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When you have an insurance claim, the last thing you want to discover is that you didn’t buy the right coverage. While it’s easy to point the finger at agents, coverage gaps could be a two-way street.
Sometimes friends and family members offer bad advice, including tenuous, illogical and even illegal strategies, hoping to save you a few bucks. But the eventual losses can be huge.
“When people shop for insurance, a lot of times they’re looking for the best deal,” says Ron Reitz, an independent insurance adjuster and president of Quality Claims Management in San Diego.
We asked some insurance veterans about the bad advice they’ve heard over the years. Here’s what makes them cringe.
1. Lock up all insurance policies and other important documents in a safe deposit box.
Do not keep your life insurance policy in a safe deposit box. If yours is the only name on the safe deposit box, no one but the executor of your will can get into it without Power of Attorney. If your life insurance policy is locked in there, your beneficiaries will have to wait until the estate is opened by a government entity and an executor is appointed.
If you want the assurance of having important documents locked up, buy a fire-safe box.
“Just make sure documents aren’t stored in a place where they can be lost in a flood or fire,” says Reitz. With today’s technology, there’s no excuse not to scan everything and create electronic copies of important papers that can be put on disks or in other storage devices.
2. You don’t need flood, earthquake or other disaster insurance.
If an earthquake destroys your home, you won’t recover a penny unless you have an earthquake insurance policy. The same rule applies to floods.
Decisions about flood insurance should be based on your proximity to a body of water that could overflow, not whether the area flooded before. On the plus side, if you’re in a low-risk area, your policy will cost less while still providing the maximum protection.
“Floods occur in all 50 states, and in many cases flood damage happens in areas that aren’t high-risk flood zones,” explains Peter Moraga, spokesperson for the Insurance Information Network of California.
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3. Renter’s insurance is a waste of money.
Many renters mistakenly assume that their belongings are covered under the landlord’s policy. Not the case! If some calamity were to occur, such as a fire, your landlord’s insurance won’t cover the contents in your apartment, nor will it pay for you to live in a temporary space while your place is uninhabitable, says Amy Bach, executive director of United Policyholders.
If someone is injured while visiting you and sues you, your landlord’s insurance won’t cover that either.
4. Get the best rate even if you have to lie a little.
It might be tempting to fudge the truth on a life insurance application, especially if you have a serious health condition. “Don’t do it,” advises Steven Modell, president of Modell Brokerage Group in Wayne, Pa. “Not only is it insurance fraud and a felony in most states, but it could prevent your beneficiaries from receiving the death benefit.”
5. Base your home insurance policy on the real estate value of your home.
Experts recommend setting the structural limit of a home insurance policy on what it would cost to rebuild the home if it were destroyed, not the real estate value. Trouble is, the rebuilding cost is a subjective number.
“Many agents use online tools to estimate the rebuild value, but those tools can be misleading,” says Moraga. “It’s more important to talk to a contractor and find out what the local costs are for your home’s particular type of construction, whether it’s in a tract home or custom construction.”
6. Set your dwelling limit low.
Some insurance agents try to give customers the lowest premium possible in order to close the sale.
“One of the ways they’re doing it is by underestimating the value of the dwelling and slapping a 100 percent extended coverage endorsement on the policy,” explains Bach. “Most policies have four separate categories of coverage: 1) Dwelling. 2) Contents. 3) Other structures. 4) Additional living expenses. Three of the four pay a percentage of the dwelling, so if you lowball the dwelling value because you have 100 percent extended coverage endorsement, you’ll be underinsured for your contents, other structures and additional living expenses.”
7. Purchase the state minimum coverage for auto insurance.
Many drivers buy the minimum coverage their state law requires for auto insurance.
“In California that minimum was set in 1967,” says Moraga. “A lot has changed since then. So when you look at your auto policy, understand that if you’re only getting what’s mandated by law, you may be woefully unable to pay any kind of a claim.”
The limit on liability for property damage in California is $5,000. That can be exhausted quickly, even with just a fender bender.
For medical expenses, the limit per accident is $30,000. “If your policy has a $30,000 limit and the medical expenses of the person you hit is $100,000, you’re on the hook for that $70,000,” says Moraga.
8. Ignore uninsured motorists coverage.
Protection against underinsured and uninsured motorists is an important add-on policy for anyone who spends a lot of time on congested roads.
“If you drive frequently in a city where there’s a lot of traffic, your odds of having an accident with someone who isn’t covered rise,” observes Moraga. The added protection can be invaluable.
9. List your vacation home as your primary address on your auto insurance.
The ZIP code of your vacation home might qualify you for better car insurance rates than your primary address. But don’t lie about the principal place where your car is garaged.
“If you have a loss and your insurer finds out, they may delay your claim settlement or take other adverse action,” says Bach. “Most people don’t grasp the concept that insurers want to know about the risks they’re undertaking, and if you mislead them there can be serious consequences.”
10. Drain your retirement accounts to fund a life insurance policy.
You should never stop contributing to your 401K because an agent tells you to put that money into a life insurance policy.
“Funding a tax savings retirement account should come before you buy anything except term life insurance, which is quite competitive [in pricing],” says James H. Hunt of evaluatelifeinsurance.org. “Buy enough life insurance to protect your family, but fund all retirement accounts that save on taxes first.”
11. It’s no problem to take cash out of a permanent life insurance policy.
“Agents often mislead people about cash value policies, saying you can borrow on it later to fund a college tuition or retirement,” says Modell, “But if you take the cash out, you won’t have the insurance.”
Withdrawals from cash value reduce the coverage amount.
Also, unless you’re young and you’re putting a lot of money in an insurance policy, it’s not going to develop enough cash for you to take money out and still have adequate coverage.
“You have to be 100 percent sure you’re happy with the policy indefinitely,” Hunt warns.
Here’s more on cash value life insurance.
12. Term life insurance policies are always the best choice.
“Most people die without insurance,” notes Modell. “If you’re in your 50s or 60s and you want a burial policy, don’t buy term life insurance. That’s not the purpose of term insurance.” If, on the other hand, you have young kids and a mortgage on your house, buying term life insurance makes sense.
If you’ve purchased term life insurance and now wish you had a permanent policy, you can usually convert some or all of it to a permanent policy. Here’s how to convert a term life policy to permanent life insurance.
