You never know when a financial emergency may occur. A car accident may require a visit to the mechanic, a storm may damage your home, or you may need the services of your local doctor.
These three scenarios can quickly get expensive and deplete your savings. That’s why many people buy insurance to minimize their financial risk, but those same policies can take you even further away from your long-term goals.
See: 11 Things You Should Do When Your Savings Reaches $50,000
Read next: 9 Downsizing Tips for the Middle Class to Save on Monthly Expenses
Some people end up with premiums that eat up a large portion of their monthly budgets. While there is a balance between having zero insurance and too much coverage, these are some of the most common signs that cutting back on your insurance coverage may be a good idea.
The optimal amount of insurance coverage depends on each person, but if premiums make up more than 10% of your budget, it’s good to reevaluate your policies. That’s the main takeaway from Andrew Izyumov, certified financial advisor (CFA), founder and CEO of 8FIGURES.
“If your total premiums are more than 10% to 15% of your take-home pay, you’re probably overinsured. Think of insurance as a way to protect yourself, not an investment,” Izyumov said. “The best way to save is to ‘self-insure’ for small expenses. I recommend raising your deductibles to the highest amounts you can easily pay with your savings. This will lower your premiums much more than keeping a low deductible.”
Learn More: I’m a Financial Planner: Eliminate These 7 Hidden Expenses to Save Hundreds a Month
Just because you can get insurance doesn’t mean you should. Extended warranties, cell phone insurance, and flight insurance are some of the policies you don’t need.
“Focus your insurance on rare but serious risks that could really hurt your finances and stop paying for coverage for minor problems. This way, you can keep more of your money invested and working for you,” Izyumov said.
If you have too many insurance policies, you may be paying twice for the same coverage. This overlapping coverage does you no good, but you will still end up with additional premiums.
“Check your ‘clauses’ and add-ons,” Izyumov suggested. “Many people pay for things like ‘towing’ or ‘accidental death’ that are already included in an AAA membership or basic life policy, so it’s just an extra.”
Getting rid of unnecessary policies can quickly free up cash flow that you can then save and reinvest. Insurance can offer some financial coverage during emergencies, but it is not intended to replace long-term financial goals, such as building up large savings. Cutting your insurance coverage frees up more capital and can put you in a stronger financial position while insuring yourself for worst-case scenarios.