The only important insurance…is the one you’re about to use.
Insurance is an intensely personal issue. People run into trouble because instead of fitting an insurance type to their specific need, they settle for the same rules of thumb used by others.
If there’s one group that can’t afford a one-size-fits-all approach, it’s artists. We have such unique needs that the wrong insurance will cost you time, money and patience (not necessarily in that order).
You don’t have time for something to go wrong, and you may not have the money to fix it later.
How to Shop for Insurances
The key to a successful insurance plan is to begin with your goal. For most of us, there is only one reason to own any insurance: we may need money when disaster strikes. This cash provides a cushion so we’re able to financially emerge from whatever pit we’ve fallen into this particular time.
Insurance planning is a game of probability.
- What is the chance you’ll die this year?
- How likely is it that you’ll have a car accident?
- Is there a chance your apartment or home will burn down?
- Will you suffer a career-debilitating disease?
You won’t know the answer to these questions, but your lifestyle can provide clues:
- How old are you?
- What is your career? What are your career-specific risks?
- Do you smoke? Do you have fire equipment or live close to a fire station?
- What’s your family health history?
The answers to questions such as these will help you piece together your risk profile, which will help you decide what’s most likely to occur in the future.
How Insurance is Priced
Providers of insurance are in the “protect your butt” game to make money, but most reputable firms are handcuffed by competitive factors. While there is a small chance you’ll be ripped off by an insurance firm, there’s a better chance you’ll buy the wrong insurance and waste money. Generally speaking, most insurances are fairly priced.
That’s why it’s important to understand how insurance companies view a policy.
An insurance company will add the amount they need as profit to stay in business to the amount they believe they may have to pay out in claims. As an equation, it looks like this:
Amount of claims + Profit = Price of Policy
Why is this important? Because you should use these same factors when buying a policy. If a company pays out a lot of claims, there’s a higher probability you might be hit with the same type of insurance need.
Most people do the exact opposite. They buy insurances that have a low number of claims…but they don’t see it that way. They buy insurances with only a few claims because they think the policy is cheap.
As an example: disability policies are often ignored because they’re expensive. Looking at it from an insurance company’s perspective gives you a clue why: they have tons of claims on disability policies and pay out lots of money.
In short, disability insurance is expensive because they think you’re going to become disabled.
Instead of ignoring disability coverage, many artists should be figuring out how to have adequate disability insurance as a part of their insurance portfolio.
Health insurance is another expensive proposition. There are many unhealthy people out there. If we ignore the politics of health insurance (we can do little to change the political situation overnight), it’s important to figure out how much is the right amount for you.
Here’s your homework:
- Write down all the pitfalls in your plan.
- Place price tags next to each item. Example: You become disabled for two years. How much money would you need to bring in to cover your rent, groceries and utilities?
- Review your assets to determine if you can withstand the risk of a pitfall occurring. If you have enough money, you may not need insurance.
- Prioritize the pitfalls.
- Begin researching the two or three most important types of insurance to make sure you have the best policy for you and the lowest price.
In two weeks we’ll talk about how to buy an insurance policy.