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Insurance Can Make or Break Your Financial Plan – Kiplinger's Personal Finance

  • Attorney Daniel Albert

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Having the correct property and casualty coverage is critical when it comes to protecting your assets.  Lack of P&C planning may cause you to lose the ability to meet your life goals if disaster strikes.
For example, if your home gets destroyed by fire (and you have substantial equity in the home) but you are only covered up to 50% of the replacement value, this can be financially devastating.
Proper planning does not stop after the initial analysis and the insurance placement; you should evaluate your insurance situation at least every couple years, or more often if there are any significant changes, such as purchasing a new home or new car, or a dependent child receiving their driver's license.
If you have multiple policies with different agents and insurance companies, with varying expiration dates, it can be tough to administer and keep track of premium payments. It also may result in serious coverage gaps.
You can minimize this risk by consolidating coverage and coordinating the dates when the policies renew. To make consolidation more appealing, insurance firms usually offer substantial discounts to individuals who purchase more than one policy from them. On the other hand, consolidation may have some disadvantages, as carriers may offer better or broader coverage for a lower cost on certain types of policies, but not on others. For example, auto coverage may be more comprehensive from a particular insurance carrier, but that carrier's homeowners coverage may be inadequate, expensive or unavailable.
When selecting an insurance policy and carrier, the major elements involved in the evaluation process include deductibles, adequacy of limits, potential coverage gaps, quality of contracts, carrier financial stability (consider firms rated A or better by at least two major rating agencies as a base benchmark), and carrier claims-settlement procedures.
Usually a general homeowners policy will protect against specific perils, such as theft, fire and personal liability. A separate flood policy may also be needed, since flood coverage is typically excluded from most homeowners policies. Basic flood coverage is provided by certain agencies that are contracted through the federal government. The statutory coverage for the home is limited to $250,000. An excess flood insurance policy is designed to cover any losses to the dwelling and to personal property above and beyond the limits that are offered by the National Flood Insurance program.
In some states, you may need to have several separate policies to protect your home. For example, in Florida, since hurricanes are an ongoing concern, a windstorm policy is also important, as coverage is usually not provided under the general homeowners policy. This type of coverage is often available through state-sponsored programs.
Property should be insured at replacement cost, which is defined as the ability to replace the property in today's dollars regardless of age or use. Dwelling coverage should equal at least 80% of the value of the property, since some value may be attached to the land. In some locations, the land may actually be worth more than the dwelling. You may want to get a separate valuation so you can avoid paying a higher premium to inadvertently insure land.
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.
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.
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.
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.
Senior Financial Adviser, Evensky & Katz/Foldes Financial Wealth Management
Roxanne Alexander is a senior financial adviser with Evensky & Katz/Foldes Financial handling client analysis on investments, insurance, annuities, college planning and developing investment policies. Prior to this, she was a senior vice president at Evensky & Katz working with both individual and institutional clients. She has a bachelor’s in accounting and business management from the University of the West Indies, she received an MBA at the University of Miami in finance and investments.
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