I spent more than 15 minutes and I saved more than 15% on my auto and homeowners insurance. For the same coverage, I saved 25% on my auto insurance and I saved 38% on my homeowners insurance.

A typical "how to save money on insurance" article will tell you to drop collision and comprehensive coverage on older cars, get your good driver, good student, and alumni association discounts, increase your deductibles, insure your car and home with the same company for the multi-policy discount, etc. etc.

I'm not going to repeat those. I assume you already know what coverage you want and what deductibles you are comfortable with, and you already pursued all the discounts. If not, you can search for those articles on the Internet. There are a ton of them.

This post focuses on shopping for a lower rate for the same coverage. Those other articles usually leave you with "shop around" or "get 3 quotes." But whom do you get quotes from?

There are perhaps more than 30 insurance companies in each market. If you get quotes from 3 expensive companies, that won't help you because you don't even know lower rates exist. On the other hand, unless you don't have better things to do, it's impractical to get quotes from all companies. You have to narrow down your target list to the companies that can potentially save you money.

When you shop for term life insurance, you can go to a single web site and get the premiums from practically all the companies. When you shop for auto and homeowners insurance, there isn't a central place to go. Although there are a few web sites that let you obtain quotes from multiple companies, they only include the companies that pay them for the lead.

I tested several of those sites with fictitious personal info. After I filled out lengthy forms, instead of giving me quotes, some of them just say the companies will contact me. Well, if they can't beat what I already have, I don't want a bunch of sales calls!

There are also independent insurance agents. These agents also only work with insurance companies that pay them. They are not able to give you quotes from companies who sell only through their own ("captive") agents, like State Farm, Allstate, or Farmers, or those who only sell directly to consumers, like GEICO, Amica, or Esurance.

Fortunately there is a great resource from a place you least expect: your state government. Insurance is regulated by the states. All insurance companies selling in a state must file their rates with the Department of Insurance in that state. Using those rate filings, some state Departments of Insurance publish a premium comparison survey or guide that shows the rates by company and by geographical area.

Because people drive different cars and have different driving records, or have different homes, these surveys typically use a few driver/homeowner profiles and show the insurance premium from each company for these profiles. You have to pick a profile that's most similar to you.

It's far from perfect. The rates used can be a year old. But it's still very useful for weeding out the expensive companies and narrowing down the list of companies that can potentially offer a premium lower than what you have now. For example I noticed a company offering good rates called Wawanesa. I bet not many people have ever heard of Wawanesa and most would never think of getting a quote from them.

It's a shame that these premium comparison surveys or guides are not advertised well. You never hear about them on TV, on radio or online. On some state Department of Insurance web sites, these surveys are buried deeply in the end of a "Consumer's Guide to Auto Insurance" publication with otherwise generic information on coverage and insurance terms.

The cynics will say it's intentional. The insurance companies don't want you to compare rates so easily. They learned the lessons from airlines. When people can go to one web site and see all the fares, the airlines are forced to compete on price. Imagine how much more people will pay if they have to call each and every airline for fares. That's the world we are in for insurance quotes.

Using the premium comparison survey for my state, I called a company that I would otherwise never call for my homeowners insurance. Although this company is well known nationally, it doesn't give homeowners insurance quotes online. The savings are huge. I saved a whopping 38% on my homeowners insurance.

For my auto insurance, I contacted three companies that had lower rates on the premium comparison survey than the company I had before. They all gave me a lower rate. I saved 25% on my auto insurance for the same coverage. The premium comparison survey was spot on, not in the premium amount, because that depends on the actual coverage, but on how the companies rank relatively.

I went through the trouble of visiting the Department of Insurance web site for each and every state plus Washington DC. I gathered all the links to auto and homeowners insurance premium comparison surveys in the table below. You can imagine how long that took me.

I couldn't find the surveys for some states. Maybe they don't publish one. Maybe I missed them because they buried them so deeply. If you find the missing links, let me know so I can add to the table. If some links become broken because they moved things around, you will have to find the surveys on your own. This map of State Department of Insurance web sites will help.

