Setting Up Your Financial Protection Plan – Insurance

Last update on: Jun 23 2020
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Hurricane Katrina has a lot of people thinking about their insurance for homes, autos, belongings, and personal liability.

Most people have a lot of their insurance wrong. They have coverage gaps or are paying too much. Don’t wait until you need the coverage to discover there is a problem. Review your insurance every year or two.

Before getting into policy details, first review who insures you and when the policies expire. Many insurers give discounts to customers who have more than one type of policy with them. Consider consolidating two or more policies. But don’t make consolidation the prime goal. If you can get broader, cheaper, or better coverage using different insurers, do so.

Your financial life also might be easier if all the policies are due for renewal at the same time each year. Consider shifting the policy effective dates.

Those moves might save time and money. A detail review also can help. We’ll start with auto insurance.

Uninsured motorist coverage is vital. Few drivers are aware of the number of uninsured drivers on the road and the threat posed by them. In eight states, including Florida and California, more than 20% of drivers are uninsured, according to the Insurance Research Council. The group estimates that in Colorado 32% of drivers are uninsured.

Standard auto and health policies might not cover all the damage done by an uninsured motorist. Purchasing uninsured motorist coverage as part of your auto policy is fairly cheap and offers solid protection. The insurer will pay for damages as though the uninsured motorist had the minimum coverage in the state. Without this coverage, you might be surprised by what your regular auto and health insurance won’t cover when the uninsured driver is at fault. The uninsured motorist coverage usually is extended to all members of your household, even if they are in someone else’s auto at the time of an accident.

You know that premiums can be slashed by raising deductibles. High deductibles ensure that insurance is only for catastrophic losses and that regular savings or income pay for other losses. (Some states or insurers do not allow deductibles to exceed $1,000.) Raising deductibles is a good move if you have the financial resources to pay the higher deductible and are comfortable absorbing that much of a loss in case of an accident.

Most people do not pay much attention to the bodily injury and property damage limits in the policies. Of course, the higher the coverage limits, the higher your premiums will be. But you don’t want to slash premiums if it leaves you exposed to significant liabilities for any accident caused by you or a family member.

The better strategy is to coordinate the liability and medical expense coverage with your other policies, especially an umbrella liability policy. Be sure there aren’t gaps, unless you are willing to cover them. For example, an umbrella policy usually won’t kick in until a minimum liability is incurred. Be sure that minimum is not higher than the auto policy’s maximum liability. Otherwise, you pay the difference in addition to the deductibles.

Homeowner’s insurance has a number of potential pitfalls.

Most policies these days cover only losses from “named perils.” Losses from other perils are the owner’s responsibility.

Flood damage is not covered in standard policies. Coverage must be purchased from the National Flood Insurance program. Special coverage for some perils is available only through state programs. For example, Florida residents generally need to get windstorm coverage through a state-sponsored program. Consider all the hazards that could damage your home. Then, see which are not covered by the policy. Ask the insurer or agent how to get covered for those perils. Coverage might not be available, at least not for a price you are willing to pay. At least then you will know the risk you are taking in that location.

The replacement cost coverage in today’s policies is something many people still get wrong. The covered amount should be the cost of rebuilding the dwelling, not its market value. There can be a dramatic difference between the two.

Insurers now require the covered amount to be at least 80% of the cost of rebuilding the dwelling. If your coverage amount is less than that, you will cover the difference in addition to deductibles.

For example, suppose your home has a $500,000 replacement cost, but the covered amount is $250,000. That is less than 80%, so the insurer will cover only a pro rata portion of any losses, in his case 50%. If you suffer a $100,000 loss, the insurer will cover only $50,000. You pay the rest, plus the deductible.

Personal property also is covered under the homeowner’s policy but requires more attention than most people give it.

Most policies exclude or put a $1,000 limit on items such as jewelry, coins, furs, antiques, and computers. You need to purchase “scheduled coverage” for these items. A list of the scheduled items is attached to the policy and the premium for covering each item is separately calculated.

You might be required to get the items appraised and to periodically have the appraisal updated. It is a good idea to maintain evidence of ownership of the items and to keep that evidence secure in a disaster-proof location or at least away from the location of the property. You should have detailed descriptions of the items, photographs, and any other supporting information. Some people maintain a video tour of their homes.

Those who own property in more than one state need to discuss this with their insurers or agents. Personal property generally is covered under a homeowner’s policy regardless of where it is damaged, lost, or stolen. But the rules might differ if you own more than one home. The insurer of one property might not cover personal property damaged or stolen at the other property. It also might matter to an insurer whether property normally was kept at one location or was transferred from one location to the other. Be sure you know which policy covers an item. Otherwise, you might find that there is a gap in your coverage.

Liability coverage also deserves more attention than most people give it.

A vacant property or rental home needs liability coverage. You could be responsible for any accident that happens on the vacant property, especially if there is some kind of attractive nuisance. Likewise, as owner of a rental property you could be responsible for actions of the tenant. You can require the tenant to have insurance, but you need separate coverage to protect you.

Almost everyone should have an umbrella liability policy.

Regular coverage for autos, homes, and other items will have liability coverage with fairly low limits. An umbrella policy significantly increases your coverage for a wide range of liabilities at a low cost. Often $1 million of additional liability coverage costs less than $300 annually.

To ensure the umbrella policy does its job, first match its lowest payout level with the maximum coverage of other policies. For example, your auto liability might top out at $300,000. But a standard umbrella policy might cover only liabilities above $500,000. That puts you on the hook for the $200,000 difference unless the umbrella policy is amended.

Also, make sure all the potential sources of liability are listed in the umbrella policy. The listings should include all residences and vehicles, watercraft, motorcycles, aircraft, and recreational vehicles, whether owned or rented. Also list every driver who resides at one or more of your homes and be sure pets are covered.

An umbrella policy will exclude some activities for which separate coverage is available, such as serving as a director or officer of a business or organization. If you engage in such activities, be sure of coverage.

Household workers, both permanent and temporary, are another potential source of liability. You could be liable to them for injuries they receive or to others for the workers’ actions. Be sure you have a policy that covers these situations.

Finally, set the umbrella coverage limit high enough. You want to cover existing assets and also future income and assets. The limit to choose is a tough call. An attorney or experienced broker might be able to offer the best advice of the maximum potential liability you face.

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