WHY THE PUBLIC OVERPAYS FOR INSURANCE, AND WHAT YOU CAN DO TO SAVE MONEY

A SERIES ON INSURANCE MISTAKES AND HOW TO AVOID THEM.

Herb Denenberg Columns for week of July 17, 2000.

(First in a series on saving money on insurance). Almost every household and every business can save money by a few simple changes in their insurance programs. The same mistakes are made all the time, and that means people pay too much for their insurance, don't have the protection they need, and end up with some policies they don't need. This series will tell you about those standard mistakes, why they're so common, and what you can do to cut your insurance costs and improve your insurance protection.

If you are wondering why those mistakes are so commonplace, here are a few reasons to explain their constant occurrence:

(1). There is the commission structure in much of the insurance industry which is determined by premium charges. The higher the premium, the higher the commission of the agent. So there is a tendency to sell the most expensive policy, not the policy that makes sense. That's why you can glance at so many insurance programs and find deductibles that are too low, or Mickey Mouse policies that are unnecessary.

These mistakes are important because most insurance buyers have a limited budget and can't afford to fritter away premium dollars. What's more, because the wrong policies are sold, most people don't have the budget for more important forms of protection that they really need.

For example, many buy towing and labor coverage and rental care coverage in their auto policy, and don't have the liability coverage they need that might wipe them out in the event of a catastrophic auto accident. They may buy policies they don't need or don't make economic sense for most people (such as cancer insurance and air travel insurance) and have too little or none at all of such vital protection as disability insurance.

(2). Then there is a general lack of competence among insurance agents. This is most obvious in the life insurance area, a segment of the industry plagued by high turnover and minimal education requirements. Some of the agents are almost as confused as their customers.

There are many highly qualified professionals, but if you make a random selection there's a good chance you'll end up with an agent of questionable ability. You can increase your chances of finding a qualified agent, by looking for someone who has been in the business awhile and has some educational attainments in the insurance field. This would include holders of the Chartered Property and Casualty Underwriter (CPCU) designation and the Chartered Life Underwriter (CLU) designation. This is the rough equivalent of the CPA in accounting.

You should select an insurance agent or broker just as you would any other professional.

(3). Still another factor is the historical lack of openness in the industry. I was recently converting a group policy from my former employer to an individual policy. When I asked the company, MetLife, for a specimen policy of the one I was considering converting to, I was told it was against the company policy to give me one. That company apparently makes a practice of attempting to force people to buy the proverbial cat-in-the-bag insurance contract.

Anyone who has studied the insurance business, knows how difficult the industry sometimes makes it to obtain policies and rates which should be an easy matter of public record, and which should be freely available to potential customers.

One of the best insurance reporters in the nation, Robert Cole of the New York Times, once told me he wanted to give up his beat because of the difficulty in communicating with the industry. Things haven't improved that much since then.

(4). On top of a public-be-damned, it's-none-of-your business attitude, the industry has historically added a shell of complexity to their policies and other aspects of information about the industry.

At one point, one researcher used scientific readability measures (average length of sentences and words) to conclude that an earlier version of the auto policy was actually more difficult to read than Einstein's Theory of Relativity. Other policies did not do a lot better in this test either. And despite moves to make policies more readable, they are still far more complicated than they have to be.

(5). In part because of the industry-created complexity, the public has often been in the dark on insurance matters. They do not understand the basic principles of insurance buying. First and foremost is the principle that insurance works best when it is used to cover catastrophic losses and to cover risks comprehensively. When you cover small or routine losses (by buying, for example, contact lens insurance) a disproportionate share of the premium dollar is eaten up by commissions and other insurance company expenses. The same result comes about by buying a lot of narrow coverages instead of one comprehensive policy. Cancer insurance is a good illustration, in contrast to buying a comprehensive medical expense policy that covers all injuries and diseases in virtually all circumstances.

In my next column, I'll have more on common insurance mistakes and how to avoid them.

(Herb Denenberg is a former Pennsylvania Insurance Commissioner and consumer advocate.)

(Last part of a series on insurance buying). The insurance buying mistakes and associated rip-offs have been remarkably stable for many decades. For some reason, consumers and businesses keep making the same mistakes that are costly in dollars wasted and needed protection not obtained.

Here are some of those mistakes and how to avoid them. They cover the major lines of insurance. Many of them are well-summarized in a recent publication of the Consumer Federation of America (CFA) entitled, "A Buyer's Guide to Insurance." (It is a 29-page booklet sold by the CFA for $5. The address is CFA, 1424 16th St., Suite 60, Washington, DC 20036.)

AUTO INSURANCE MISTAKES. Make sure your deductibles are up-to-date and are not too small. At one time, a $100 deductible on collision and comprehensive made sense. But inflation has made low deductibles unaffordable and unsound.

