Getting the Most for the Least from Your Insurers

Perhaps the most neglected area of financial planning is insurance. The older you are, and the more wealth you have, the more likely you are to have the wrong coverage and be paying too much for the coverage you have. I’m talking here about the plain vanilla policies for insuring your home, autos, and any other property you have, plus your liability insurance.

Your insurance coverage likely isn’t optimum unless you’ve had it closely reviewed in the last couple of years. You’re probably overinsured in some areas, underinsured in others, and paying premiums that are too much for the total coverage. By adjusting the coverage, you’ll probably have better coverage at a cost similar to what you’re paying now.

Here are ways to consider shaking up your insurance.

Have regular insurance checkups. Don’t simply buy insurance. Have a relationship with one or more insurance agents. An agent needs to know your income (and how stable it is), the assets you own, your liabilities, details of any unique assets, your dependents, and other details. If you are upper middle class, you probably should deal with an agent who works with more than one insurer and has a relationship with an insurer who focuses on high-net-worth clients. When there’s a major change in any of these factors between insurance checkups, let your agent or agents know.

Consider higher deductibles. Your deductibles probably are too low. Your income likely has increased over the years, so you can absorb a higher deductible. Also, you probably don’t file claims for damages that exceed the deductible but are low enough to pay the damages from cash flow. You’d rather do that than put a claim on your record (and face the higher premiums) and have to deal with the insurance company.

So, consider raising your deductibles, perhaps substantially to $2,500 or more.

Ask your agent how much lower the annual premiums will be by raising the deductible. Then, calculate how many years you have to go without a claim for the savings to pay off. Suppose raising the deductible by $2,000 saves you $500 in annual premiums. That means you break even if you don’t file a claim more than every four years

Consolidate policies. One advantage to having all your policies with one insurer is you’re less likely to have gaps in coverage. One insurer issuing all the policies is going to coordinate not only the coverage terms but also the dates of the policies. You’re also likely to receive one bill itemizing all the policies.

Consolidation also makes filing major claims easier. For example, if an auto accident exceeds the liability coverage on the auto policy, the separate umbrella liability policy would kick in. If the policies are with the same insurer, you likely file only one claim and deal with one claims agent and only one legal team.

The most obvious and immediate benefits of consolidation are premium savings. Most insurers give a discount of 10% or so for having more than one type of coverage with them.

Maximize safety discounts. Be sure your insurer knows all the safety features in your home, autos, and other property. Many insurers will provide a checklist to ensure you don’t miss anything. Also, when an older home has one or more of its systems upgraded, that can result in discounts if the insurer knows about it. If you’re planning a major home project it’s a good idea to talk with the insurance agent before beginning. 

Review valuables. You probably have riders for valuables not covered by the basic homeowner’s policy, such as computers and some other electronics, jewelry, furs, and collectibles. Did you know you might reduce premiums by making changes? For example, there are discounts when jewelry or furs that aren’t worn regularly are stored in a secure location outside your home.

A typical policy requires an appraisal and insures the item only for the appraised amount. A better policy term insures an item for up to 150% of the listed value listed. You’re protected from short-term market fluctuations and from having to update the appraisal frequently.

Other personal contents. Be sure you know how much you would be compensated for the destruction of furnishings and personal items in your home. Would you receive enough to replace those big screen televisions, high-end audio systems, and nice furniture? Your agent shouldn’t use a formula to determine the contents coverage. Be clear about what’s in your home and what it would cost to replace it, and be sure you’re comfortable that the policy will cover it.

Review home coverage limits. Your home should be insured for the cost of rebuilding it, not the cost of buying it. Often, the cost of rebuilding a home exceeds its market value. This is especially true for an older home, because building codes have been changed in ways that increase the cost of building. Most good policies these days list a maximum coverage amount and then state the coverage actually is for up to 150% of that amount.

Add umbrella liability coverage. Auto and homeowner’s insurance have limited liability coverage. The limits often are much lower than the potential damages from a major incident or what an aggressive lawyer might convince a jury to award. Remember, you’re likely responsible for damages caused by your dependents, others living in your home, and your pets. You also might need protection if you have housekeeping or other services or serve on the board of a charity or nonprofit.

The solution is umbrella liability coverage. Most insurers offer an umbrella liability rider or a separate policy of $1 million coverage for a few hundred dollars. Additional millions of dollars cost even less. The best move for many upper middle class Americans often is to use some of the methods discussed earlier to reduce overall premiums, and then put all or most of that savings into umbrella liability coverage equal to your net worth or more. Umbrella coverage is an inexpensive way to protect your assets and income.

Read the policy terms carefully. The insurer will defend you or hire lawyers to defend you. But some policies count the cost of the legal defense toward your liability limit, while others don’t.

RW August 2015.