Property & Casualty


For the last few weeks, we’ve made a point of saying not to shop price when purchasing property & casualty insurance. However, we want to be sure to note that there are ways to save money on your insurance, even after you structure a policy to protect yourself well.

Discounts

Most insurance companies have a long list of discounts that can have a big impact on the price of your insurance premiums. A big one is the multiline discount. It is always simpler to have all of your property & casualty insurance through the same insurance company. You just have to make sure you find a company that can provide the right type of coverage. Then you should be able to use their multiline discount, which will lower the premium on all the property & casualty policies you have with them.

There are many other possible discounts as well: safe driver and good student discounts for auto, home alarm system discount for homeowners, etc. Be sure to check with your agent to make sure you are taking advantage of all the discounts you qualify for.

Deductibles

Another area that may be able to save you money in premiums is adjusting your deductibles. For example, if you have a $250 deductible on your Collision coverage, it may be worth adjusting it up to $500 or $1,000 (if you can afford the payout in the event of an accident). The way to decide if the savings is worth it, take the difference in deductibles and divide it by the difference in the annual premiums. This will give you your payback period (how long it would take in saved premium to make up the difference in deductible). If this period is five years or less for auto, and eight years or less for homeowners, then the increase in deductible is probably worth it.

The reasoning behind using five years for auto and eight years for homeowners is simple. Property and casualty insurance companies expect that you’ll file an auto claim about once every fives years, and that you’ll file a homeowners claim once every eight. So, if your payback period falls within these years, you’ll have saved enough money in premiums to pay for the difference in deductible at claim time.

So, for an example, the difference in a $250 and $500 deductible is $250. The difference in the annual premium with those two deductibles is $70.

$250 / $70 = 3.57

So, increasing the deductible to $500 would save you $70 in annual premiums, giving you a payback period of 3.57 years. So, as long as you can afford the extra out of pocket cost of the increased deductible, then the increase would be worth it. You use this method for both auto and homeowners insurance to decide on the right deductible for you.

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After our discussions on auto insurance and homeowners insurance, do you feel that your coverage is adequate? If you set your personal injury liability limits at $500,000 as we usually suggest, will that be enough to cover you in a potential lawsuit? What if you severely injure or kill medical doctor who is a highly specialized in an unusual field? The truth is $500,000 may not be enough for all possible situations, which is why we often recommend people add what is known as an umbrella policy.

An umbrella policy is liability coverage designed to rest on top of your other liability coverages. It steps in to pay for liability costs you may incur once your auto and homeowners policies coverage runs out.

Umbrella policies are another great deal. It often comes in $1,000,000 increments and can cost as little as $100-$200 a year.

A good umbrella policy will not only pick up when your other coverage runs out (including legal cost), but it will also cover areas that may not be covered by your primary policies (coverage gaps). Otherwise, if you are sued for something that is not covered by your primary policies, which can happen even when you try your best to have a solid policy, everything you owe in the result of a lawsuit will be out of pocket to you.

Many people would probably do well to purchase $1,000,000 of coverage. Even if you don’t feel you need it, the second layer of protection may be worth it, especially at such a low cost. If you have a high “sueability factor” (high net worth, high income, etc.), you may want to purchase more coverage.

Things to consider

There are a few things you should think about before buying. Not all umbrella policies are the same. Many don’t have the gap coverage that is such an important feature. Don’t pay for an umbrella policy that only covers what your primary policies cover; find one that will cover all the important gaps those policies may have. Be sure to do your research first and make sure you find an insurance company that has quality coverage.

Also, in our talks of auto insurance and homeowners insurance, we’ve discussed the importance of matching your liability limits. An umbrella policy comes in only after your primary polices have reached their limits. If your umbrella policy is set to start at $500,000, but you only have your homeowners’ liability limit set to $500,000 and your auto at $300,000, you can be in trouble. If you get into an accident and the lawsuit makes you liable for $600,000, your auto policy will cover the first $300,000, your umbrella policy the additional $100,000 (kicking in at $500,000), and you personally are responsible for the $200,000 gap. So it’s very important to make sure all of your liability limits match and your umbrella policy sits directly on top.

With all of our talk about not shopping price when structuring your insurance policies, next week we wanted to spend some time discussing ways you can actually save money on your insurance.

