Without the right insurance, you could be in danger of being involved in a bad accident, storm, or even a lawsuit. It could take several types of insurance to cover everything, from umbrella to uninsured driver, flood, and excess liability.
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Protecting your assets is as simple as having the right property and casualty insurance. If you don’t plan properly, you may lose your ability to achieve your life goals in the event of a disaster.
If your home is destroyed by fire and you only have 50% coverage, it can be financially disastrous.
Are you worried that your neighbor’s tree will fall on your property?
Planning is not done after you have completed the initial analysis and placed your insurance policy. You should review your insurance situation every two years or more frequently if there are significant changes such as a purchase of a new home, a new car or the birth of a child.
Check that all policies are compatible
It can be difficult to manage and track premium payments if you have multiple policies from different insurance companies and agents. This can also lead to coverage gaps.
This risk can be reduced by consolidating coverage, and coordinating when policies are renewed. Insurance companies often offer significant discounts to customers who buy more than one policy. Consolidation can have its disadvantages. Some carriers might offer better coverage or more affordable rates for certain types of policies. However, they may not be able to provide the same coverage on other types of policies. One example is that while auto coverage might be more extensive from one insurance carrier, homeowners coverage may not be available, be expensive, or be insufficient.
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The major components of the selection process for an insurance policy or carrier include deductibles and adequacy limits. Quality of contracts and financial stability. (Remember firms that have been rated A by at least two major rating agency as a baseline benchmark). Also, claims-settlement procedures.
Considerations for homeowners insurance
A general homeowners policy usually covers you against theft, fire, and personal liability. An additional flood policy might be required, as flood coverage is usually excluded from homeowners policies. Certain agencies contracted by the federal government provide basic flood coverage. Maximum statutory coverage for the home is $250,000. The statutory coverage for the home is limited to $250,000. An excess flood insurance policy covers any loss to the dwelling or personal property beyond what is offered by the National Flood Insurance program.
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You may need multiple policies in some states to protect your home. In Florida, for example, hurricanes are a constant concern. A windstorm policy is important as it provides coverage that is not available under the homeowners policy. This coverage is often offered through state-sponsored programs.
Personal Property
Make sure to protect your personal property. A general homeowners policy excludes valuable personal items such as jewelry, artwork and antiques. The insurance company may also have caps (generally $1,000) on the amount they will pay in case of loss. A separate rider listing each item’s value is required to make up the difference. This is then insureable at an additional cost. Because of limitations on property coverage, standard homeowners insurance policies often fail to protect valuable items.
It is important to evaluate the terms of the policy regarding replacement. It is often cheaper for an insurance company to replace damaged items than to have them repaired by specialists. Most insurance companies prefer to replace the item, or pay cash. They may not offer an option for repair. You may be able to choose to repair the item if the cost of repair is less than the cost for replacement. This depends on the contract.
Considerations for Auto Insurance
Insurance is used to manage catastrophic risk and is priced accordingly. Deductibles should be as high as possible to balance your financial capacity to absorb casualty loss and your comfort level with out-of-pocket expenses. A deductible higher than $1,000 may not be possible if your car is leased, financed, or used as a vehicle. A higher deductible will reduce your premium. However, you should make sure that you have the funds to pay the higher deductible in case of a claim.
Insurance policies can leave gaps when it comes to coverage for medical expenses resulting from an auto accident. While umbrella liability policies provide coverage for liability (covering injuries to policyholders), they do not cover injuries sustained by policyholders. This risk can be mitigated by uninsured motorist coverage, which provides coverage for areas where health insurance is not available. Uninsured motorist coverage (UM) allows you to recover from the other insurer any damages that could arise from an underinsured or uninsured driver. This coverage is in addition to any coverage you already have.
Excess Liability/Umbrella
Umbrella liability covers personal injury and property damages in the event of an accident that results in a lawsuit. This coverage is beyond what homeowners and auto policies provide. It is important that you have liability insurance if you own vacant land and rental properties.
An umbrella policy provides coverage for additional lawsuits such as defamation and invasion of privacy, in addition to higher dollar coverage for bodily injuries or property damage.
The exclusion of liability insurance might not provide sufficient protection against liabilities that arise from your service as a director, officer or member of a non-profit board. You should consider buying a separate directors and officers (D&O), liability policy to cover additional liabilities such as errors and omissions and breach of duty. When an umbrella policy is purchased, many insurers will ask whether the insured is a director/officer.
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About the Author
Roxanne Alexander, CFP(r), CAIA, AIF(r), ADPA(r)
Senior Financial Adviser, Evensky & Katz/Foldes Financial Wealth Management
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Roxanne Alexander works as a senior financial advisor with Evensky & Katz/Foldes Financial. She provides analysis and recommendations to clients on insurance, annuities, college plans, and the development of investment policies. Before this she was a senior vice-president at Evensky & Katz, working with individual and institutional clients. She holds a Bachelor’s degree in business management and accounting from the University of the West Indies. She also has an MBA in finance and investments from the University of Miami.