Let me know how much you are able to save on your auto and homeowners insurance with these premium comparison surveys. If you are able to save money, may I suggest that you give me 10% of your savings in the first year as a tip?

State Department of Insurance Premium Comparison Surveys

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1. Liability vs. Theft, Collision and Damages. On any auto insurance policy in the U.S., the coverage for liability and the coverage for the car are separate. If you have an older car, you may not have coverage for the car itself, but you should have coverage for liability, i.e. damage you cause to others. This liability coverage may or may not follow you worldwide. You have to call your auto insurance company to find out. If you are covered, there is usually no deductible on liability coverage. Theft is covered under comprehensive while damage caused by a collision is covered under collision. There are separate deductibles for comprehensive and collision coverage. Your collision and comprehensive coverage from your auto policy also may not follow you worldwide. I called my insurance company. They told me I will be covered for liability worldwide but I won't have collision or comprehensive coverage outside of U.S. and Canada.

2. Primary Rental Car Insurance. Your own auto insurance usually covers you when you rent a car, at least in the U.S. If you don't want to use your own auto insurance (and subject yourself to premium increases in case you file a claim), you can buy primary rental car insurance. I found two places that sell primary rental car insurance:

[1] Must enroll an American Express card

I don't find primary rental car insurance that useful. I am exposed to the risk of having an auto accident every day when I drive my own car. That risk is covered by my own insurance. I don't see why all of a sudden I want to pay extra to protect my own insurance only when I rent a car. If you want primary rental car insurance though, I think the American Express product is a better deal.

3. Secondary Rental Car Insurance. Many credit cards provide free rental car insurance. This insurance only covers theft, collision and damages. It does not cover liability. Usually it's also secondary, which means your own auto insurance must pay first. In effect, the credit card's rental car insurance only pays your deductible. If you don't have collision or comprehensive coverage on your own auto insurance policy, then the credit card's insurance becomes primary.

The coverage from Visa and MasterCard are better than that from American Express because Visa and MasterCard also cover loss of use.

4. Ireland. If you are still with me, you notice Ireland is one of the excluded countries in all these insurance options, and I happen to be going to Ireland! I don't know what the deal is with Ireland. Theoretically AmEx, Visa, and MasterCard cover me if I rent a car in Iraq but they won't cover me in Ireland. Isn't that crazy? The rental car companies in Ireland offer Collision Damage Waiver (CDW) for about 15 Euros per day, and it comes with a deductible of 1,500 Euros or so. 1 Euro is worth about $1.50 now. If I pay another 10 Euros per day for a so-called "Super CDW," they will lower the deductible to 100 Euros. $25 Euros per day for insurance is more than the cost for renting the car itself!

Fortunately I found a way to avoid being fleeced. The rental car insurance offered by a regular ("Platinum") MasterCard excludes Ireland. The insurance from a World MasterCard (except those issued by Citibank) includes Ireland. Needless to say I upgraded my MasterCard to a World MasterCard. Whew!

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The webcast archive will be available from now through June 23. It requires registration, but you don't have to give your real personal information. You can just use tfbreader@invalid.com because I registered with that address already. If you don't have two hours for the webcast, read the slides.

The COBRA subsidy is a subsidy paid directly to the employers. It's not taxable to the employees.

A key requirement for receiving the COBRA subsidy is losing health benefits by "involuntary termination." A layoff is clearly involuntary termination. It gets a little fuzzy in other situations. What if the employees are in furlough? Officially they are still employees but the employer told them not to come in until further notice. According to the officials, that is involuntary termination for the purpose of COBRA premium subsidy. What if an office or plant is closing and the employees are asked to relocate but someone is unwilling to move? That counts as involuntary termination too. What if an employer asked for volunteers to retire or resign, or else be laid off, and an employee took the offer? That counts too.