Homeowners insurance is similar to auto insurance in that people often shop for price and don’t consider what kind of coverage they are buying. This is a very dangerous way to buy this type of insurance because it’s filled with gaps and pitfalls that you have to be wary of.

If you’re like many people, your home is the biggest financial investment you’ll make. However, insuring the physical structure of the house is only a portion of what homeowners insurance can cover for you. And it’s a great deal, you can usually get a lot of coverage for a small price, so don’t hesitate to increase your coverage where needed.

Basic Coverage

There are a number of different coverages that homeowners insurance offers.

Coverage A – Coverage for the structure of your home – This pays to repair or rebuild your home if it is damaged or destroyed by fire, hurricane, wind, hail, lightning, or other disaster listed in your policy.

It’s very important that you cover at least 80% of the replacement cost of your home (to rebuild new). If your coverage is less than 80%, you will get a depreciated claim settlement. To be safe, you should insure 100% of the replacement cost of the home, though it’s not always easy to decide on that number. Insurance companies often have a formula which is used to estimate this cost (based on size, materials, etc.). If you choose to use this formula, make sure the company has all the correct information on the house for the most accurate estimate.

Also, some insurance companies offer a Home Replacement Guarantee. This is a great option! This guarantee will cover you should you discover at claim time that your full replacement cost is higher than you estimated. Since this risk is likely due to the difficulty in getting an accurate estimate, the Home Replacement Guarantee can be a big help. So be wary of insurance companies that don’t offer this coverage.

Coverage B – Coverage for the structure of detached buildings – This refers to detached garages, sheds, in-ground pools, etc. The usual coverage is 10% of the coverage on the home, which is automatic with the policy. This automatic coverage is often sufficient, but if you have a structure that you know is worth more than the 10%, you can purchase additional coverage.

Coverage C – Coverage for your personal property This pays to replace the contents of your home if items are stolen, damaged, or destroyed by a covered risk. Most policies cover up to 70% of the amount of the coverage on your home. It’s important to buy the replacement cost option, which will cover replacing your belonging new instead of the depreciated cost of the items. If you need more than the automatic coverage, it can be purchased.

If you have specialty items (jewelry, electronics, antiques) or collectibles (stamps, coins, figurines), you may need a separate “rider” for those items. Consult with your homeowners insurance agent to confirm that your coverage is adequate.

The problem with this coverage comes at claim time. Even if you insure everything properly and have enough coverage, if your home is completely destroyed, will you be able to remember everything you had inside and also be able to prove you had it? Insurance companies aren’t going to payout for items you can’t remember you had, and often they will require proof. The solution to this problem is incredibly easy but we don’t think many people take to time to do it. Just take pictures or videotape the contents of your home. It doesn’t take long and it’s easy to update when you get new things. Don’t forget to open all the closets, cabinets, and drawers, and go through all the nooks and crannies of the house and garage. Of course, the key here is to keep the proof off site. Insurance companies will take videos or pictures as proof of your ownership and you won’t have to go through the incredibly stressful task of having to remember everything you owned when it’s gone.

Coverage D – Coverage for additional living expenses – If you are displaced from your home due to damage covered by A, B, and C, this coverage will help with the additional living expenses you may incur (hotels, dining out, etc.). You will get coverage based on a percentage of the coverage on your home, depending on the insurance company.

Coverage E – Coverage for liability protection Covers you against lawsuits for bodily injury or property damage that you, family members, or your pets cause to other people, even if it’s not on your property. Liability limits generally start at $100,000. We generally recommend that your have at least $500,000 for better protection, but make sure to match your other liability limits on your auto insurance.

Coverage F – Coverage for medical payments – This covers the medical payments for someone injured on your property. It’s not as important as the other coverages, and if someone is seriously injured, you should be covered by your coverage E.

Dangers of Homeowners Insurance

Homeowners insurance policies are filled with exclusions and gaps. We’re not going to get into every one possible, but just know they exist and if you review your policy and are uncomfortable with what you see, talk with your insurance agent and see if you’re covered properly. A good agent will be able to tell you where your policy needs to be strengthened.

One exclusion we will mention because it’s important is for business use. If you have a home office and/or use any portion of your home or detached structures for business use, you will not be covered under your normal homeowners policy for property damage or liability! That’s incredibly important because some people may not realize that when they store some business equipment in the garage or keep inventory for a personal sales job, it may not be covered if lost or damaged. Make sure you talk to your agent about the risks you are taking on with a home business and what coverage you will need to protect yourself.

