Save 70% on your insurance with this one weird trick!
Buy less of it. That’s right, just buy less. Buy a lot less.
When my wife and I started down this path to financial independence, we were spending almost $1200 per month on insurance. Why was that? Because everyone told us to. Smart people buy insurance, and we were smart, right? We took out comprehensive coverage for our 10-year-old cars, so that if a runaway shopping cart in the WholeFoods parking lot happened to ding one we’d be covered. We took out low deductible homeowners insurance so that if a dog farted on our lawn we’d be safe. I took out legal cost insurance from my employer because…reasons…apparently in a haze of HR presentation induced amnesia I forgot that Mrs. Grizzly is a Lawyer and a pretty good one that. In so many ways we had insulated ourselves from any possible financial outlay; all the while, massive amounts of cash were flushed down the toilet. It was one of the single largest line items on our budget outside of our mortgage payment. And it was almost all a complete waste of money.
The amount we were overpaying to be insured from risk was staggering. Let’s take car insurance as an example. We were maxing out everything on our car insurance to hit $150 per month – rental replacement, towing, comprehensive, collision, etc. Let’s isolate in on just one element – collision. There is readily available data on the number and cost of car accidents in the US from the DOT and various insurance publications, so we can do a rough back of the envelope calculation to determine the average cost for a company to ensure the Grizzlies. Let’s see just how much the insurance company was sticking it to us in any given year.
|Collision Insurance||Cost per month||Source|
|Our collision cost per month||$56|
|Our collision cost per year||$672|
|Our annual miles driven||4000|
|Accidents Per Million Miles||4.49||NY DOT|
|Our projected # of accidents per year||0.018|
|Average collision claim per accident||$3,144||RMIIA|
|Average annual cost of our accidents||$56|
|Amount we overpaid per year for collision||$616|
|% we overpaid||92%|
|Total car insurance cost per month||$153|
|Total we overpaid per month||$140|
|Total we overpaid per year||$1,682|
|Total we overpaid on ALL insurance per year||$12,673|
I always knew that the house won when it came to insurance. Insurance companies make money after all and lots of it. They employee teams of very smart people to discover exactly how much on average everyone and everything will cost. But I had no idea that I was paying over 94% above my actual costs. Extending this out to the full auto policy we were paying almost $1700 a year more than necessary. Extending this to all our insurance products we were likely paying almost $13k more than our actual costs. After doing this math and reading this post, we changed our ways. We now only buy insurance under a two circumstances.
- We are forced to buy it – i.e. car insurance
- The potential cost would be large enough that we would not want to absorb it with our savings. e.g. earthquake or other massive damage to our house, high medical costs
As a result of this simple change were now spending $752 less per month for a total of almost 70% savings. Using the handy time vs. money calculator, we removed 1.12 YEARS from our working life. This took me about 10 minutes on my computer one night to log in to USAA, change our policies, hit update. 10 minutes for 1.12 years of my life. Not bad for such a simple trick. So what insurance do we have now?
- Auto Insurance from USAA – $60 per month for liability, nothing else.
- Homeowners also from USAA – A 5% deductible for earthquake and a $15k deductible for everything else
- Medical insurance through my employer – PPO plan for $130 per month
- Life insurance – we pay about $30 per month for a $750k policy on each of us through our employers. This is for one very specific reason. In the (very low probability) one of us kicks the bucket we want the other to still be able to execute on the plan in the same time frame and without moving if necessary. We view this as a significant enough long tail risk that we carry the monthly cost. This goes away once we actually have enough to self-insure against even this risk. Other situations where I think life insurance makes sense would be in situations in which one spouse significantly out-earns the other and there isn’t enough in savings yet. Or in the case of having children with special needs that would cost significant amounts of money to care for properly without parents in the picture. (This should be the topic of a much longer post!)
That’s it. Nothing more. No personal property insurance, no legal insurance, no collision, no comprehensive auto. We will take the money we save on insurance and continue to invest it every year. And get an ever-growing snowball of cash behind us. In the event something happens that we used to be insured against, we will simply pay for it gladly and move on. We’re our own insurance company now, and very happy to be raking in that 92% profit margin every year for the rest of our lives!