Being sold an insurance plan that does not meet your needs is a common occurrence. Other than dragging down the amount available for your wealth building, overpaying for certain types of insurance might mean under coverage in other areas.
Here are some common reasons why people are over insured
1. Not being truthful – An insurance agent’s job is to ensure that you get sufficient coverage for your risk profile and they tend to do this in a hurry. Doing a needs assessment on the very first meeting without knowing someone well enough and expecting them to tell you squarely about their financial health is somewhat overly optimistic.
People are naturally egoistic or overly conservative. Can you imagine buying a income replacement insurance for someone who was not truthful about his income? Here is “the” one time where it literally pays to be honest. Expecting your insurance agents to work backwards, probe and piece your financial dots together, is akin to asking a hairdresser if you’d need a haircut.
2. Knowing who your dependents are – I would say this, if you are currently spending all of your salary on yourself – you have no dependents. If you give a small allowance to your parents whom would really be fine without you – you have no dependents.
A dependent is someone who would be unable to care for themselves financially should you not be there for them. For someone to be beholden to your income is some legit responsibility. You have to think really hard about this, otherwise you’ve just put a bulls eye over your head, where everyone is rewarded upon the insurance trigger event.
3. Not knowing a want from a need – This is a seriously wrong time to confuse wants and needs. People who base their monthly payouts on their current income in the case of disability are at real risk of overpaying for insurance. You should really be looking at your expenses plus cost of care. You are not going to be driving your car if you’re bedridden.
4. Forgetting your time horizon – Insurance agents are there to cover you through the various stages in life. Get affordable coverage for your current stage in life and review and add when you get older. Buying insurance while thinking of future children is foolhardy and a surefire way to overpay.
I’ve written about how important cash flow is to your financial life and wealth building journey. Over time, as your needs and circumstances change, it would be good to review and re-look your insurance plans, rather than thinking of the worst possible scenario at the outset.
Over paying for insurance early in your financial life can be a real drag on your ability to generate passive income. Don’t over insure to the point where you’ll be financially rewarded for triggering the insurance.
Lastly, insurance money is meant to supplement your wealth and ensure that your dependents downside are covered. Don’t mix insurance with investments.