When something seems too good to be true, it usually is. Purchasing insurance is often a grudge purchase, but most believe its better to be safe than sorry. However “Caveat emptor” which means “Let the buyer beware”. This industry makes it’s living off ‘risk assessment’. There are many insurance traps hiding in plain sight. Too often we think it is such a hassle to read the entire policy document or to review the terms and conditions but this is exactly how these traps work. They rely on us not understanding everything fully. Read the fine print carefully before signing what could be your life away, or leaving your family saddled with huge tax bills. Make sure you understand the implication and extent of the cover. Here are 8 Annoying and Costly Insurance Traps to Avoid.
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1. Excess
The most common insurance trap is excess on auto or vehicle insurance. This type of insurance is probably the most competitive, and therefore has more hidden clauses and exclusions. In most countries it is law to insure a motor vehicle that is to be used on public roads. This insurance can be costly with many exclusions and excesses also known as deductibles. Your premiums may seem low but it might be tied to high excesses, so in the event of a claim you may find yourself paying the first $1,000. Not the best trade off for reduced premiums.
2. Reduced Premiums
Your broker or agent will offer reduced premiums if you fit into or comply with their profile of low risk. The insurance trap of this system is that the lower the premium, the lower the rate of cover. You could find yourself having to pay in after a claim. This would apply to most short-term cover. Think about an extra monthly cost, rather than trying to come up with a lump sum after the fact, especially if you have been injured or unable to work.
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3. Low Mileage Premiums
The popular ‘hook’ or insurance trap is pay as you drive. This means that you have a lower premium if you drive a specified mileage per annum. Should this amount change you become liable for the additional premium shortfalls.
4. Gender
Actuaries have calculated that men drive on average higher miles per annum and have more accidents than women. Previously, because of this, women have enjoyed lower premiums than men. This year this was ruled as sex discriminatory by the European Court and European insurers have all had to bring premiums for both men and women to equal levels.
Keep a careful eye on the gender laws and conditions. You may find you can’t get a massively reduced premium because you are a woman, but you can make savings with your impeccable driving record.
5. Under-Insured
Being under insured is another insurance trap that can catch you unawares. Does your vehicle or household policy value compare with your insured amount? Often when a car is ‘written off’ the settlement of the vehicle (after excess deductions) is nowhere near the replacement value or the settling of any outstanding loans against the vehicle. The bank gets first bite out of this payout.
The same applies to homeowners. If the assessor believes you are underinsured then only a percentage of the claimed value will be paid out. All of a sudden, having 300 DVDs becomes a very expensive collection to insure and affects the overall value of your home. When you renew your home insurance, check the level of cover you’re paying for. Your home possessions change every year – make sure your insurance follows suit (see also point 4).
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6. Automatic Annual Renewals
The Annual renewals insurance trap is that the increase in your premium does not necessarily mean increase in your cover. Each year your insurer will send you documentation detailing all your cover and excess amounts. The onus is on you the policy holder to advise of any adjustments you need made to keep inline with inflation and replacement costs (as in point 3 above). Most people fall into this insurance trap, they don’t make the correct adjustments only to find there is a shortfall when submitting a claim.
The bigger issue with annual renewals though, is that although you may be satisfied with your level of cover, by simply renewing with your current provider means you could be missing out on a better deal.
The insurance market is incredibly competitive. Companies are looking to keep existing customer and gain new ones. At renewal time, you have the upper hand. Look around for a better deal than your current provider is offering and then go back to them to negotiate. If they value your business, you’ll end up with an offer that not only beats their original offer but also undercuts the better one you found.
7. Specified Items
Don’t assume that an item in your home is automatically covered especially with high-risk items like mobiles and laptops. Read all the terms and conditions carefully. Make sure you understand the exclusions. Most home insurance traps are that there is a limit allowed on a single item. Specify your valuables. This may increase your premium but will serve you well when you have to claim for your designer shoes or that piece of antique furniture. When specifying your electronics, make sure that they are also covered for when you are not in your home or place of business.
8. Death Benefits
The cruelest insurance trap is death benefits. Shortfalls, estate tax implications and being the ‘owner’ of the policy when you die create problems for your next of kin or beneficiaries. When you die owning a policy on your own life, the proceeds become part of your taxable estate. This leaves your family not as well provided for as you anticipated, as they have to pay the relevant taxes. Make sure your life insurance policy is air-tight and will provide for your family after covering any expenses.
Insurance isn’t the easiest subject to understand but there are basics we should all know. Don’t get caught in the insurance trap - read your documentation carefully. Do your research online for competitive quotes. Sign up with an established and trusted broker or agent with stable underwriters – doing this you’ll identify those Costly and Annoying Insurance Traps to Avoid.
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