Insurance Mistakes
Insurance mistakes refer to common missteps that consumers make when purchasing insurance policies, which can lead to inadequate coverage or unnecessary expenses. One prevalent mistake is failing to thoroughly research and compare different insurance options before committing to a policy. Many consumers do not realize that standard policies might exclude coverage for specific risks, such as floods or sewage damage. Additionally, individuals often neglect to reassess their insurance needs following significant life changes, which can result in either insufficient or redundant coverage.
Consumers may also overlook essential details like premiums, deductibles, and the extent of benefits offered by different providers. It’s important for individuals to understand their specific coverage requirements, especially in relation to personal and property risks in their location. Moreover, many are not aware that certain improvements or changes in circumstances may necessitate updates to their existing policies. By becoming informed and actively managing their insurance plans, consumers can avoid common pitfalls and ensure they have adequate protection tailored to their unique situations.
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Subject Terms
Insurance Mistakes
Insurance is an agreement between a consumer and a company or agency in which the consumer pays a regular fee in return for the company or agency’s agreement to pay compensation in the event of an event leading to death, injury, or damage or loss of property. Insurance agencies and financial experts have identified several common mistakes that consumers make when shopping for or purchasing insurance. One of the most common mistakes made by consumers is not fully researching insurance options and benefits before purchasing an insurance plan. In many cases, consumers purchasing home insurance, for instance, fail to realize that standard home insurance does not cover certain catastrophes, such as flood and sewage damage. In addition, many consumers fail to determine their specific insurance needs and purchase insurance above or below their needs. Insurance policyholders also frequently neglect to adjust or update their policies, leaving them with insufficient coverage after a major life change.
Background
Insurance is an agreement made by a consumer with a company or insurance agency in which the consumer agrees to pay a fee (called a premium) to the company or agency on a regular schedule, while the company or agency agrees to provide financial compensation in the case of certain events. Insurance agreements are used to protect consumers in situations where the cost of coping with an event that leads to death, injury, or property damage or loss exceeds what the consumer or their family can afford. Following such an event, the policyholder files a claim—a formal statement to the insurance company informing them of the event and requesting compensation. The insurance company may then adjust the insurance policy rates if the policy will continue after the event.
Many types of insurance are designed to protect consumers in various circumstances—some cover health and injury issues. Life insurance policies provide compensation after the policyholder's death, which family or associates of the deceased can use to pay funerary costs, cover existing financial obligations, and provide financial security for family, associates, and employees. Similarly, disability insurance provides compensation if the policyholder cannot work due to illness or injury. Medical insurance is used to pay for emergency or regular medical care. In nations with private healthcare, like the United States, insurance is often needed to pay for regular medical care as the cost of services has been raised to adjust to the insurance model.
Other insurance policies cover property in case of loss or damage. Home and rental insurance can be used to cover a consumer’s property in the case of incidents like fire, weather damage, flooding, or theft. Car insurance can be used to pay expenses in the event of a car accident or theft, while liability insurance compensates other drivers or property owners in cases where the policyholder is considered "at fault" for causing damage to their vehicle.
Insurance coverage is an inherently speculative investment, as the conditions that warrant compensation from the company or agency may or may not occur. A person might, for instance, pay a monthly fee for car insurance, but never have an accident or other cause to file an insurance claim. However, consumers who opt out of purchasing insurance are personally liable to cover the expenses associated with an incident. Many industries, like the medical, funerary, and auto repair industries, have adopted pricing models that assume consumers have insurance, and thus charge more than uninsured consumers can easily pay.
Surveys indicate that many people fail to obtain insurance because they believe insurance is unaffordable. For instance, in 2012, the US Census Bureau reported 48 million Americans without health insurance. According to the Gallup Well-Being Index for 2013, 18 percent of Americans were uninsured. However, with provisions of the Affordable Care Act, the percentage of uninsured Americans decreased to 11.9 percent in 2015 and 8 percent by 2023. While some people may not be able to afford insurance, the variety of insurance providers and options make it possible for individuals in various income brackets to afford at least a basic level of insurance coverage. Before deciding that insurance is unaffordable, therefore, consumers are advised to spend time carefully researching their options.
Overview
One of the primary mistakes that consumers make when purchasing insurance is not comparing different insurance options before signing a contract. Insurance providers differ markedly in how they calculate premiums, deductibles, and benefits. A deductible is a specified amount that a policyholder must pay before the insurance carrier will pay an insurance claim. Benefits include the total compensation that the company agrees to pay to cover an insurance claim.
Financial experts warn against making decisions based solely on a single variable, such as the cost of premiums or deductibles. Consumers should be careful to examine all relevant variables. In addition to the cost of premiums, the level of coverage or compensation, and the size of deductibles, other factors are important as well, including consumer satisfaction ratings, the time frame of payment for common claims, and the quality of the company’s customer service. Experts also recommend shopping annually to see if alternative providers offer better coverage or better rates.
