Compared to the South and the West, the climate in the Midwest is derided for harsh winters and chilly, sloppy springs. But one silver lining is the absence of a hurricane season that plagues the Southeast and Eastern seaboard this time of year. The problem is that this out-of-sight out-of-mind perspective on cataclysmic weather events can sometimes lull people into a false sense of security that citizens of New Orleans would never take for granted. Look no further than the recent damage inflicted by Hurricane Ida, which is estimated to cost upwards of $95 billion. These costs must be paid by someone. A good portion will be borne by property and casualty insurance companies. Reviewing insurance coverage regularly can prevent these low-probability, high-impact life events from derailing your financial plan.*
*Note: Life insurance and disability insurance are also two major considerations for any wealth plan.
The protection provided by home and auto coverage is critical to families’ comprehensive wealth plan. But often it’s an afterthought and is considered a necessary evil. Most people spend more time researching their next vacation than reviewing their insurance coverage. It can also be confusing. But a little homework and a solid understanding of coverage can be time well spent. Properly matching insurance policies to one’s lifestyle can potentially save thousands if not hundreds of thousands of account-draining, retirement-killing expenses.
A best practice is to engage property and casualty insurance specialists for this critical aspect of wealth management. We are not licensed to sell any insurance products. Instead, we seek to coordinate with the specialists and match their expertise with our in-depth knowledge of the broader plan. Below we provide some perspective on best practices and pitfalls to avoid.
Know Your Coverage: Before getting into the details on home, auto, and umbrella policies, the first emphasis is for consumers to understand what they are buying and to know your coverage. No two situations are exactly alike, and just about everyone could use some tweaking to coverage in order to ensure the right fit in the most cost-effective manner possible. Everyone needs to account for the unique aspects of their home, property, and driving circumstances.
How Much Auto Insurance Do I Need?
- The Big Picture: First and foremost, clients should understand the numbers on the statements. For example, “$100,000 / $300,000 / $100,000” can be translated this way: In an auto accident that is your fault, after you pay your deductible (the first dollar expenses as noted in your policy), the insurance company will cover $100,000 of expenses per person you could have injured, up to $300,000 per accident (total) and up to $100,000 in property damage.
- Biggest Mistakes: Insurance brokers tell us the biggest mistake people make is failing to align coverage with their unique circumstances. For example, the $100,000 / $300,000 / $100,000 limits are probably too low for most. While those amounts are well above the State of Ohio minimum required coverage, it’s usually the lowest level most insurance providers will quote. In a serious accident, $100,000 of liability would quickly be reached. After that, the person at fault is on the hook for all expenses related to the accident. If substantial injuries are inflicted, this could lead to liquidation of retirement accounts, future wage garnishment, and other reimbursement mandates that could put a serious dent in a retirement plan.
- Best Practices: Consider an increase in coverage (which would increase premiums) and also an increase in the deductible (which would lower premiums). This is a common conclusion and strategy we’ve seen executed. In addition, keep an eye out for redundant coverage on items like warranties, towing, labor, etc. A manufacturers’ warranty or AAA coverage may already cover some expenses also covered in the policy.
How Much Homeowners Insurance Do I Need?
- The Big Picture: First, it’s important to be familiar with the basic terminology on a homeowners policy statement. A few to note are:
- “Dwelling” is the amount that is estimated to cover the replacement value of your home. This includes the costs to demolish and rebuild the home in the case of near-total destruction from fire, tornado, etc. Rising costs of construction have outpaced this coverage amount in many policies.
- “Liability” covers costs for injuries to people while on the policy holder’s property from incidents like slips/falls, dog bites, swimming pool accidents, etc.
- “External Structures” covers anything NOT attached to a home like a shed, fence, etc.
- “Personal Property” covers the “stuff” in your home like jewelry, artwork, electronics, etc.
- Biggest Mistakes: Much like auto coverage, having too little coverage and too low a deductible are common mistakes. Another is NOT having additional coverage for backup of sewer and drain, especially if a homeowner has made a substantial investment in a finished basement. In addition, damage from floods is typically NOT covered by homeowners insurance (or is limited) and may need to be a separately purchased policy or rider. Finally, owners of rental homes should work closely with their insurance providers to delineate between “owner-occupied” and “non-owner-occupied” (i.e. rental property) insurance coverage. An incorrect policy could, in extreme cases, void the policy coverage.
- Best Practice: Be acutely aware of the difference between “replacement cost” and “actual cash value” when evaluating coverage. Replacement cost is what it would take to replace your property, while “actual cash value” is effectively the “depreciated value” (much lower). For example, if one owns a ten-year-old couch that’s been destroyed, the homeowner probably won’t go buy another ten-year-old couch. They would obviously buy a new one. This type of estimate should be factored in across all property to ensure accurate coverage for replacement value.
Other Nuggets of Insurance Wisdom
- Consider an Umbrella Policy: For most of our clients, we recommend working with their insurance provider to estimate and procure an “umbrella” policy for liabilities that go above auto and home liability coverage. It’s usually cost effective and can save the day in serious situations where the homeowner is liable due to negligence. For example, an umbrella policy of $1,000,000 (beyond the liability protection from the homeowners policy) can start at around $300 per year. This is an inexpensive way to have large insurance companies’ attorneys “on retainer” for a small annual fee. Any insurance company liable for $1,000,000 will certainly have their attorneys engaged in the claim and potential lawsuit!
- Consider Working with an Insurance Professional: Those who work with an insurance broker often appreciate the ability to call their insurance advisor first to get advice about a potential claim before having to make a call to an insurance company, which could negatively impact coverage and future premium costs. In addition, insurance advisors can help customize coverage for unique situations and keep costs lower because of their ability to shop among many insurance carriers.
- Look for Package Discounts: Typically, it makes sense to bundle the purchase of home, auto, and umbrella policies from one company. Insurance carriers usually provide a package discount for buying all three forms of coverage from the company. While it’s not uncommon to obtain a cheaper policy by buying auto insurance alone online, the overall insurance expense may still be lower by buying all three policies from one carrier.