Insurance

Last update:  March 8, 2024

How insurance companies make money

Insurance companies make their money by receiving more in premiums (customer payments) than they pay out in claims (compensation for customer losses).  So mathematically, insurance isn’t a good deal:  The average person will pay more in premiums than they receive in claims.  The reason that we buy insurance is that if disaster strikes and we didn’t have insurance, we couldn’t afford to replace the car or the house, or pay for massive medical bills.

Terms and concepts you need to know

Policy.  An insurance contract.  This is what you're buying.  For health insurance, it's also called a "plan".

Premium.  This is the amount you pay to the insurance company for your policy.

Benefits.  This is what the insurance company pays to you when you have an expense or loss.  Losses are sometimes called "perils", especially with homeowners insurance (e.g., fire, hail).

Claim.  Your request from the insurance company to reimburse you for a loss.  For example, if you stuff gets stolen, you file a claim.  When you go to a hospital, doctor, or lab, they file the claim for you.

Provider.  A business that provides services.  For car insurance, it's the body shop and/or mechanic that fixes a car after a crash.  For health insurance, it's a doctor, hospital, lab, etc.

Deductible.  This is the amount you have to pay to providers before insurance starts paying a larger amount.  For car and home insurance, you'll pay 100% of the costs to providers until you meet the deductible, and then insurance pays 100% of the rest.  For health insurance it's different, I'll cover that below.

Deductibles reset to zero every year when the policy renews.

You can choose how high or low you want the deductible to be when you buy insurance (within the minimum and maximum the insurer offers).  A higher deductible means you'll have to pay out more when you have a loss before insurance kicks in, but it lowers your premium.  There is no formula or standard advice for how to choose this.  You'll have to decide whether it's worth it to you to pay more for a lower deductible in order to lower your risk.

1. It refers to what kinds of things your policy covers.  For example, if your policy covers liability, then you have "liability coverage".
2. It also refers to how much insurance you have.  For example, I have $750,000 in coverage on Treehouse, which means the insurance company will pay out up to $750k if it burns down.
3. So, coverage refers to both what kinds of things are insured, and how much they're insured.

Health insurance

Deductibles work differently for health insurance vs. car or home insurance.  For health insurance, it's NOT the case that you pay 100% before you meet the deductible, and that insurance pays 100% after you meet the deductible.  Even before you meet the deductible, some medical services will be free or discounted, and even after you meet the deductible, you'll continue to pay some of the cost of providers until you meet the MOOP (Maximum Out Of Pocket).  Here's how it works:

1. Free before you meet the deductible.  Generally, things like vaccines, annual checkup, and other preventative care are often free, even before you meet the deductible.
2. Discounted before you meet the deductible.  You generally pay a "copay" for doctor office visits of like $25, $50, or $75.  (Our crappy Golden Rule insurance doesn't have this feature, we pay 100% for office visits, although most providers give us the "Contracted Rate" which lowers the cost a bit.  So, we pay 100% of the Contracted Rate, which is lower than the full rate.)
   
3. The range between the deductible and the MOOP (Maximum Out of Pocket).  Let's say your policy has 30% coinsurance, a $5000 deductible, and $9000 MOOP.
1. You pay 100% of hospital costs until you meet the deductible of $5000.
2. Once you've met the $5000 deductible, you pay 30% of costs until you've paid the $9000 MOOP.  (The MOOP doesn't start over at $0 when you hit the deductible, it continues from the $5000 that you already paid.)
3. Once you've paid $9000, hitting the MOOP, then insurance pays 100% of the rest, up to the policy maximum.
4. Some policies are unlimited, meaning that after you hit the MOOP, they'll pay no matter how much the costs are.  But most policies have a "lifetime maximum" of like $250,000, or $1 million, etc.  With these policies, once insurance has paid out the lifetime maximum, which can span several years, they stop paying.

MOOP resets every year, just like the deductible.

Copay and Coinsurance.  This is the portion you pay your providers.  Copays are fixed dollar amounts (e.g., $50), coinsurance is a percentage (e.g., 70%).  Some insurance summaries get it backwards, listing the % the *insurer* pays, not you.  For example, Daiso screwed it up: They say coinsurance is 70% (which would mean you pay 70%), but they really mean that *insurance* pays 70%.  The reason I know this is because it says 70% for In-Network and 50% for Out-of-Network (OoN).  OoN benefits should be less, so that means the 70% is the amount that insurance pays.  If there’s no clue such as in-network vs. OoN, then the only way to know whether they screwed it up is to call and ask how much you pay and how much insurance pays.

Liability (for auto, renters, and homeowners insurance)

1. Think of this word as "responsibility", it's almost the same thing.  Liability covers you for things that you'd be responsible for to someone else if you didn't have insurance.  For example, if you hit another car, then the liability coverage protects you by paying the other person.
   
2. You have to pay any excess.  If you cause $100,000 in damage or injuries, but you have only $70,000 in liability coverage, you'll have to pay the remaining $30,000, personally.  More on this later.
3. As your net worth increases, increase your liability coverage.  If your insurance doesn't cover everything, you don't want the other party to sue you and wipe you out.  So, once your net worth is greater than the liability amount on your policy, raise your liability amount on your policy accordingly.
   
