Penny Wise and Pound Foolish
Do you remember as you were growing up having your parents tell you not to be penny wise and pound foolish? I related to the penny but didn’t know what the pound was until I found out it was the British cash equivalent to our American dollar, and then I understood the words of advice.
There are many purchases one can use as examples of penny wise and pound foolish expenditures which, if considered with a little more look into the future, would not be made. For example, purchasing a car at a discount price due to an oil leak from the engine; a pair of shoes which perfectly fit a child who is in an incredible growing spurt and will need more shoes before these have time to wear out; an inside cabin on a cruise ship to Alaska where for a few more dollars you could have a outside balcony view; choosing to go on vacation in the off season where you have the choice; or, flavorless grapes or oranges when for a few pennies more get delicious flavorful grapes or oranges organically grown.
Insurance Policy Options
When you purchase your home, several insurance policy options are available as to how you will protect its value. These options come in the types of perils you want to insure against such as fire, windstorm, vandalism, earthquake, volcano, theft, to name a few.
The choice you make varies from a policy which provides coverage for fire only with an exception sometimes for glass breakage, to a policy which states it covers every physical loss except the ones excluded in the policy. This policy was formerly labeled an all risk policy, but this was confusing since not everything which could go wrong was covered; so the terminology was changed to “special perils” policy.
Saving Money Method–Reduce Covered Perils
The saving of money comes in eliminating as many perils from coverage as you can. This is possible due to the way insurance companies have structured their policies.
The insurance companies have developed standard uniform policies with standardized language so they can reduce their costs by not having to customize each policy sold in the marketplace. Consequently, your choice will boil down to one of possibly four policies.
- The least expensive policy will identify that you are covering your property for just the peril of fire; so if anything else goes wrong, there is no assistance to help reimburse you for your loss.
- Next in cost is the standard policy which gives you coverage for nine specific named perils: fire or lightning, removal, windstorm or hail, explosion, riot or civil commotion, aircraft, vehicles, smoke, and vandalism or malicious mischief.
- Then comes the policy which gives you coverage for 26 named perils (see your personal policy for enumeration.)
- Finally, special perils which states you are covered for all physical loss except those which are specifically excluded.
Point of Clarification: All homeowner policies have various associated coverages tied to the value of the home. For example, the policy declaration page shows a home insured for a specific amount with a certain percentage of that amount designated for appurtenant structures, personal belongings, and loss of use. Some companies also declare an amount for sewage or sump system backup and limited fungi, wet or dry rot, or bacteria.
If you choose to do a fire only policy or a perils 1-9 policy, all these other policy benefits are not included in the premium. They possibly may be added for an additional cost.
You may find purchasing the above types of policies save you money but may find the limitations on accompanying benefits to be too great a cost, so staying with a special risk policy and using the following methods for saving money may be more palatable.
Saving Money Method–Use of Deductibles
This is perhaps the most logical method of keeping your premium down. Chances are you will go some time before you would ever have to submit a claim, so saving several hundred dollars every year will go a long way in paying the deductible when it is required. Insurance companies usually give a pretty decent premium discount when you are willing to take on more of the smaller claim responsibilities, and it also shows some pride in ownership where you are willing to participate in claim management.
Saving Money Method–Take Advantage of Co-Insurance Provision
Most structural losses are partial in nature; so why not take advantage of the insurance company’s agreement that if you will keep your home insured to at least 80% of its replacement cost and you have a partial claim, the company will still pay 100% of loss minus deductible.Taking advantage of this 80% co-insurance will not adversely affect how your personal belongings are handled in a claim, other than there will be a reduced amount of dollar coverage commensurate with the 20% less coverage on the home. Again, the odds are, the premium saved will offset your potential loss over time. Of course, you always run the risk you may be the unlucky one to have a total loss and that would hurt; but that’s part of the equation you have to deal with.
Summing It Up
In the present day marketing approach of “pay only for what you need” to attract customers, buyers need to be sure they are not being penny wise and pound foolish when it comes to keeping expenses down when purchasing insurance. Trying to look into the future to determine what risks will present themselves and then to insure against them is pretty tenuous at best. If the proper insurance isn’t in force before the loss, trying to get it after the fact is like trying to order up a parachute as the plane is coming down–isn’t going to work.
With insurance companies’ many years of researching and developing policies to protect customers’ assets, a buyer needs to take advantage of that expertise and with proper planning use only the tools available to reduce the cost without affecting the insurance coverage needed.