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When Frugal isn’t Smart

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Are you one of those people that wants to find ways to save money? Does following the latest frugal tips get you excited? I believe in reducing my expenses just like anyone else, but there are certain times when it pays to spend more. The best example of this is with insurance. I understand that this contradicts the popular wisdom, but I would rather protect myself against a worst case scenario than risk it.

The Price of Paying Higher Premiums

There are many other personal finance websites that will recommend that everyone increase their deductibles in order to have lower premiums. It’s unlikely that you will have to file an insurance claim, so there no reason to have a low deductible. At least, that is the logic of many of my colleagues. Should insurance be something that only protects you for the emergencies that will put you in the poor house?

What many fail to mention is that with higher deductibles, it means more money out of your pocket when something does happen. Instead of trying to cut corners, I would rather budget in a slightly higher premium for the benefit of lower unexpected cost. I would much rather have the security of knowing that I will never have to lose a decent part of my savings because I was trying to save a few bucks a month. Think about what would be more detrimental to you – spending a few extra dollars a month and not having any major unexpected expenses OR saving those few bucks and digging into your savings when something does happen?

When Paying for Security is Okay

When I realized that I prefer to pay higher premiums for the bigger safety net, I realized that there was one area of insurance that was lacking: property insurance. I had been renting for a couple years and would occasionally think about what would happen if my apartment burnt down or if someone broke into my apartment. Truth be told, if something did happen, I would be completely devastated. I didn’t like the idea of feeling vulnerable.

While I was saving about $100 each month, it wasn’t worth the risk to me. So, I finally decided to get renter’s insurance. It is costing me a little more money and even though nothing has ever happened before, this guarantees me that I am covered. I will never have to go through my emergency fund for something that I could have prevented. I would hate to regret not doing it and if that means paying a little more for security, I am going to do it. If you are limiting your coverage and putting yourself at risk of going through your emergency fund too easily, it may be time to reconsider your insurance coverage. Is it really worth the extra dollars each month?

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Posted by CJ   @   2 February 2012 1 comments
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Feb 3, 2012
12:33 pm
#1 Lucas :

About ten years ago a tree limp fell on my car during a snow storm. Because there was already four feet of snow on the roof acting as a cushion, the damage was not nearly as bad as it could have been. Estimates for repair came to $800 about $200 dollars less than my deductible.

I called the insurance company. I found if I filed a claim, my rates would go up for three years based on the value of the claim even though the insurance would actually pay nothing. So no point in filing a claim.

I did some shopping around and compared prices with and without a deductible. I discovered it would take about eleven years for the difference between the higher and lower premium to equal the deductible amount.

One option would be to keep the deductible and save the difference over time, so that if something bad happened in the eleventh year, I would be a break-even point. Another option would be to pay the higher premium. If something happened before the eleventh year, I would be ahead.

For example, if something happened at the 5.5 year mark, under option one I would have save about half of the deductible, but would be on the hook for the other half. Under option two, the higher premium means I would have effectively “prepaid” half of what would have been the deductible and the insurance company would be on the hook for the other half. I decided to go with the no-deductible option. The bonus is that staying with the same insurance company claim-free means my premiums have decreased, pushing the break-even point further into the future.

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