You've seen the ads. Some insurers promise coverage for extremely low insurance rates, making a big fuss over the great price but saying little about what you'll get for that price.
There's nothing wrong with wanting a deal, but it's important to remember that if something goes wrong, and you want to turn to your insurer, you're going to want some meaningful help. After all, you get what you pay for, as the saying goes, and it may turn out that you won't get much of anything.
The next time you buy into a cheap insurance plan, or if you have a plan known for its rock-bottom premiums, you'd do well to review the risks you may be taking -- and take another look at that policy.
Why Your Cheap Insurance May Be Worthless
It might not be real. Numbers, especially recent numbers, are hard to come by, but an updated 2015 report from the National Association of Insurance Commissioners found that between 2000 and 2002, the U.S. Government Accountability Office identified 144 fake insurers nationwide that sold fake health insurance to more than 200,000 policyholders, resulting in more than $252 million in unpaid claims.
The NAIC's report also said there are still many fake companies that sell auto, homeowners, rental, life, disability, prescription drug and long-term care policies. And it's evidently a global problem. This year, in England, the Association of British Insurers warned consumers that unauthorized insurance advisers -- also known as ghost brokers -- were selling bogus car insurance policies.
You're likely underinsured. Sean Scott, a restoration and general contractor in San Diego and author of "The Red Guide to Recovery -- Resource Handbook for Disaster Survivors," says many people have been burned by cheap homeowners insurance policies. That doesn't mean your insurance isn't the real thing; even if you have the most ethical insurer in the world, if your premiums are really cheap, your policy may feel fake because there are so many restrictions that barely anything is covered.
Scott offers the example of wildfires that swept through Southern California in 2003 and 2007. He worked with many of the homeowners, but he couldn't help several because of their lackluster insurance policies.
"Many of the survivors found themselves unable to rebuild their homes due in large part to being sold cheap, bare-bones homeowners insurance policies, which in many cases didn't allow enough coverage to rebuild the home or lacked essential endorsements to adequately cover things like building code upgrades, additional living expenses, debris removal and landscaping," Scott says. "To this day, there are vacant lots all over the region that are stark reminders of [the] disaster survivors who evolved into disaster victims simply because they were underinsured."
Scott remembers how some of his friends lost their homes in the Witch Creek Fire of 2007, in San Diego County. They had a good insurance policies and were able to rebuild.
"However, their next-door neighbors didn't fare as well," Scott says. "One neighbor on one side got into a war with their insurance company, lost their home and moved away, and the neighbor on the other side became distraught and committed suicide."
Your claims may be paid at a snail's pace. Granted, this can happen when you're paying big bucks for insurance. But if your payments are going to El Cheapo Insurance, it seems logical that the company specializing in getting the lowest possible premiums from its customers might be a little stingy when it comes time to return some of that money.
That seems to be what Kyle O'Dell encountered. O'Dell is a managing partner at O'Dell, Winkfield, Roseman & Shipp, a wealth management firm in Englewood, Colorado. In his case, he faced a problem with someone else's cheap insurance. In 2012, a semi truck drove into his lane and hit his car. Nobody was hurt, but O'Dell's car was banged up.
"We decided to exchange information quickly and get off the shoulder of the road, and not wait for a police officer to write the driver a ticket," O'Dell says.
That was a rookie mistake, leaving a wreck without a police report, although sometimes there's nothing you can do about that; often, the police won't come to the scene of a traffic accident if nobody's hurt. Still, the truck driver's insurer, one that often touts its low rates, O'Dell says, balked at paying for the damage because the police didn't come to the scene.
So, O'Dell had little choice but to pay for the repairs himself, which came to $2,000. He kept hounding the insurance company for reimbursement, however, until he was finally paid back six months later.
What to Do if You Have a Cheap Insurance Policy
Research your insurer . This would save many a headache caused by bogus insurers. Go to your favorite search engine and start checking out your insurance company.
"Look for companies that have a strong rating with A.M. Best, Moody's and S&P," O'Dell says, referring to some well-known businesses that have information, such as credit ratings, on financial services. A.M. Best, in particular, is geared toward the insurance industry.
Even if you can't make sense of whether your insurer has a strong credit rating, you can probably discern whether you have a reputable company on your hands. If the insurer you're eyeing is constantly being fined by the government for ripping off its customers, there's your red flag.
And if you can't find any or much intel on your insurer? Hardin says that's a big problem, too.
Read the policy. Sounds logical, but plenty of smart people don't. "More than once, clients have shown me a policy they bought through the mail thinking it was a great deal on some life insurance, only to read the coverage and find it was only an accidental death and dismemberment policy. If you die of natural causes, it pays nothing," says David Hardin, president of Hardin Financial Group, a retirement planning firm based in Troy, Michigan.
Hardin suggests asking your insurer for a policy specimen, which is basically an outline of everything your insurance covers.
Perhaps most importantly, Hardin says: "Make sure you're buying what you think you are buying."
So whether you have a car, a house, life insurance or health insurance, start running through the worst-case scenarios in your head and see if you're covered. Don't assume you are, which is understandable if you're cash-strapped, and those low payments still seem high to you. It's easy to think that when you're forking over a wad of cash every month to a company, surely you'll be protected from whatever bad developments come your way.
In addition, be on the lookout for any language in your policy that you don't understand. True, every insurance policy, even the best, has complex language and legalese, but you want to look for a policy that, for the most part, offers fairly clear and straightforward language. And keep an eye out for weasel words -- ambiguous phrasing that could mean anything.
Insurance, after all, is all about managing risk and trying to have a happy ending if something terrible happens. If you end up paying for a risky insurance policy, you're already losing.