photo credit: alancleaver_2000
Your emergency savings is set aside to be used for NOTHING but emergencies. Right? Right! But that very fund (3-6 months of income) can also be used to help save on insurance premiums. On a side note, make sure your emergency fund is in a high yield interest savings account.
Think of it this way: because the purpose of insurance is to transfer risk from us to the insurance company, having a good emergency fund allows you to assume a bit more risk by raising your deductibles and therefore lowering your premiums. Of course you have to run the numbers to see if this is a good idea for you. I asked my local insurance agent for some generic quotes to help me better understand how higher deductibles would affect auto, homeowners and health insurance. This is what I learned:
Auto Insurance
A quick and easy way to lower your auto insurance premium is to raise your auto collision deductible from $100 to $1000 will normally save you $500/year on premiums. This is good news if you have that emergency fund in place because you would only need to go accident free for about two years to justify the higher deductible. Of course if you are accident prone, you may be better off with the higher deductible and higher premium.
Homeowners Insurance
My agent told me that most could expect a $100/year savings of on homeowners insurance premium by raising the deductible from $500 to $1000. Is this savings worth the higher deductible? Saving $100 a year on premiums, you would need to go five years without a claim to justify the higher deductible. Because I buy homeowners insurance to cover major events, I don’t mind the high deductibe. I keep it high and take that savings in premium.
Health Insurance
While the auto or homeowners savings may not dramatically change your world, the potential savings in health insurance premiums could. My agent told me that a family of four in good health can reduce their premiums from $600 per month to $300 per month by switching from a traditional $25 co-pay plan to a High Deductible Health Plan (HDHP). Understand that this plan requires a family deductible of $4,000 per year, but with an annual savings in premium of $3,600, it is possible (with NO health costs) to save nearly all of that deductible in one year. Even if your family health costs are normally $200 a month, you would still be able to save $100 a month over the traditional plan.
And it keeps getting better, because when you place those premium savings in a Health Savings Account (HSA) you could save you another $1,000 in taxes. Why? Because contributions to an HSA are tax deductible. This is worth getting excited about, but don’t get caught up in the euphoria of HDHP unless you already have an emergency plan in effect. Why? Because you have no way of paying your share until you have the deductible amount available. And make sure you use that savings in premiums to build up your HSA, not only for the tax break, but in order to keep a separate emergency fund specifically earmarked for health needs.
In summary, if you already have an emergency fund, you should check with your agent to see how a higher deductible could help you save on premiums. If you don’t have one, you need one. Start saving for it today.
Hi Joe,
I, too, am a fan of high deductible insurance plans. With my auto insurance, for example, I have saved enough over the years to buy my car 4 or 5 times in unpaid premiums. Don’t currently own a home, but we do have renter’s insurance. Like you, I figure it’s only for major events, so the deductible won’t really matter to much as a percentage of cost and recovery. Thanks for the post.