   That doesn't for-sure protect you, but it helps.  Let's say you have $100,000 in assets (e.g, equity in a house or condo).  So you make sure you have $100k in auto liability.  You cause an accident and someone is injured.  Often, the injured person's insurance won't try to claim more than your insurance, as long as your insurance is a decent amount, like $100k.  But they might sue you for $150k.  If they win, then your insurance will pay $100k and you'll have to pay $50k out of pocket.  There is really no way around this:  The other side could always try to sue you for more than your liability coverage, but having lots of liability coverage just greatly reduces the chances that they'll try.

Auto[mobile] insurance

What you have to get

Liability.  Covers injuries to other people and damage to their car, that you cause.  It's required by law (and is the only kind of car insurance required by law).  See the Liability section above, it's super-important.  Texas law requires at least:

1. $30k for injury to each person
2. $60k total for injuries (not necessarily 2 people @ $30k each, could be 4 people at $15k each)
3. $25k in property damage

This is referred to as 30/60/25 insurance.  The state minimum isn't really enough, since if you total someone else's car, it's probably worth more than $25k.  I suggest at least 50/100/50, and it doesn't cost much more to bump up the coverage.  Also, as your wealth increases beyond $50k, increase the coverage on your policy accordingly.

What you should definitely get

Collision.  Covers damage to your car that you cause.

As with all insurance, it's hard to choose the deductible amount: higher deductible means lower premium, but more risk.  Lower deductible means more risk, but higher premium.  $750 might be a good balance of risk/premium, but the choice is up to you.  With Progressive, you can play around with their online pricing tool and see exactly how much a change in deductible affects your premium.

Uninsured Motorist.  If you get hit by someone who (illegally) doesn't have liability insurance, this covers your car and medical expenses for your and your passengers.  There are two flavors of Uninsured Motorist, sold separately:  Bodily Injury ("BI") and Property Damage ("PD").  You don't need Bodily Injury because you have health insurance and your passengers are supposed to have their own health insurance.  You do need PD to cover your car.  However, some (maybe all) insurers make you get BI before they'll sell you PD.

What you should probably get

Roadside Assistance.  They'll send a mechanic to fix minor problems (like dead battery, flat tire, out of gas, locked key in car), or will tow your car to the mechanic of your choice.  If they bring you gas you pay for the gas.  Some insurers have multiple levels of Roadside, like towing up to 15 miles for the normal level, or up to 100 miles for the Premium level.  Premium is worth it.

PIP (Personal Injury Protection).  Covers injuries and lost wages to you and your passengers if you or they are injured.  Your health insurance will already cover your medical expenses, but it probably won't cover lost wages.  And your passengers are supposed to have health insurance, but might not, and probably don't have insurance for lost wages.  Some states require this kind of coverage, but not Texas.

What you might want

Rental car.  If you see this offered, this is not to cover damage to a rental car if you're in a collision.  (Most auto insurance covers you automatically for that.)  This coverage is to pay for the cost of the rental car while your car is being repaired if you're in a collision.  It's relatively pricey, an extra $7/mo., so it's not a lot of bang for the buck.  I suggest skipping it, but you can add it if you want.

Safe Driver discount

Ask for it.  They’ll give you an app that tracks your acceleration, deceleration, highest typical speed, and whether you use your phone while driving (or even stopped at red lights).  So drive carefully, and as little as possible (except drive the minimum they require; every insurer is different, with Travelers you have to do 500 miles in 90 days).

Avoiding rate increases

Insurance companies always jack up the rates when it's time to renew.  That's why they try to steer you to a six-month policy, so they can raise your rate soon.  So, try to get a one-year policy, which delays the rate increase. 

Shop every year.  Insurers try to suck you in by offering a low initial rate, then raising it at renewal.  So if your renewal goes up a lot, shop for insurance again at renewal time.  A great broker will automatically check each year to see if switching insurers will get you a lower rate.  With most brokers, you’ll have to ask them to check.  (Or you can check yourself.)

Credit Score.  Premiums are partially based on your credit score.  So, if your score goes up substantially in a year, when it’s time to renew, ask your broker if you can get a lower premium.

Where to shop for insurance

Online

1. It works, but you have to use a separate phone # and email address, b/c the spam may never stop.  Get a free phone # from Google Voice.  For email, use the plus-addressing feature with Gmail (e.g., yourGmailUsername+autoins@gmail.com).
2. You might not be able to buy online, you might be directed to make the purchase from a broker or agent, that’s normal.
3. I don't know the very best place to compare insurance quotes online.  I tried a few sites but didn't really like them.  However, for auto insurance, I liked Progressive, because it's easy to use, lets you easily adjust your coverage to exactly what you want, and had the best rates when i checked.

Brokers

Agents

They work for a particular insurer and can sell only for that insurer, so they can’t shop around for you.

Insurance companies

1. You generally can't buy directly from an insurance company, but there are some exceptions (like Lemonade).
2. State Farm generally has the best rates for renter's, so even if you don’t shop around, and you go with State Farm, you’ll probably get a decent deal.  The best-reviewed local State Farm agent is Yan Tung.