Believe it or not, it’s common to run into issues that can make insurance coverage a potentially destructive force in your portfolio. That’s because, what many fail to understand, is that while their insurance typically covers the costs when they suffer a personal or business loss, it often comes at a high cost.

The purpose of taking out an insurance policy is to help you reduce financial uncertainty and make accidental losses more manageable. To obtain this type of coverage, you pay a premium to transfer risk to a professional insurer for the assumption of the risk of a significant loss as well as a promise to pay in the event of the loss.

But if you aren’t careful, you can end up overpaying on your premiums—or even end up paying for policies that you don’t need pay for. It happens to a lot of people. Maybe their friend is an insurance agent and they want to give them their business—or maybe they want to secure a policy for an obscure risk that statistically may never happen for them. Whatever the driving force, it’s not uncommon to end up paying for expensive premiums or coverage you likely don’t need.

That’s precisely what happened to me. When I was working with a financial coach a few years back, we strategically dug into my insurance coverages and found the opportunity for over $1,497 in annual savings. If I were to set aside those savings annually and compound the returns over 30 years, I would have $47,005. In other words, by simply taking a deep dive into my insurance coverage, I was suddenly much closer to financial independence—and I could meet that goal without sacrificing my lifestyle. 

Six ways to outsource your liability

The trick to dealing with this “horseman” in your portfolio is to reduce your costs, but not necessarily your coverage, in order to optimize your cash flow and savings. 

The first step would be to sit down with a qualified agent or broker to help you optimize your coverage.  During this process, you’ll work to identify policies that are not needed and then fill in gaps with your policies where your policy may fall short.

To get you started, here are a few tips that I received:

1. Health insurance 

• Consider high deductible insurance or self-insure instead: It may be smart to get a high deductible plan and self-insure for the more minor expenses if you are relatively healthy.
• Put away money in an HSA: Self-insuring or using a high deductible plan will also open up the opportunity for you to set aside funds into a health savings account. Once your account balance reaches a certain level, you can even invest it. Health savings accounts can also be self-directed. 
• Use your employer coverage: The most cost-effective way to secure comprehensive health insurance is generally through a group policy with an employer since the employer will most likely split the costs with you. 

2. Disability insurance

• Know the coverage terms of your disability insurance: Disability insurance is essentially where you are insuring your ability to earn an income. Be aware as there are differences in the type of policies. Some policies cover if you can’t work your own occupation anymore. Other policies cover if you can’t work any occupation. Be sure to talk to a specialist about this.

3. Auto

• Consider a high deductible or the option to self-insure: Auto insurance is another area where you can secure a higher deductible and self-insure for the more minor expenses unless there is an extenuating need.
• Be careful not to under-insure: Since auto insurance is the most likely used of all policies, the key to auto insurance is not to be under-insured on liability, uninsured/under-insured motorist, or medical. 
• Know your umbrella policy coverage: If you choose to get a personal umbrella policy, be sure to understand what type of coverage your umbrella policy will require.

4. Homeowner’s insurance

• A high deductible or self-insuring could work here, too: To optimize cash flow, consider getting a high deductible and self-insure for the more minor expenses. 
• Check for adequate coverage: As the cost of materials and labor rises, be sure to check in periodically to make sure your policy coverage is still adequate should you sustain a catastrophic loss. 
• Make sure your home office is covered: If you have a home office, make sure you are covered for loss of production should you sustain a loss. 

5. Umbrella insurance

• This coverage could be worth the investment: Umbrella policies are relatively inexpensive and worth the investment if you have significant assets or are looking to protect from costly liability claims, especially if your assets exceed your auto or home liability insurance limits. 
• Use it to fill in coverage gaps: This is a great way to coordinate other insurances together to fill in gaps in liability on home and auto. Be sure the underlying liability policy meets the terms of the umbrella policy. 

6. Life insurance

• Choose at least some type of coverage: I firmly believe that everyone should have some life insurance, as it helps you insure for your life value, even if you are a homemaker. This policy can also help smooth the financial transition for your loved ones in the event of your untimely death. There are a couple of different types of life insurance: 
  • Term insurance is generally inexpensive when you are young and provides a death benefit only. 
  • Permanent insurance, if designed right, can help you build up cash value within the policy in a short few years. The cash value can be used for an emergency fund, your own personal bank, or generating an arbitrage return when investing. 

Final thoughts

Even though we’ve focused solely on insurances, I’d be culpa if I didn’t mention another way you might be overpaying on a type of “insurance” … warranties (i.e., cell phone, computer, car, appliance warranties, etc.). As discussed with the other insurances above, save up quickly in your emergency fund so you can self-insure should the item get damaged and need replacing. I set aside my health, auto, and home insurance deductibles in my emergency account. Ideally, these are funds I may never touch, and it allows me to give this pot of money a double duty to cover any “warranty” needs I might have. 

Proper insurance coverage is a must-have to outsource liability and protect your wealth in case of a loss. Take care to optimize costs and coverages so that you can increase your cash flow today!