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Whats Your Financial 411 on Insurance

Monday, April 6, 2009
Americans believe they’re savvy about insurance, but on average, people surveyed were only able to correctly answer four out of 10 basic insurance questions.

(Washington, DC) —In these uncertain financial times, knowledge is your best policy—especially when it comes to insurance. That is why during Financial Literacy Month, the DC Department of Insurance, Securities and Banking (DISB) is releasing a new survey commissioned by the agency and the National Association of Insurance Commissioners (NAIC), which found out that a vast majority of Americans believe they are smart about insurance. However, a deeper look at the issue tells a different story. If you, too, believe you have a high “Insurance IQ,” see if you can answer these three basic questions:

  1. Does auto insurance automatically cover a rental car?
  2. Can you own a house without homeowners insurance?
  3. In general, how much life insurance is recommended in relation to your annual salary?

If you answered, no, yes and 5-7 times your annual salary, you bested the majority of 1,000 American adults who got them wrong in a 10-question quiz designed to test the nation’s Insurance IQ. Indeed, on average, Americans flunked the test with only a 40 percent score — a solid “F” by most US educational grading standards.  

This apparent lack of knowledge contrasts sharply with confidence levels expressed by survey respondents. Before taking the IIQ, nearly 60 percent said they feel “very confident” when making insurance decisions overall, with only 15 percent voicing any insecurity about their decision-making abilities.

In Today’s Economy, Consumers Need to Understand Their Insurance Coverage

With rising joblessness and falling home prices, Americans need to make sure they understand what their insurance policies cover. By making careful, informed decisions about their insurance, consumers can save money and ensure long-term protection for themselves and their loved ones. 

“Now, more than ever as the District celebrates Financial Literacy Month in April, consumers need to be mindful of the impact their insurance decisions can have on their financial futures,” said DISB Commissioner Thomas E. Hampton. “By arming themselves with the facts—and improving their Insurance IQ—consumers can make sure they are adequately protected, without paying more than they should for that coverage.”

Among the key findings:

Health: Less than half of those surveyed (49 percent) know that if they leave their job and choose the federal Consolidated Budget Reconciliation Act (COBRA) to continue their health benefits, they must pay the full cost of coverage. Recently, however, with the president’s stimulus package, workers who were involuntarily terminated between Sept. 1, 2008, and Dec. 31, 2009, will only pay 35 percent of the cost for nine months. Also, 58 percent are aware that health insurance will not cover their living expenses if they became disabled and cannot perform their job.

Home: Just one in five respondents (19 percent) realizes that the requirement for private mortgage insurance (PMI) on a newly purchased home depends on the size of the down payment and lender; almost 30 percent think PMI is required by law. Less than 50 percent of people surveyed realize they can legally own a home without homeowners insurance (although lenders will not allow it).

Life: Only 14 percent of respondents correctly know that the amount of life insurance typically recommended for individuals is 5-7 times your annual salary; 29 percent believe 2-4 times an annual salary is the recommended amount; and nearly 40 percent simply say they have no idea. 

Auto: Less than two-thirds of Americans (62 percent) are aware of the top three factors that impact the cost of auto insurance coverage (i.e., accident history, vehicle safety features, geography). And, only four in 10 respondents (41 percent) know that auto insurance does not automatically cover a rental car.

How to Improve Your Insurance IQ
Here are four useful tips to help District residents better understand their insurance policies:

  1. Get Savvy.
    Before shopping for a policy, learn as much as you can about insurance. The award-winning “Insure U” consumer-education Web site (www.insureUonline.org) is an unbiased, expert resource to help you understand the types of insurance available, the factors that affect price and the insurance options for your personal situation. Residents may visit DISB’s Web site at www.disb.dc.gov to link the Insure U site, as well as to get other pertinent insurance information.
  2. Shop Around; Do Your Homework.
    After learning the insurance basics, get premium quotes from several companies for the amount of coverage you require. The Insurance IQ survey found that although many Americans rely on personal experience and recommendations from family and friends when making insurance decisions, nearly 90 percent do not gather information from other, more reliable sources of information — such as DISB, the District’s insurance department. DISB offers several online tools to assist consumers with the insurance-buying process. In addition, the NAIC’s Consumer Information Source provides fundamental facts about insurance companies, including complaint ratios, licensing details and key financial data.
  3. Before Committing: Stop. Call. Confirm.
    If you are unsure about an insurer or agent you are working with 1) Stop before signing any paperwork or writing a check; 2) Call DISB at (202) 727-8000; and 3) Confirm the company or agent is legitimate and licensed to do business in the District of Columbia.
  4. Review Your Policy.
    Do not wait until you need to file a claim before evaluating the scope of your coverage. The Insurance IQ study found that 60 percent of respondents do not periodically review their policy— that is, they wait until they are filing a claim or renewing their coverage. Twenty-five percent admit rarely or never looking at their policies. By understanding your policies, you can be prepared for any situation and, potentially, save money by avoiding unnecessary costs.

Here is one other important element to remember: Throughout the year, you may encounter changes in employment, salary, geographic location and family dynamics. These factors affect your insurance options and the amount of coverage you need. Any time your life situation changes, be sure to review your insurance coverage and make any necessary adjustments.

Want to see how your insurance knowledge stacks up against the rest of America?  Go to insureUonline.org and take the Insurance IQ quiz to see how savvy you are.