An insurance company’s overall reputation is an important factor to consider when thinking about purchasing a policy. Publications like Consumer Reports provide reviews of insurance companies and their policies, including customer service reviews derived from consumer surveys. For automotive insurance, market research company J. D. Power provides survey-based ratings of auto insurance policies in various categories. Websites and publications like these can help consumers to make informed decisions about insurance providers.
Over time, a consumer’s insurance needs may change, and consumers should update their insurance coverage. Neglecting to change or update insurance coverage is one of the most common consumer mistakes regarding insurance coverage. For instance, for an individual with a home insurance policy, renovations, home improvements, or additions can sometimes nullify or reduce insurance coverage. Consumers are, therefore, advised to revisit their coverage annually or whenever significant changes arise in their insurance needs. A common mistake consumers make when purchasing home insurance is insuring for the real estate value of the home rather than the cost of rebuilding in the case of catastrophic loss. Some consumers are tempted to drop flood insurance coverage from their policy to lower their monthly payments. However, it is essential to check the National Flood Insurance Program's database of flood zone areas to ensure the property is not at a high risk.
Individuals with medical insurance should update their coverage in the event of emerging medical conditions. Those with health and other personal coverage might also find that their insurance rates and eligibility for different insurance programs change after marriage. Insurance companies typically offer various options and programs for married clients. In addition, customers may need to update their beneficiary information after marriage.
In many cases, consumers might not be aware of the specifics covered under certain types of insurance policies. For instance, standard home insurance coverage usually covers damage from fire, hail, wind, lightning, falling trees, tornadoes, automobile impact, and vandalism. However, standard policies often do not cover several major types of property damage, including damage from flooding, sewage backups or other malfunctions, hurricanes, and earthquakes. While these sources of damage are not covered in standard policies, many insurance companies offer supplementary coverage, such as flood insurance, for types of property threats not covered under standard policies.
In addition, most home insurance policies do not completely cover items inside the home. Therefore, victims of theft or other catastrophic events may find that their insurance does not cover the cost of replacing some of their lost property. Policyholders are also often unaware that while standard home insurance policies cover some types of home improvements, permanent and full-time domestic employees are not covered under most standard policies. Homeowners or renters can purchase additional coverage to protect their possessions and employees.
Renters insurance is another type of residential insurance coverage that consumers often overlook. Standard renters insurance covers the loss of personal property due to theft, vandalism, or fire. However, standard renters’ policies typically do not cover loss of property due to hurricanes, floods, earthquakes, or sewer backups. Many companies offering property insurance also offer supplemental coverage to cover incidents like flood and sewer damage that can be added to a consumer’s insurance agreement.
When shopping for insurance, it is important for people to understand their insurance needs. For instance, when considering car insurance, consumers should determine whether they will have an alternative form of transportation available if their primary vehicle is unavailable. If not, the consumer may want to invest in an insurance policy that covers the cost of a temporary car rental.
Similarly, when considering home or rental insurance, the consumer should take note of relevant local factors. For instance, when renting or purchasing property, consumers should note whether the property is in an area where it is likely to be at risk of flooding or hurricane damage. Similarly, homes in some areas may be more frequently exposed to risk from fire, tornadoes, hail or ice damage, or other types of environmental threats.
Taking the time to examine specific insurance needs can prevent another of the most common insurance mistakes: overbuying coverage. Financial experts have found that many consumers purchase higher levels of insurance than needed or supplemental coverage that they do not need. Making informed decisions about insurance requires consumers to familiarize themselves with available insurance options and to carefully consider their specific needs.
Among other common insurance mistakes is purchasing a policy based only on price without investigating the company using an independent rating website or reading the National Association of Insurance Commissioner's list of complaints filed against individual companies. Another mistake consumers make is failing to consider bundling insurance types by buying multiple types of insurance through the same agency. This can sometimes reduce an individual's total insurance costs and simplify billing.
Bibliography
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Erkis, Todd. What Insurance Companies Don’t Want You to Know: An Insider Shows You How to Win at Insurance. Create Space, 2017.
"Home Buyer's Insurance Guide." Insurance Information Institute, www.iii.org/article/home-buyers-insurance-guide. Accessed 7 Jan. 2025.
"How to Pick a Health Insurance Plan." Healthcare.gov, www.healthcare.gov/choose-a-plan/comparing-plans. Accessed 7 Jan. 2025.
Kinzler, Peter. Highway Robbery: The Two-Decade Battle to Reform America’s Automobile Insurance System. UP of Kansas, 2021.
"Life Insurance Buyer's Guide." National Association of Insurance Commissioners, content.naic.org/sites/default/files/publication-lig-lp-consumer-life.pdf. Accessed 7 Jan. 2025.
Stanger, Tobie. "Why Home Insurance Costs So Much—and How to Pay Less." Consumer Reports, 1 Nov. 2024, www.consumerreports.org/money/homeowners-insurance/why-home-insurance-costs-so-much-and-how-to-pay-less-a6189826846. Accessed 7 Jan. 2025.
"10 Common Insurance Mistakes to Avoid." Global Credit Union, www.globalcu.org/learn/insurance-tips/10-common-insurance-mistakes-to-avoid. Accessed 7 Jan. 2025.