You see benefits administration can get so complicated. I'm glad I don't work in that area any more. For example a domestic partner and a child can be covered by an employee with family coverage. If an employee is laid off, the employee and the child can be eligible for the COBRA premium subsidy. The domestic partner is also eligible for COBRA, but the incremental cost for covering the domestic partner is not eligible for the subsidy.

More info: FAQs on Department of Labor website

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Confusion a part of health care plan in stimulus

It's about the COBRA subsidy enacted in the latest stimulus law. The lawmakers gave laid off workers a 65% subsidy on COBRA premiums for nine months. However, it's easier for them to have a debate and vote than getting the systems and procedures in place at the Treasury Department, the IRS, the employers and the insurance companies. People want to sign up for COBRA, but the employers and the insurance companies don't know how to charge them the reduced premium or how to get reimbursed from the IRS or from the Treasury Department. If you have a cash reserve, you can pay the full premium now and get reimbursed later. The law is already the law. You know will get the subsidy. It's a matter of cash flow, not a matter of the cost. You know eventually you will be reimbursed by someone: the employer, the insurance company, or the IRS. Let time sort it out. Get insurance first.

But it gets complicated when you don't have the cash. You have to wait in limbo until they figure it out how to give you the COBRA subsidy. Doctors, hospitals, and pharmacies won't take you unless you pay them in cash or give them an insurance card. Telling them you will have COBRA when they figure out the subsidy won't fly. You won't have health care until then. It's painful.

It helps if you have some cash reserve. A cash reserve make it easier to manage the cash flow.

People often confuse the concept of cash flow and cost. A cash outflow which will be reimbursed in the future is not a cost (except for time value). A deal that requires no cash now but more cash later is a cost. When people focus on cash flow instead of on cost, they often end up paying a high cost, as in the "no payments for 12 months" deals. When you are able to take a hit on cash flow, you often get a low cost, as in a lower interest rate on a 15-year mortgage versus a 30-year mortgage.

Speaking of mortgages, let me tell you another story. A few years ago when I inquired about a loan refinance, the loan officer told me the closing cost in their loan is not really a cost to me because I will be able to skip a payment during the refi and I can use the payment I normally would make to pay for the closing cost. No additional immediate cash flow from me, yes. No cost? No. Guess what happens to the skipped payment? Added to the principal balance. After hearing that kind of logic about cost and cash flow, I decided not to do the refi with that company.

Build a cash reserve. Pay more attention to cost than to cash flow.

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If you use flexible spending account, you should be familiar with the use-it-or-lose-it rule. If you put too much in the FSA, you will lose what you can't use. In the past I always estimated conservatively. I've never lost any money to the FSA. However there is also a cost to that approach. After the money in the FSA is used up, any additional expenses must be paid with after-tax dollars. There has to be a point where losing a little pre-tax money in the FSA is less expensive than paying a lot with after-tax money.

This becomes an interesting math problem.

Suppose your best estimate for next year's FSA-eligible expenses is $1,000, plus or minus $500 because you can never be sure what your actual expenses will be. Your marginal tax rate for FSA contributions is 32% (you have to include the Social Security and Medicare taxes if your income is below the Social Security Wage Base, $106,800 in 2009). How much should be put in your FSA?

So your expenses will range from $500 to $1,500 next year. We can divide it up into ten smaller intervals: $500-600, $600-700, …, $1,400-1,500. For each interval, we use the mid-point as the proxy and calculate the total after-tax cost. The total after-tax cost is:

FSA Contributions * (1 – Marginal Tax Rate) + Expenses Above & Beyond FSA

For example, if you contribute $1,000 to FSA, and your actual eligible expenses are:

Over the full range of likely expenses, your average total after-tax cost is $805 if you contribute $1,000 to your FSA. After calculating the same for other contribution amounts, we get this nice graph.

