Prepare for the worst, but hope for the best.
Let’s face it: bad things can happen to our homes, cars or belongings and can hurt your financial picture. Fortunately, we have things like property and casualty insurance to protect our assets from damage inflicted to and by them.
But how often should we be reviewing our policies, and what should we be looking for?
To get a better idea of what to focus on when reviewing current or new policies, I sat down with Brian Trask, an insurance advisor at Cox Insurance Associates, Inc* in St. Paul, Minnesota. Here are a few things you should consider when reviewing property and casualty insurance policies.
When was the last time your personal insurance program was evaluated?
Our lives are in constant motion from year to year, whether it’s family dynamics, market conditions, home renovations, premiums, etc. If it has been several years or you don’t have someone actively monitoring and managing your coverage, it could be in your best interest to set up a review with an insurance advisor to make sure your plan is up-to-date and well-designed for your current situation.
Consider excess liability insurance (aka umbrella policies)
“An excess liability policy, or ‘umbrella policy,’ is most likely the least expensive aspect of one’s insurance program but can certainly be the most important,” says Brian.
Umbrella insurance does exactly what you imagine — it acts as an “umbrella” for your property and casualty policies, protecting you if costs or damages exceed your policy’s maximum. If a situation arises where you are found at fault for damages or are brought to court for a legal suit, the insurance company would cover the costs up to the maximum limits set by your original policy.
Without an umbrella policy, any cost above the limit would be out-of-pocket. Assets such as your home, car and retirement assets, as well as your future earnings, could be at risk in order to cover any remaining amount owed.
An umbrella policy can be the difference between a bad day and financial ruin.
When is the right time to consider an umbrella policy?
Brian says that purchasing the proper liability limit is not an exact science, but your current net-worth and future earnings should be major factors that influence your decision.
If you have a higher net worth, and a high income, an appropriate liability limit umbrella policy protects your assets and shields your hard-earned future wages from being garnished. Umbrella policies typically start at coverage levels of $1 million and are typically inexpensive. Even if your net worth is not above the $1 million threshold, it is worthwhile to consider an umbrella policy.
“It may also be a good idea to think about an umbrella policy if you own a boat, recreational vehicle, pool, trampoline, rental properties, or have young drivers in the home,” says Brian. “Any one of these things may put you at a higher risk of an incident or having legal action taken against you.”
What is the cost?
Umbrella policies are typically quite inexpensive for the level of excess coverage they can provide. Usually policies with coverage of $1 million will likely cost you a few hundred dollars at most per year, which gives you good value. This should be affordable to a wide range of people.
What about uninsured motorist coverage?
Many umbrella policies do not have uninsured/underinsured motorist coverage.
Brian considers it essential to have at least $1 million from your umbrella to protect against at-fault drivers who do not carry liability insurance or carry very little. This is often overlooked but is a rising threat to all drivers.
Key takeaway: Umbrella policies are inexpensive and provide peace of mind by covering you above and beyond your existing property and casualty policy limits. You do not have to be super wealthy for this to make sense — it can be a good move for many people.
Many assume their home’s market value and rebuild cost are one and the same, but they are different. The fluctuating prices of building materials often make the rebuild cost more expensive than the market value, which means you should base your policy’s coverage on your home’s reconstruction cost.
Brian reiterated how important it can be to make this distinction when reviewing your current homeowners insurance policy or looking for a new policy:
“In the event of a significant loss, the reconstruction cost is often higher than the current market value. If you feel your coverage limit may not be adequate, many insurance companies will offer a free reconstruction appraisal to help determine the proper coverage amount.”
Key takeaway: Be proactive by taking a closer look at the features in your homeowners insurance policy. Recognizing small distinctions now can prevent future problems in the event of claim.
What is the right deductible?
In the insurance world, higher deductibles (the out-of-pocket amount you agree to pay for any claim you file) are typically associated with lower premiums. In the eyes of insurance companies, a higher deductible shows you are more financially responsible.
Brian also asserts that “taking a higher automobile deductible can help maintain the integrity and insurability of your policy and can also be an effective way to help manage premiums.”
Should you avoid turning in small claims?
Brian emphasized that “insurance companies judge us on the frequency of claims, not the actual size or payout.”
If you send in claims to the insurance company often, it will likely increase your cost of coverage. This is one area where being able to afford a higher deductible can benefit you. Let’s say someone with a higher deductible of $1,000 had $800 of damages to their car. This would be paid out of pocket, since it is under the $1,000 limit and no claim would need to be filed.
Should you purchase “liability only” coverage on older vehicles?
No one wants to overpay for their car insurance. Liability only coverage essentially limits the scope of what is covered. It pays for damages to other people or property in the event of an accident or incident, but damage to your vehicle is not covered.
This might be the right policy in a situation where someone owns an older car with high mileage and low replacement value.
Key takeaway: Evaluate how much you can afford to “self-insure” when it comes to small claims, as well as how high of a deductible you can afford. Liability only coverage for older vehicles can lower your costs.
Can you get any discounts?
You don’t want to pay full price if you don’t have to, right? According to Brian, there are a number of discounts that you may qualify for.
“Every insurance company has their own, unique discounts for automobile insurance,” he says. “That being said, almost all have the following discounts in common: good student discount, student away at school discount, multi-policy and multi-car discount, and the defensive driver discount (which you must be age 55 or above to qualify for).”
Key takeaway: Talk to your insurance provider to find what discounts they can offer you. Just asking can go a long way to discover some hidden savings!
Are you ready?
Insurance planning is an important piece of your financial picture, but there are other impactful areas — such as retirement, investing and estate planning — that should be addressed as well for a healthy picture.
Are you ready to make the most of your financial future? If you have any questions about your insurance needs, reach out to an advisor at Wipfli Financial.
* Cox Insurance Associates, Inc is not affiliated with Wipfli Financial or any of its affiliates.