Your 'Cheap' Insurance Policy May Be Expensive When You Actually Need It

Getting the cheapest possible insurance policy can feel like a big win when you are paying monthly expenses. But having that extra space in your budget may not be worth it.

A cheap insurance policy may only save you money until something goes wrong. Here’s what to consider before purchasing one.

Why cheaper premiums often come with trade-offs

Insurance policies help shield people from risk, such as potential damage to their car or home. Typically, more coverage comes with higher premiums. While lower premiums reduce your monthly expenses, you could also end up with a policy that has less coverage and higher deductibles, which are the amounts you have to pay out-of-pocket before your policy kicks in. You will likely have to pay more out-of-pocket before your insurer offers financial assistance, and missing optional coverage can result in your premiums offering no protection from specific scenarios.

For health insurance, a cheap policy can also result in narrow networks. Not every health care provider may work with people who have your insurance policy, so you may have to bounce around from provider to provider until you find someone who will accept your policy.

This also comes up with auto insurance. Generally, a higher deductible raises what the policyholder must pay after a claim. Lower premiums aren’t always enough to justify the high deductible, and even then, the deductible can come as a big surprise expense. Not everyone is financially prepared for emergency costs, and cheap insurance often gives you even less room for error.

When you opt for cheaper insurance, not only are you sometimes stuck with high deductibles, but insurers often have lower policy limits if you opt for low premiums. A driver with state-minimum liability coverage can be personally responsible if damages exceed policy limits. Meanwhile, homeowners may discover their cheap policies do not cover roof damage, sewer backup or rebuilding costs.

How to tell whether a cheap policy is worth it

You often get what you pay for, but a cheap policy isn’t always a bad idea — it just depends on your specific situation and needs. A higher deductible may make more sense if you have a strong emergency fund and are at a lower risk. For instance, a low auto insurance premium could make sense if you only drive your car once per week. However, driving that same car multiple times per day increases the total risk, which may make a more expensive insurance policy a prudent investment.

When shopping for insurance policies, the premium isn’t the only thing you should analyze. It’s also a good idea to check the deductibles, coinsurance and out-of-pocket maximums. Those numbers indicate how much you will have to pay if you ever make a claim.

The policy should be able to cover a realistic worst-case scenario and minimize the financial impact. You should assess how much your policy can end up costing if you need to make a claim instead of exclusively making a decision based on premiums.

An affordable policy can be a good option if it insures you from likely risks. But you don’t want to be underinsured by accident. Knowing how your insurance policy aligns with your finances can help you make the right decision for your financial situation.