The graph shows that putting in the most conservative amount ($500) isn't the best strategy. Putting in your best estimate ($1,000) isn't the best either. The lowest average total after-tax cost over the full range of the estimated expenses is achieved when you put in somewhere in between those two numbers, around $800 in our example.

If you'd like to play with your own numbers, here's the spreadsheet I created.

Spreadsheet: How Much Should You Put Into Flexible Spending Account (FSA)

Math-minded readers probably noticed that by taking a straight average of the total after-tax costs for all ten intervals, I'm giving each interval equal weight. In math terms, it's called a uniform distribution. In real life, the intervals at either end of the range ($500-600 and $1,400-1,500) will be less likely than the intervals in the middle. So here's the challenge question for interested readers:

If you assume your next year's FSA-eligible expenses follow a normal distribution with a mean of $1,000 and a standard deviation of $250 (same $500 to $1,500 range with 95% confidence), how much should you put into the flexible spending account in order to minimize your expected total after-tax cost?

Who knew a flexible spending account involves this much math?

Finally, if you are married and one of you earns an income above the Social Security Wage Base and another earns below, you should have the spouse with the lower income contribute to the FSA. This was explained by indexfundfan.

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IRS making sure your rebate gets spent (Marketplace, audio) – This April Fool's story fooled me. It gave me a good laugh.

Iceland's Biggest Banks Targeted by 'Unscrupulous' Speculators (Bloomberg) – Iceland banks under attack. You can't blame the attackers if your banks  borrowed four times of your country's GNP.

How Many Points Should I Pay On My Mortgage? Do You Like To Gamble? (My Money Blog) – Another great article by Jonathan. Should you pay points when you get a mortgage? It comes down to a guessing game on whether and when the interest rate will go down after you get your mortgage. If you think it may go down within a few years, don't pay points. If you think it won't go down in the next few years, pay points. Also see my previous post "No Cost" Mortgage Refinance: Stepping Down the Ladder.

Accident Victims Face Grab for Legal Winnings (Wall Street Journal) – This article brought out an outcry from many bloggers. Wal-Mart haters, chill. Whoever injured the woman should pay her medical bills and her future income, not Wal-Mart. Wal-Mart already advanced her medical bills. Getting paid back is fair. It's called subrogation.

McCain Rejects Broad U.S. Aid on Mortgages (New York Times) – Also don't miss the included pop-up for Candidates' Proposals on Housing. Although I side with Democrats on many issues, I have to say McCain "gets it" on this one. The mortgage crisis is a result of the burst housing bubble. Mortgage backed securities investors, lenders, and borrowers were all counting on the housing bubble continuing. They bet and they lost. It's that simple. Losing their home? It's not their home to begin with.

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The pitch from the FSA vendor is that I won't have to file reimbursement claims for items I charge to the debit card. But I'm still required to save every receipt. They can come back and challenge me for the eligibility of the purchase and I must then send them the receipt showing what exactly I bought with the card. Using the card is only going to complicate matters. Because the card is good only for FSA eligible expenses, if I buy a 12-pack of soda together with a prescription at a drug store, I must pay for the drugs with the FSA debit card and pay for the soda with cash or a different card. It's also only accepted at stores which installed a special computer system which distinguishes FSA eligible items from non-eligible items. If I charge the co-pay for a doctor's visit to the FSA debit card, and the insurance company later tells me I haven't met the annual deductible yet, I still have to file a paper claim to the FSA but I also have to explain to them that the co-pay is already reimbursed but the deductible isn't. What a mess.

I'm afraid this is just an attempt from the FSA vendor to capture the merchant fees from the purchase. The FSA debit card came with no PIN. All transactions must be processed as "credit."  If I use their card, I won't receive the 5% rebate from drug stores or the 1.5% rebate from elsewhere on my own credit card. Thanks, but no thanks. I cut up the FSA debit card without even activating it.

