USE YOUR EMERGENCY FUND TO SAVE ON INSURANCE PREMIUMS

DOLLARS AND SENSE

by Joe Plemon            

                 Your emergency savings is set aside to be used for NOTHING but emergencies.  Right?  Right!  But that very fund (3-6 months of expenses) can also be used to help save on insurance premiums. 

                  Think of it this way: because the purpose of insurance is to transfer risk from us to the insurance company, having a good emergency fund allows you to assume a bit more risk by raising your deductibles and therefore lowering your premiums.

                  Of course you have to run the numbers to see if this is a good idea for you.  For example, if raising your auto collision deductible from $100 to $1000 will save you $500/year on premiums (these are numbers from a real quote), you would only need to go accident free for about two years to justify the higher deductible.  If you saved $100/year on homeowners insurance by raising the deductible from $500 to $1000, you would need to go five years without a claim to justify the higher deductible.

                While the auto or homeowners savings may not dramatically change your world, the potential savings in health insurance could.   Assuming good health, a family of four can reduce their premiums from $600 per month to $300 per month by switching from a traditional $25 co-pay plan to a High Deductible Health Plan (HDHP) requiring a family deductible of $4,000 per year.  If your emergency fund is already in place, you could switch immediately and save $3,600 annually on your premiums.   And it keeps getting better, because when you place those premium savings in a Health Savings Account (HSA) you could save you another $1,000 in taxes.  Remember, the deductible goes toward the first $4000 in medical expenses, but your potential savings is $4200 a year. This is worth getting excited about!

              If you already have an emergency fund, put it to work for you.  If you don’t have one, you need one.  Start saving for it today.