Just going from $100 to $250 on collision can save about 20 percent and you should consider higher deductibles, perhaps $500 or $1,000.

Another common mistake is buying collision coverage on older cars. As the value of the car decreases, and the deductible is taken into account, it may not makes sense to continue the coverage. The same may be said for comprehensive, but there are differences. Comprehensive is less expensive and the chances of a total loss are higher (due to theft and flood covered by comprehensive). What's more, unlike collision, with comprehensive there is usually no wrongdoer from which there can be recovery (to provide payment when there is no insurance).

Still another mistake is buying incidental insurance coverage to take care of small losses which may be more economically and efficiently self-insured. You should think twice before buying towing and labor coverage or substitute transportation coverage.

Those are mistakes of buying what you don't need. A common mistake of not buying what you do need is buying too little liability insurance. If you carry the minimum required by law, you may leave your home and other assets in danger if you're involved in an expensive auto accident. And it doesn't take much of an accident to go above the amount of minimum coverage. In Pennsylvania and New Jersey, you have to carry only the $15,000/$30,000/$5000 limits. That means if you're in an accident involving more than $30,000 in damages, you've exhausted your coverage and you might have to pay the excess. (The three limits specified are, in order, per person, per accident, and property damage).

HOMEOWNERS INSURANCE. In obtaining the right amount of coverage, there are a number of common mistakes.

Take an inventory of your property. You need it to see if your coverage amount is correct. It is also important to have an inventory in the event of a loss. It will be easier to prove, and you're like to forget many items if your property should be totally destroyed due to fire, for example.

It's a good idea to take still photos or video of property, to make proof of loss easier.

Don't assume the market value of your home is the correct insurable value. Get advice on this matter, as it can get complicated. Under the typical homeowners policy, you should insure for replacement value, not market value.

As with the rest of your insurance program, don't set an amount of coverage and then forget about it. Values and circumstances keep changing so reevaluate your coverage amount and insurance program every year or two.

Don't overlook the exclusions in homeowners insurance. The most important is flood. You can get separate coverage for that if you have an exposure. Another exclusion that can be important is earthquake.

LIFE INSURANCE. There are fatter commissions for whole life than term. So don't get pressured into whole life by a commission-hungry agent. For most people, term (without cash value) makes the most sense. There are some cases in which whole life insurance makes sense, but they are unusual for the typical buyer.

Don't make another common life insurance mistake -- buying what you don't need. Life insurance is designed to protect the family in the event of the death of a breadwinner. So you don't need life insurance on children. You don't need life insurance if you have no dependents. (Of course, you can make an argument that if you plan to marry later, you want to take out life insurance now to protect yourself against becoming uninsurable).

Watch out for agents who want to get you to drop an old policy and take out a new one (often, so they can earn the jumbo first-year commission). Sometimes it makes sense to drop an old policy. But often it is a marketing rip-off of the unscrupulous or uninformed agent. Before dropping an old policy, get advice from the agent that sold you the old policy (if someone other than the one who wants to sell you the new policy), and make sure you're not giving up valuable protection which would best be continued.

One final caution. It may be better to buy term than whole life initially, but once you've bought the whole life policy, be very careful about replacing it with term or some other coverage. Once you've made the investment in whole life, it may pay to stay with it. But there are exceptions. There are also some exceptions when whole life makes sense such as for estate planning purposes.

DISABILITY INCOME INSURANCE. This is probably the most overlooked and neglected of all kinds of insurance. There is much more marketing pressure to sell life than disability so it is frequently overlooked.

Two good places to start looking for disability are USAA Life (800-531-8000) and Northwestern Mutual Life, which sells through agents.

HEALTH INSURANCE. This is ordinarily provided through the employer or a union. If you don't have such employment-related insurance, don't make the mistake of giving up. For example, in some state, such as Pennsylvania, Blue Cross is still the insurer of last resort. Another possibility are special programs set up in some states to provide insurance for those who can't get it in the regular market.

There are other viable alternatives when insurance is not available through your employer. But, as with all comprehensive health insurance, the coverage gets expensive.

The CFA also cautions against some kinds of coverage which are usually best avoided: unsolicited mail order insurance policies, student accident insurance and cancer insurance.

LONG-TERM CARE INSURANCE. This is a relatively new coverage and all the problems are still not apparent. So it probably takes more shopping and study than other kinds of insurance. Mistakes are easy to make. For example, if you don't buy inflation protection (so the coverage goes up over time), the policy is likely to be totally inadequate by the time you need it.

Be sure you can afford it for the long-run. It is an expensive form of coverage, so if you buy it and then drop it in a few years, you'll have heavy losses.

(Herb Denenberg is the former Pennsylvania Insurance Commissioner and consumer advocate.).

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