Is It Possible to Have Too Much Insurance?

Among experts, it is well known that many people buy too much insurance. Some people purchase piece-meal insurance, which means they insure various things with multiple policies. In some cases, these things do not need to be insured at all because other contractual agreements take care of the cost. Other people buy insurance on important things like their house or car, but choose lower deductibles than necessary. Although it is important for people to be insured, buying too much insurance in this way can have a negative impact on a person’s savings account.

Many people buy too much insurance because they are not aware of what their current policies or contracts cover. As an example, some companies offer tuition insurance, which pays out a portion of a student’s tuition should he or she become sick and drop out. This kind of insurance is rarely necessary because most schools have policies that deal with critical illness and refund some of the student’s money. Identify theft insurance and cancer insurance are other policies that usually fall under a credit card company’s policies or local law and a person’s primary health insurance company, respectively. In addition, insurance policies that cover things like cancer sometimes do not cover the most common forms of cancer, like skin cancer.

Sometimes people buy too much insurance to be well covered, but they could be saving a lot money. For example, if a driver has never had an accident in the past 15 years, he or she could save money by raising the deductible on his or her automobile insurance. It is unlikely for that person to have an accident in the near future, though it is always a possibility. Of course, it is necessary that he or she make sure the deductible is affordable, but this is often possible by simply not spending some of the money that is being saved by having a higher deductible. Whether to raise a deductible on an insurance policy can be a very personal finance decision.

A general rule of thumb is to avoid insuring against events that are incredibly unlikely to happen. For example, people who have just given birth are often bombarded by offers of low-cost infant life insurance. The insurance pays for burial costs if the infant dies within a certain amount of months after its birth. Infant deaths are relatively rare in places where this insurance is usually offered, however. In addition, locking in a low price on whole life insurance might be a more financially responsible decision.