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You never know when a financial emergency may strike. A car accident may require a trip to the mechanic, a storm may damage your home or you may need the services of your local doctor.
These three scenarios can get expensive in a hurry and drain your savings. That’s why many people take out insurance to reduce their financial risk, but those same policies can take you away from long-term goals.
Some people end up paying premiums that consume a large portion of their monthly budget. Although there is a balance between zero insurance and too much coverage, these are some of the most common signs that it may be a good idea to reduce your insurance coverage.
Insurance takes up more than 10% of your budget
The optimal amount of insurance coverage depends on each individual, but if premiums are taking up more than 10% of your budget, it’s a good idea to reevaluate your policies. These are the key learnings from Andrew Izyumov, Certified Financial Advisor (CFA), Founder and CEO 8figures.
“If your total premiums take up more than 10% to 15% of your take-home pay, you’re probably overinsured. Think of insurance not as an investment, but as a way to protect yourself,” Izyumov said. “The best way to save is to ‘self-insure’ for small expenses. I recommend raising your deductible to the highest amount you can comfortably pay from your savings. This will lower your premiums much more than keeping a low deductible.”
You have coverage for minor problems
Just because you can get insurance doesn’t mean you should. Extended warranty, cellphone insurance, and flight insurance are some of the policies you don’t need.
“Focus your insurance on rare but serious risks that can really hurt your finances, and stop paying for coverage for smaller issues. This way, you can keep more of your money invested and working for you,” Izyumov said.
overlapping policies
If you have too many insurance policies, you may have to pay twice for the same coverage. This overlapping coverage does not benefit you, but you still have to pay an additional premium.
“Review your ‘riders’ and add-ons,” suggested Izyumov. “Many people pay for things like ‘towing’ or ‘accidental death’ that are already included in a AAA membership or basic life policy, so this is just extra.”
Getting rid of unnecessary policies can quickly free up cash flow that you can save and reinvest. Insurance can provide some financial coverage during emergencies, but it is not intended to replace long-term financial goals, such as building a larger nest egg. Reducing your insurance coverage frees up more capital and can put you in a stronger financial position while insuring yourself against the worst-case scenario.