How to Pay Less for Insurance Without Sacrificing Safety

Good morning!

As I continue building the upcoming membership platform, I’m getting more excited about the content that will soon be available through a gamified experience designed to help you grow wealth across four key areas: time, flexibility, money, and purpose.

In the meantime, here’s a lesser-known strategy that can help you play the odds with insurance companies—and potentially save money over the long run.

One more tool to keep in your financial back pocket.

FINANCIAL TOOL
How to Pay Less for Insurance Without Sacrificing Safety

Insurance is one of those necessary expenses that few like to talk about, but we’re glad it’s there if we need it.

Insurance premiums are set up to benefit the insurance company in the long-run, and us in the short-run.

That is, they agree to pay for a certain financial disaster, unlikely as it may be. And we agree to pay small monthly premiums to them for this safety net.

But the likelihood of a massive disaster costing hundreds of thousands of dollars is very low. That’s why the insurance company usually wins with enough customers. They play the odds, and the odds win out for them.

How can we turn this to our advantage?

Allow me to lay the foundation.

There are two types of safety net accounts that we should have as part of a complete budget system: the Emergency Fund and the Preparation Fund.

The Emergency Fund covers expenses that are unlikely: sudden job loss, medical emergencies, and emergency travel.

The Preparation Fund covers expenses that we know will happen, although timing is usually unknown: home repairs, car repairs, car replacement, doctor visits, etc.

Let’s zero in on the Preparation Fund. The goal for this account is to build to the value of at least the biggest surprise expense on the list. That could mean roof replacement deductible, car accident deductible, or health plan deductible.

Now circle back to insurance. Insurance is set up for the insurance company to win, but also to make sure we don’t totally lose everything. In other words, instead of risking the loss of everything, we guarantee the loss of a little bit that we can control (premiums) in order to avoid the risk of total loss.

But what happens when our Preparation Fund builds higher than our existing deductible on home, auto, or health insurance? If we have a deductible of $5,000, but a Preparation Fund that could cover $10,000, we are now essentially self-insured for a higher deductible—meaning we can afford to take on more of the risk ourselves, without depending entirely on an insurance payout.

We’ve built up reserves to handle higher deductibles if something goes wrong.

At this point, we can afford to raise our deductible on one or more insurances up to the level that is covered by our Preparation Fund. Now there should, of course, always be a cushion of margin above the deductible amount. Don’t ever max out your insurance deductible to exactly the level of your liquid cash, because there will be more than one surprise that places a demand on that cash.

But here’s the thing. If you could save, for example, $80/month by raising a deductible by $5,000, you could save that extra $80/month into a savings account like the Preparation Fund, and it would amount to $5,000 in about five years.

Of course, this approach carries risk—if you experience a large claim before you’ve fully funded your Preparation Fund, you could be on the hook for more than you’re ready for. Or if several unexpected expenses hit at once—like a car repair and a medical bill—it can strain your Preparation Fund and leave you financially exposed. So this is not one-size-fits-all advice, and it’s worth speaking with a licensed professional before adjusting your coverage.

The risk is, you still may lose on this bet. Insurance is always playing odds, and odds mean that sometimes, the event with the rare chance can still win out.

But while a large claim could still hit earlier than expected, over several years, many people can come out ahead by making it a habit to align deductible levels with their actual savings

As you build wealth (pay off debt, build an emergency fund, build a preparation fund), saving becomes easier—because you’re consistently freeing yourself from dependence on lenders and insurance companies.

And you propel further and faster as you gain momentum.

This content is for educational purposes only and does not constitute personalized financial advice. Please consult a licensed financial advisor—such as myself—or an insurance professional before making changes to your coverage or financial plan.

Daniel Lancaster, CFA

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