Another insurance option that compliments the auto and homeowners policies is called an umbrella policy, and this type of coverage can help you avoid the exclusions and gaps you otherwise may be open to. We’ll cover umbrella policies next week.

When it comes to property & casualty insurance, many people shop for price. Most of us have seen the popular Progressive commercial with the “price gun” where the customer names the price and the policy is built to match.

Unfortunately, this type of insurance policy leaves a lot to be desired. If your only concern while looking for insurance is how much it will cost you in premiums, you run the risk of being underinsured, which you won’t feel the impact of until it’s too late.

The point of insurance is to protect you from the possibility of financial hardships due to catastrophes. What you should be concerned about is how well you are being covered for each possible scenario. This isn’t to say premiums aren’t important. You should definitely price shop among as many different insurance companies as you can to find the best deal and make use of as many discounts as you can, but just be sure you’re shopping for the correct coverage.

Today we’ll cover how to structure an auto policy to protect you better.

Split Limits vs. Single Limit Coverage

Something to note about the liability coverage on auto insurance is there are two different types of coverage: split limits and single limits.

While liability coverage is often sold as single limit (this coverage pays for any injuries and property damage you cause in an accident up to one single limit), it is most commonly sold as split limits. Split limit coverage has three limits that you must choose. The first is what pays for injuries you cause to one person in an accident (per person), the second pays for all the injuries you cause in an accident to more than one person (per accident), and the third is any damage you cause to property. We prefer single limit coverage, but not all insurance companies sell auto coverage as single limit.

If your insurance company doesn’t offer single limit coverage, be careful when choosing split limits. The common coverage often has per person coverage set lower than per accident, however per person coverage is the most likely to be used up.

Here are a couple of examples. Say you have $100,000 per person, $300,000 per accident split limit liability coverage. You injure one person in an accident who is awarded $200,000 for their injuries by the court. You would be fully covered by your $300,000 per accident coverage, right? Unfortunately, it doesn’t work that way. The insurance company would pay the $100,000 per person coverage, and you would have $100,000 out of pocket expense. Same situation, except you injure two people. One is awarded $50,000 and the other $150,000. What happens here? The $50,000 is fully paid by the insurance to the first person because it is under the per person limit, but only $100,000 will be paid for the other person and the $50,000 will be out of pocket for you.

Scary, isn’t it? But the likelihood of these type of situations can be greatly reduced by increasing and matching both the per person and per accident liability coverage.

Basic Coverage

Collision – Pays for damage to your car resulting from a collision or accident. Everyone should have this coverage, except perhaps in cases of old, high mileage cars.

Comprehensive – Coverage for almost everything other than collision or accident, such as wind or hail damage, broken windshield, and theft. As with collision coverage, everyone should have this unless the car is not worth the cost of coverage.

Bodily Injury Liability – Covers you and other designated drivers if you cause injury to another person. A common coverage is $100,000 of bodily injury protection per person and $300,000 per accident. We would usually recommend that you have at least $500,000 for single limits and $500,000 per person, $500,000 per accident for split limits.

Property Damage Liability (split limits) – Covers damages that you may cause to someone else’s property, i.e. vehicle, fence, landscape, etc. You should match the other limits at $500,000 of property damage protection.

Medical Payments or Personal Injury Protection (PIP) – Covers medical payments and possibly lost wages of someone injured in an auto accident. There are state laws that will typically dictate how much of this coverage is needed.

Uninsured and Underinsured Motorist Coverage – Reimburses you if an accident is caused by an uninsured or underinsured driver. A common coverage is again $100,000 per person, $300,000 per accident.

  • Uninsured Motorists – Covers you if you are involved in an accident with a driver that has no liability coverage or is unidentified (hit and run)
  • Underinsured Motorists – Covers any gap that may occur when your injury’s cost exceeds the other driver’s auto liability coverage.

Make sure to match your Uninsured and Underinsured coverage to your liability coverage for bodily injury (at least $500,000 for single limit and $500,000 per person, $500,000 per accident for split limits).

Not all insurance companies offer underinsured coverage, so be wary of working with a company that doesn’t offer this important coverage.

Building the correct policies for insurance can be frustrating. It involves a lot of leg work and if you’re not careful, you may end up falling through the many gaps that policies can have when it comes time to file a claim. Next week we’ll talk about homeowners insurance.