Related post: Why Banks Push Debit Cards

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It's a long story but the story line is familiar. A Mrs. Barbara Calder has a rare genetic illness but she had to jump through one hoop after another to get her health insurance to cover the treatment she needed. I'm going to use this case as an example to show what to do if your health insurance says the treatment you need is not covered.

Here's a timeline of the events. I'm marking my comments with [TFB].

July 2006 – Mrs. Calder suspected that she had Ehlers-Danlos Syndrome (EDS), a rare genetic illness which can be life threatening. She had health insurance through her husband's employer. She called the insurance company about seeing a specialist. She was told she needed a referral from another doctor.

August 2006 – She received the referral to a specialist who charges $650 for a consultation. She verified that the specialist was in the insurance company's network. Before she made an appointment, she called the insurance company again to confirm coverage but this time she was told the service wouldn't be covered.

[TFB] You got the required referral and the doctor was in the network. So just go. Whether the service is covered or not can be sorted out later. The agents answering the phone are not the ones who process claims. They can be wrong. Whether a claim is covered or not depends on the ICD-9 codes the doctor writes on the claim form. Before you see the doctor, you don't know what the codes will be. Even if the claim is initially denied, it can be appealed. Health is more important than money. Go get the diagnosis. Have the doctor bill the insurance. Worst case you will have to pay $650 yourself. It's not astronomical.

September (?) 2006 – Unhappy about the insurance company telling her the consultation would not be covered, Mrs. Calder showed up unannounced at the office of the HR Director at her husband's employer. She had an argument with him about her insurance coverage. Later, an executive at the employer's corporate office in a different state was also involved.

[TFB] This was totally unnecessary. Managers at the employer don't make health care coverage decisions.

October 2006 – Her husband was laid off. They suspected it had something to do with her condition but the company denied. They decided not to take COBRA because they couldn't afford the $1,200 a month premium.

[TFB] Paying $650 for the consultation out of the pocket would be a lot cheaper than losing a job or paying for COBRA.

December 2006 – Her husband found another job but the new health insurance doesn't start until 3 months later.

[TFB] Still waiting just to save that $650? Health is more important than money.

July 2007 – She finally saw the specialist and got a confirmed diagnosis. The specialist prescribed a drug but the insurance company refused to cover it. They wanted her to use some cheaper drugs first. The doctor also recommended a test to see if her condition was the type that could result in sudden death. She called the insurance company about the test. Because she didn't know the exact term, the insurance company misunderstood and told her that the test would not be covered.

[TFB] If you need the drug, pay for the first prescription. Let your doctor tell the insurance company why you need it. Then your next prescription will be covered. Your first prescription will likely be reimbursed as well. If you need the test, go get the test. Fight it only *after* they deny the claim.

August 2007 – Her husband took another job for better pay. The new insurance had another 3-month waiting period. She became uninsured again because she thought COBRA was not worth it.

[TFB] If you keep skipping COBRA and have breaks in coverage like this, your pre-existing condition might be excluded by your next insurance company for one year. See Department of Labor's FAQs on HIPAA.

November 2007 - Her health deteriorated. She still doesn't know whether her illness is the more serious type because she never took the test. She's worried about her children because the illness is hereditary. She wants to move to Belgium because Belgium has universal health care.

[TFB] How is it fair to have Belgian people pay for your health care? The U.S. health care system isn't perfect. You just have to be willing to pay something out of your own pocket, most likely only for a short while. If the service is medically necessary, it will be covered eventually.

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• Life Insurance: How Much Should You Buy?

When you buy life insurance, you want to make sure the company will still be there when your beneficiaries need the payout. Otherwise you just paid premiums for nothing. How can you be sure it will be there? Well, you can't. Insurance companies can and do go out of business. Nobody can predict the future. But that doesn't mean you shouldn't try to pick a financially strong company when you buy your life insurance.

