Retiring Gay, Part Three: Insurance - Not Fun, But Necessary

Editor's Note: This series, Retiring Gay, primarily considers the financial steps to successful retirement. However, preparing emotionally for retirement is equally important to a happy, fulfilling and successful retirement. Planning for retirement is your opportunity to reconsider day to day living. Insurance, investments, spending, savings, socializing, residence and many other considerations change. Reaching retirement with a well executed plan makes your transition to a post work life easier and more fulfilling.

Insurance is a fact of life. As you accumulate assets it pays to have proper insurance as protection against the total loss of all you have worked to create and accumulate.

Most states require that drivers buy auto insurance to drive on public roadways, enforced as a condition of legally registering your car. Lenders require insurance to protect them in the event that their collateral is damaged or lost. Medical service providers will ask for proof of your insurance coverage prior to providing care.

Everywhere you turn there exists an opportunity to insure your every activity. Insurance transfers money from your pocket to the insurance company, so let's take a look at what you get for your premiums.

Policy holders pay monthly in the unlikely event some catastrophic event will happen and wipe them out financially. You want to have insurance. The coverage and rates are often government controlled. So where is your flexibility?

First there is shopping among primary providers. Going with low level no name organizations only invites problems in the event of a loss; particularly a major or widespread loss that might force a small company out of the ability to cover losses. Most often, this possibility is overseen by governments that will step in when an insurer goes under, but why put yourself in the position of having to collect from a government agency? Go with the big guys, they are less expensive in the end; they can take care of everything because they know how and have the resources to do whatever is required in your situation.

Once you have chosen a secure carrier the primary way to save on insurance costs is deductibles. Most insurance claims are small. Insurance companies know that and price coverage accordingly. Buy a policy with the highest deductible allowed by the insurer or the lien holder that you can afford in the event of a loss. In reality you become the insurer of first risk and the insurance company doesn't pay unless the loss exceeds the deductible. A benefit of high deductibles is that the insurance company doesn't even know about incidents you self insure, eliminating the risk of premium increases based on claim history.

When you are looking left and driving right and skim the back corner of another car you don't need insurance for that. Know you were at fault, reach for your wallet and repair the other car.

As you consider retirement consider where and how you will live. Even if your lifestyle doesn't change a great deal take advantage of discounts for driving less, for taking a safe driver course, and combining auto and homeowner policies. Check rates before buying a new car which vary greatly by model, raise deductibles wherever possible and eliminate unnecessary insurance altogether.

Higher deductibles lower premium costs. Presume that the premium for your automobile policy with a $100 collision deductible is $1,000 for a year. Your car cost about $25,000 and you have to pay $1,000 to insure it.

What if the deductible was $500 and the premium was $800? You take on an additional $400 risk (the new deductible less the original deductible) and the premium drops $200. This example shows that the next $400 of risk is worth $200 to the insurance company. The cost of that additional $400 worth of coverage is $200, or 50 percent. The $100 deductible policy provides $24,900 coverage for your $25,000 automobile at a cost of 4 percent. The $500 deductible policy provides $24,500 coverage for your $25,000 automobile at a cost of 3 percent.

Insurance, regardless of the coverage, is for catastrophic loss only. Carry the highest deductible you can pay in the event of a loss and let the insurance company insure the rest. The difference in premium is yours to keep and looks much better in your pocket than theirs.

Ric Reily is the author of two books, "Money Is The Root Of All - Skip The Debt Habit," and "Gregory's Hero." You can reach him at [email protected]