Having the right P&C coverage is essential when it comes to protecting your assets. Failure to plan for damages can cause you to lose the ability to achieve your life goals in the event of a disaster.
For example, if your home is destroyed by fire (and you have substantial equity in the home) but you are only covered for 50% of the replacement value, this can be financially devastating.
Good planning doesn’t stop after the initial analysis and insurance placement; you should review your insurance situation at least every two years, or more often if there are significant changes, such as the purchase of a new house or a new car, or a dependent child receiving his or her driver’s license.
Make sure existing policies align
If you have multiple policies with different agents and insurance companies, with varying expiration dates, it can be difficult to administer and track premium payments. It can also lead to serious coverage gaps.
You can minimize this risk by consolidating coverage and coordinating policy renewal dates. To make consolidation more attractive, insurance companies usually offer substantial discounts to people who purchase more than one policy from them. On the other hand, consolidation can have some disadvantages, as insurers may offer better or broader coverage at lower cost on some types of policies, but not on others. For example, auto coverage may be more comprehensive with a particular insurance company, but homeowner coverage with that company may be inadequate, expensive, or unavailable.
When selecting an insurance policy and insurer, key elements involved in the evaluation process include deductibles, adequacy of limits, potential coverage gaps, contract quality, stability insurer financials (consider companies rated A or better by at least two major rating agencies as a baseline) and carrier claims procedures.
Home Insurance Considerations
Usually, a general home insurance policy protects against specific perils, such as theft, fire, and personal liability. A separate flood policy may also be required, as flood coverage is generally excluded from most homeowner policies. Basic flood coverage is provided by certain agencies under contract with the federal government. Legal coverage for the home is limited to $250,000. An excess flood insurance policy is designed to cover any loss to home and personal property beyond the limits offered by the National Flood Insurance Program.
In some states, you may need to have multiple 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 as part of the general homeowners policy. This type of coverage is often available through state-sponsored programs.
The property must be insured at replacement cost, which is defined as the ability to replace the property in today’s dollars, regardless of its age or use. Housing coverage should be at least 80% of the value of the property, as some value may be attached to the land. In some places, land may actually be worth more than housing. You may want to get a separate appraisal to avoid paying a higher premium to inadvertently insure land.
If the policy limit is less than 80% of the replacement cost of the home, you may face a co-insurance penalty in the event of a claim; that is, in the event of a disaster, you may have to pay expenses beyond the deductible you have chosen. For example, if the replacement value of a home is $1 million, you must have coverage for at least 80% of the replacement value ($800,000). If the home was insured for $400,000, the insurer would only pay half the loss, minus the deductible. For example, if you suffer a loss of $200,000, the insurance company will only pay $100,000 less the 10% deductible.
Home insurance costs have increased recently due to supply chain shortages and demand for raw materials, so you may want to check that your coverage is keeping up with these costs.
Don’t forget to insure your personal valuables. Under a general homeowners policy, valuable personal items, such as jewelry, antiques, and artwork, are excluded or capped (usually $1,000) at what the insurance company will pay in the event of a claim. To make up the difference, a separate endorsement is required listing each item and its value, which is then insured at an additional cost. Standard home insurance policies are generally insufficient to cover valuables due to property coverage limitations.
In general, if the house suffers a total loss, the company must pay the amount indicated for the accommodation and contents for which the premium was paid. However, if the loss is only partial, the insurance company may only reimburse the actual cash value of the items that perished, until you are able to produce physical receipts for the replacement items.
If an item has sentimental value, the terms of replacement outlined in the policy should be assessed, as it is usually much cheaper for the insurance company to replace a damaged item than to have it repaired by a specialist. In fact, most insurance companies prefer to replace the item or pay cash, and they may not offer a repair option. If the cost of repair does not exceed the cost of replacement, you may choose to repair the item, depending on how the contract is written.
Valuables that are kept outside your principal residence must also be insured. If you own property in more than one state, coverage and policies may vary.
Car Insurance Considerations
Because insurance is used as a risk management vehicle to protect against catastrophic risks (and is priced accordingly), deductibles should be at the highest possible level, balancing your financial capacity to absorb accident losses and your comfort level with potential payouts. If your car is leased or financed, it may not be possible to select a deductible greater than $1,000. Choosing a higher deductible lowers the premium, but you’d want to make sure you can afford to cover the higher deductible in the event of a claim.
When it comes to medical expenses due to a car accident, health insurance policies often leave gaping holes and, although general liability insurance policies provide liability coverage (i.e. that they cover the injuries of the people the insureds injure), they may not provide any cover for injuries sustained by the insureds. in an accident themselves. Coverage for uninsured motorists will mitigate this risk by providing coverage where health insurance stops. Uninsured Motorist (UM) coverage allows you to recover from the other insurance company any damages that may result from an uninsured or underinsured motorist in addition to any coverage you have.
Stacked coverage adds the policy limits for each automobile, in the event of injuries sustained by an uninsured motorist. In general, you should consider selecting stacked coverage if you have more than one auto insurance under the policy.
If an accident results in legal action, Umbrella Liability protects against damage resulting from bodily injury and property damage, beyond the coverage provided by home and auto insurance policies. If you own vacant land or rental property, it’s important to make sure it’s covered by 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.
Supplemental liability insurance can provide limited protection for liabilities arising from service as a director or officer of a nonprofit board of directors. If you have this type of board liability, you should consider purchasing a separate Directors & Officers (D&O) liability insurance policy that will cover additional liabilities, including errors and omissions, misrepresentations and breaches of duty. Many insurers typically ask if the insured is a director or officer when purchasing an umbrella policy.
Potential liabilities can also arise when employing domestic workers or personal assistants. If someone gets hurt on the job or injures someone else on the job, you can be personally liable, even if the employee is considered an “independent contractor” or a non-employee person. Many independent contractors have their own liability insurance, but you should check the level of their coverage before hiring them to ensure there is adequate protection.
You can purchase excess liability insurance for amounts ranging from $1 million to $50 million. The amount of excess cover that is sufficient depends on several factors, such as your risk profile and financial situation. A $1 million policy can cost as little as $200 to $250 a year. Again, make sure the liability insurance is sufficient to cover existing assets as well as future earning capacity. You may need to discuss this with your attorney and your P&C insurance professional to get a clear idea of which assets are at risk in the event of a lawsuit.
Senior Financial Advisor, Evensky & Katz/Foldes Financial Wealth Management
Roxanne Alexander is a Senior Financial Advisor at Evensky & Katz/Foldes Financial, managing client analysis on investments, insurance, annuities, college planning and investment policy development. Prior to that, she was a senior vice president at Evensky & Katz working with individual and institutional clients. She holds a bachelor’s degree in accounting and business management from the University of the West Indies, she obtained an MBA from the University of Miami in finance and investments.