’s, our homeowner’s insurance policy underwriter, and received quotes that were similar priced. The logic was that, given the same premium, we should go with a company that deals with jewelry related claims on a regular basis rather than a general insurance company. Another reason was that in this case, a jewelry loss would have no effect on our homeowners insurance premium.

Replacement vs. Dollar Value Coverage

The type of insurance we purchased was for replacement coverage. That meant that if we did suffer a loss, JMI would replace our covered jewelry with something similar or better. The other option is where you get the dollar value of the appraisal. So if your piece was appraised at $5,000 and you somehow lost it, you would be compensated $5,000 for your loss.

Premiums

As I was filling out the form, I started playing with the deductibles, coverage amounts, and “other factors” to see how they would affect the premium. For the sake of simple math, I put in the dollar value of the piece of be $10,000 and found that the difference between a $5000 deductible and a $1000 deductible was a mere $7 a year (8%). The premium went from $84/year for the $1000 deductible to $77/year for the $5000 deductible, though that does represent an 8% difference. This may seem like very little but the reason is because the item covered was an engagement ring/wedding band set that is worn daily. You could have no safe or an 80 lb. anchored floor safe with a digital lock, sharks with lasers, and your premium would not change because the piece is worn daily. (I made up the sharks part, but it’s likely that would have no effect)

That’s when I decided to have some fun and put in a $10,000 necklace that is worn only for special occasions. If you had no alarm, no safe, and just kept it in a hiding place while you weren’t wearing it, the premium would be $131 for a $1000 deductible and $120 for a $5000 deductible (9% difference). However, in changing the “other factors,” the premium didn’t change at all. Keeping the necklace at a safe deposit box at a bank still had a $131 premium. You could have an armed killer robot guard wear your necklace while you weren’t wearing it and it would still cost you $131 a year. It could be that those factors don’t affect the application’s calculator, since they are subject to verification, but it seemed like they should add a note if that was the case.

Unscheduled Jewelry Insurance

The items that you specify for coverage go on a “schedule.” Usually you have your more valuable or expensive pieces put on the schedule because you’ve had them appraised and would like insurance. Unscheduled is everything else and you can get a catch-all coverage for all those. At JMI, the coverage was $1000 with a $100 deductible for $15. If you wanted more coverage, it’s essentially at those intervals ($2000 of coverage with a $100 deductible cost $30/year). We didn’t elect this coverage.

Application Process

The application process was a piece of cake. You can submit all the details online through a slick Flash-like form and then email, fax, or postal mail your appraisal forms to JMI for verification. Within ten minutes we had coverage, very technology friendly so far.

Knock another one off the checklist, albeit a year-plus from when we put it on.

(Photo by dbking)

I had a meeting with my accountant last week to discuss some business related items and we got on the topic of insurance, specifically life and disability insurance. He told me that his personal philosophy was to keep insurance and investments separate. The reason for this is that when you start mixing insurance and investment, you start muddying the waters and things become much more difficult to keep track of.

When it comes to insurance, he buys term life insurance. Term life insurance is the simplest type of insurance, you pay a premium for a set period of time and they pay out if you die. There is not an investment component and it’s a very simple concept. When I looked at four types of life insurance (term, whole, universal, variable), it confused me to no end. Generic terms, that are barely descriptive because they are so generic, tied to specific plans really mess me up.

Is this the most financially efficient method? I don’t know enough to know. Is it a clear, easy to understand, easy to execute plan with little room for error? I believe so. I prefer a plan I fully understand and can execute without problems over one that is half a percentage point more efficient that I could potentially screw up.

You don’t have to be married to take advantage of a multi-car discount with a car insurance company.

One of the best ways to save money in car insurance is to insure multiple cars with one company. Two cars with one company often costs less than if they had their own individual policies. Up until now, I had always thought that doing so required the owners of the two cars to be related in some way, such as through marriage, but that’s not the case.

Two of my friends, who are dating, had been living together in a rowhome and recently bought a house together a few blocks away. They recently changed insurance companies when they were researching homeowners insurance. One of them had a GEICO auto insurance policy and when he called to cancel, GEICO wanted a shot at keeping his business. He told him his situation and GEICO offered the multi-car discount despite them not being married but couldn’t offer a break on the homeowners (its through Travelers and they don’t offer a discount), so they went with Erie Insurance anyway. It appears that you didn’t have to be married to take advantage of the multi-car discount, though I suspect sharing an address may be necessary.

Does anyone else have experience with this?

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On an unrelated note, the 156th Carnival of Personal Finance is available at PT Money and my post on Best Gasoline Cashback Credit Cards was included.