Leveraging Credit to Save Money on Insurance

Your lines of credit can save you money on your insurance. Money that people are willing to lend you, but that you don’t have to draw upon, can end up meaning that you can choose higher deductibles in your insurance policies. Because insurance is so inefficient (where every dollar you buy only pays out cents on the dollar), choosing higher deductibles and relying on lines of credit to pay for unexpected expenses can end up with you saving money. Here’s the details on how this can work for you.

Understanding Deductibles

Before delving into the benefits of higher deductible insurance, let's first understand what a deductible is. From the Coverage Cat Glossary: A deductible is the amount of money you’ll pay out of pocket before the insurance coverage kicks in to cover the remaining costs. For instance, if you have a $1,000 deductible and you incur $5,000 in damages, you would pay the initial $1,000, and your insurance would cover the remaining $4,000.

If You Can Afford It, You Should Pick High Deductibles 

High deductibles means the insurance company will pay out less often, which means they’ll give you lower insurance premium costs, allowing you to save money in the long run. By assuming a greater portion of the risk, insurance companies reward policyholders with reduced premiums. Secondly, high deductibles give you more control over your insurance coverage. If you have a stable financial situation and can comfortably afford a higher out-of-pocket expense in the event of a claim, opting for a high deductible policy will reduce your claims rate. Lastly, high deductibles can encourage responsible financial behavior. When faced with a larger deductible, individuals tend to be more cautious and take preventive measures to avoid filing claims for smaller expenses. This approach can help you maintain a good claims history and potentially reduce future premium increases.

Higher Deductibles Relying On Insurance Less

Let's consider a hypothetical scenario where you have a high deductible insurance policy for your home. 

1. One day, a mild storm passes through your area, causing minor damage to your property, such as a few shingles coming loose. 
2. Since you have a high deductible of $5,000, and the estimated cost of repairs is $2,000, you realize that it falls below your deductible threshold. 
3. In this case, you won’t file an insurance claim because the cost of repairs is within the range you can comfortably handle without relying on your insurance coverage. 
4. By opting not to file a claim, you avoid the hassle of dealing with insurance, and avoid premium increases that result from making claims. Maintaining a clean claims history gives you more insurance options and saves you money on premiums.

When You Shouldn’t Pick High Deductibles

While high deductibles can be beneficial for those who can afford it, there are certain scenarios where it may not be advisable to choose high deductibles. Here’s some factors to consider if this is right for you:

1. Limited Savings: If you are facing financial instability or have limited savings, selecting a high deductible insurance policy may not be the right choice. Higher deductibles require you to pay a significant amount out of pocket before insurance coverage kicks in. If you are unable to comfortably cover the deductible, it could lead to financial strain or potential difficulty in meeting other essential expenses.
2. Limited Access to Credit: If you don't have access to credit or borrowing options, and you don’t have personal savings to use, selecting a high deductible insurance policy may not be feasible. Without the means to cover the deductible in the event of a claim, you risk being unable to afford necessary repairs or replacements, leaving you financially vulnerable.
3. Limited Emergency Funds: If you don't have an adequate emergency fund to cover unexpected expenses, it might be prudent to opt for a lower deductible insurance policy. A lower deductible ensures that you have a safety net in place, allowing you to afford necessary repairs or replacements without relying heavily on credit or struggling to come up with a large sum of money.
4. Frequency of Claims: If you anticipate filing insurance claims regularly due to the nature of your property or specific circumstances, it may be more cost-effective to choose a lower deductible. High deductibles are more suitable for individuals who expect to make infrequent claims and can comfortably handle larger out-of-pocket expenses when they arise. However, frequent small claims are likely to get you dropped by your insurer, so it may be worth asking what you can do to reduce the claim frequency anyway.
5. Risk Tolerance & Peace of Mind: It's essential to consider your personal comfort level when choosing a deductible. If the idea of paying a higher amount out of pocket in the event of a claim causes significant stress or anxiety, it may be preferable to opt for a lower deductible for peace of mind.

Using Lines of Credit for Higher Deductible Insurance

If you don’t have an emergency fund, you can still use higher deductible insurance, by relying on lines of credit to cover unexpected sudden expenses. Access to credit is risky because you can be charged high interest rates though, so it is important to use debt optimization strategies, rather than just paying in the most convenient way.

Optimizing Your Credit to Save You Money

Many companies offer strategies for optimizing your access to credit. New entrants to this area, like Upstart offer personal loans, and loan optimization companies like Solve Finance can help you find the best lines of credit that will charge you the least and give you the most flexibility. This can enable everyone to better access higher deductible insurance and get the best of both worlds: low interest rates for the rare occasion you need debt to cover an unexpected disaster, and low insurance premiums to save you money every day.