The good news is that you don't have to learn how to read the insurance companies' financial statements in order to evaluate the companies' financial strength. Professionals already do that. When you compare rates on Term4Sale or any other sites, you will see the insurance companies' ratings, for example A+ from A.M. Best. Like a scorecard, the rating is an indication of the company's financial strength. Stronger companies are expected to last longer. Rating agencies are not 100% reliable, but in my opinion they do a far better job than amateurs like you and me. They are as good as you can get.

There are at least five companies who rate insurance companies in the United States — A.M. Best, Fitch, Moody's, Standard & Poor's, and TheStreet.com Ratings (formerly Weiss). Ratings from A.M. Best are the most often advertised, but A.M. Best also gives out the softest ratings. Just like in college, professors who hand out good grades for mediocre performance are more popular. Fewer students want to take a class from a professor who's tough in grading. Companies like to get their ratings from A.M. Best because it makes everybody look good. Fewer companies apply for ratings from the other rating agencies. They go to the other agencies only when they want to show off they are good.

When you buy life insurance, an A+ (Superior) from A.M. Best is the minimum you should require. You should also look for a good rating from at least one other rating agency like Standard & Poor's or Moody's. In my opinion you should insist on a rating in the top 4 tiers from S&P or Moody's, which means at least an AA- from S&P or Aa3 from Moody's.

A.M. Best and Fitch offer free access to their ratings to everybody on the Internet. Moody's and S&P also offer free access to their ratings online but they require a free registration. Get a user name and password from BugMeNot if you hate mandatory registration. TheStreet.com Ratings only publishes the names of the 10 strongest and the 10 weakest companies. It sells its ratings for $14.99 each. With ratings from the former four agencies available for free, I don't see any point of paying for one from TheStreet.com Ratings. Here are the ratings search links:

• A.M. Best
• Fitch
• Moody's (requires free registration)
• Standard & Poor's (requires free registration)
• TheStreet.com Ratings (10 strongest and 10 weakest)

Reference:

• Steven W. Pottier and David W. Sommer, Property-Liability Insurer Financial Strength Ratings: Differences Across Rating Agencies, The Journal of Risk and Insurance, 1999, Vol. 66, No. 4

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First you have to figure out how much income you need to replace for your beneficiaries. You don't have to replace 100% of your gross income because if you died, you would stop earning a salary, and you wouldn't have to pay taxes on that salary either. You also wouldn't have to contribute to your 401k and retirement savings any more because you don't no longer need them (you died). For me, taxes and retirement savings take up more than half of my income. Some of the household expenses directly attributable to you would be gone (you wouldn't need a second car); and some other expenses might go up (perhaps your family is on your health insurance).

After figuring out how much income you will need to replace, you can run some numbers. AccuQuote provides a life insurance needs calculator. According to the calculator, a 30-year-old wanting to replace $30,000 income for 20 years, with 3% inflation and 6% investment return, will need life insurance for $463,507.

Should you deduct from the need number the free insurance you already have from work? I didn't. I didn't because the free insurance from work is usually not portable. If I leave my job, my insurance ends. My next employer may not give me free life insurance. I treat the free insurance simply as extra.

All else being equal, the amount needed for life insurance goes down over time. It takes more money to replace income for 30 years than what it takes for 20 years. If you survived the first ten years, you would need less insurance than ten years ago because you only need to cover a shorter time. However I haven't seen a policy that will automatically reduce the face amount over time. So perhaps you should buy more when you are young and review your need again every 5 years.

Term life insurance is cheap, especially when you are young. You really don't have to pinch on the coverage. The cost per $100,000 also goes down the more coverage you buy. See chart below for sample annual premiums per $100,000 coverage at different coverage levels.

For this hypothetical 30-year-old male, the cost difference between $100,000 coverage and $250,000 coverage is only about $60 a year.

Next, which is also the last post in this mini series on life insurance, researching insurance company ratings. Stay tuned.

[Update on 9/19/2007] This is the 3rd post in a mini series on life insurance. Other posts in this series are:

• How to Buy Life Insurance
• Life Insurance: What to Buy
• Research Life Insurance Company Ratings

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