Insurance Can Make or Break Your Financial Plan

If the policy limit is less than 80% of the replacement cost of the home, then you may face a coinsurance penalty in event of a loss; that is, should disaster strike, you may have to pay expenses beyond your chosen policy deductible. For example, if a home’s replacement value is $1 million, you should carry coverage of at least 80% of the replacement value ($800,000). If the home was insured for $400,000, the insurer would only pay for half of the loss, less the deductible. For example, if you suffered a $200,000 loss the insurance company would only pay out $100,000, less the 10% deductible.

Home insurance costs have gone up recently due to supply chain shortages and demand for raw materials, so you may want to verify that your coverage is keeping up with these costs.

Personal Property

Don’t forget to insure your valuable personal property. Under a general homeowners policy, valuable personal articles, such as jewelry, antiques and artwork, are excluded or have caps (generally $1,000) on what the insurance company will pay in the event of a loss. To make up the difference, a separate rider is needed listing each item and its value, which is then insured at an additional cost. Standard homeowners insurance policies are usually inadequate to cover valuable items because of the limitations on property coverage.

In general, if the home suffers a total loss, the company should pay the amount shown for the dwelling and contents for which the premium has been paid. However, if the loss is only a partial one, then the insurance company may only reimburse the actual cash value of the items that perished, until you are able to produce the physical receipts for the replacement items.

If an item has sentimental value, the replacement terms outlined in the policy should be evaluated, since it is usually much less costly for the insurance company to replace a damaged item than to have it repaired by a specialist. In fact, most insurance companies would prefer to replace the item or pay cash, and they may not provide an option for repair. If the cost of repair doesn’t exceed the cost of replacement, you may have the option to choose to repair the item, based on how the contract is written.

Valuables that are kept outside your primary residence also need to be insured. If you own property in more than one state, coverage and policies may vary.

Auto Insurance Considerations

Because insurance is used as a risk management vehicle to protect against catastrophic risk (and is priced accordingly), deductibles should be the highest level possible, balancing your financial ability to absorb casualty losses and your comfort level with potential out-of-pocket costs. If your car is leased or financed, it may not be possible to select a deductible that’s higher than $1,000. Choosing a higher deductible reduces the premium, but you would want to make sure you can afford to cover the higher deductible in the event of a claim.

When it comes to medical costs due to an auto accident, health insurance policies often leave gaping holes and while umbrella liability policies provide liability coverage (meaning they cover the injuries of people policyholders injure), they may not provide any coverage for injuries the policyholders suffer in an accident themselves. Uninsured motorist’s coverage will mitigate this risk by providing coverage where health insurance stops. Uninsured motorist (UM) coverage allows you to collect from the other insurance company any damages that may arise from an uninsured or underinsured motorist over and above any coverage you have.

Stacked coverage adds together policy limits for each automobile, should injuries be sustained by an uninsured motorist. In general, you should consider selecting stacked coverage if you have more than one auto under the policy.

Excess Liability/Umbrella

If an accident results in a lawsuit, umbrella liability protects against damage arising out of personal injury and property damage, above the coverage provided by homeowners and automobile policies. If you own vacant land or rental property, it’s important to ensure that it’s covered under your liability insurance.

In addition to providing higher dollar coverage for bodily injury or property damage, an umbrella policy can provide coverage for other lawsuits, such as defamation of character and invasion of privacy.

Excess liability insurance may provide limited protection for liabilities arising out of service as a director or officer on a nonprofit board. If you have this kind of board responsibility, then you should consider purchasing a separate directors’ and officers’ (D&O) liability policy that will cover additional liabilities, including errors and omissions, misstatements and breach of duty. Many insurers typically ask if the insured is a director or officer when an umbrella policy is purchased.

Potential liabilities may also arise when employing household workers or personal assistants. If a person is injured while working or injures someone else while on the job, you may be personally liable, even if the employee is considered an “independent contractor” or non-salaried individual. Many independent contractors have their own liability insurance, but you should check the level of their coverage before hiring them to ensure that there’s adequate protection.

You can purchase excess liability insurance in amounts ranging from $1 million all the way up to $50 million. How much excess coverage is enough depends on several factors, such as your risk profile and financial situation. A $1 million policy can cost as little as $200-$250 annually. Again, make sure liability insurance is adequate to cover existing assets as well as future earning capacity. You may need to discuss this with your attorney and property and casualty professional to get a clear idea of which assets are at risk in the event of a lawsuit.