A few weeks ago, this blog addressed things to consider when purchasing property and liability coverage. As we review policies and quotes on behalf of clients there are some common questions, mistakes and coverages that are worth discussing. We take a closer look at auto, homeowners, and umbrella insurance below.
Auto Insurance Related
- Rates – It’s important to understand what drives auto insurance rates. There are some things such as the type of car you drive and your driving record that you have direct control over. Broad market factors such as increasing cost of auto repairs, and the impact of distracted driving are largely outside of your control and lead to increased rates. More and more companies, such as ROOT Insurance, are starting to use actual driving data to individualize rating. This could change things for the better but is still a work in progress.
- Discounts – Many mainstream insurance companies like to talk about discounts they offer for various things. They have commercials about them and highlight these on the policy declarations to make people feel good about how much money they are “saving”. My advice is to be careful about getting too excited for a “discount”. What really matters is the bottom-line cost. When comparing quotes, focus on the overall cost, but also the coverage terms and limits you are getting for that cost.
- Rental Reimbursement Coverage – This is an additional coverage that comes standard on some policies and cost extra on others. If you don’t have access to an extra car, this can be a very nice benefit to have, should you need to rely on a rental car for several days while your car is in the shop. However, if you have spare wheels, you can potentially save some money by removing this from your policy.
- Deductibles – It’s important to understand your deductible. You will pay this amount before the insurance company pays a dime. A higher deductible generally means your cost will be lower because you’re assuming more of the risk. The deductible will always apply to comprehensive, and collision claims, but may not apply to liability claims.
- Liability Limits – Liability limits have two parts – bodily injury and property damage. Bodily injury limits are usually written as a per person and per occurrence amount. Most commonly we see $100k to $250k per person and $300k to $500k per occurrence. Property damage is a separate limit, usually $100k. Some policies have what is called a Combined Single Limit which is the total amount of liability for any bodily injury or property damage caused by a single occurrence. Combined Single Limits are usually a higher amount such as $500k. For most people, higher limits are worth the additional premium cost given the rising costs of auto repairs and medical bills.
- Medical payments – This is separate from the liability limits and typically ranges from $2k to $10k. It is sort of a “don’t sue me” coverage. It’s what the insurance company will pay out no questions asked to an injured party in hopes of avoiding an expensive lawsuit.
Homeowners Insurance Related
- Coverage Types – Home insurance coverage is divided into four main coverage parts. Parts B & C are usually written as a % of Part A. More often than not the insured does not have the ability to choose their limits, they are based on an appraisal by the insurance company. Insureds can ask for an updated appraisal or an appraisal report if they wish to challenge the limits.
- Coverage A Dwelling – This is the limit for the primary dwelling on the property and anything attached to it.
- Coverage B Other Structures – This is the limit for unattached garages, sheds, fencing, and outdoor patios and decks. If it’s on the property but not attached to the primary home, then it’s covered here.
- Coverage C Contents – This is coverage for all the stuff inside your home. I like to say if you were to pick up your home and shake it, anything that falls out is covered here.
- Coverage D Loss of Use – This is coverage to reimburse the insured for costs incurred while their home is being repaired or rebuilt.
- Replacement Cost – Ideally you should have replacement cost coverage for Parts A, B and C above. This means that the insurance company will pay to replace your home and contents in full. The limit is still important as it drives the premium costs, but if the cost to re-build ends up being more than the limit of insurance, replacement cost ensures you’ll be able to build your home back the way it was before.
- Actual Loss Sustained – This applies to coverage D, loss of use, and provides a time limitation to loss of use coverage as opposed to a dollar limit. This is preferred since hotel rates, food costs and other loss of use items can be very unpredictable. The most standard is two years, but sometimes there is not a definitive time as long as work has begun repairing the home.
- Scheduled Items – Many high value items such as jewelry, art, furs, cash, firearms, collectibles, and silverware have separate lower limits due to their propensity to be stolen or lost. It’s not uncommon for these items to be limited to $1,500 each and $5,000 per occurrence even if you have a much higher Coverage C limit. If you have these items, it’s important to list them separately on the policy at their fair value. The insurance company may ask for an appraisal depending on the item and the amount. Without scheduling these things, you risk receiving only a fraction of the true value in the event of a claim.
- Changes to your Home – Making significant changes to your home can impact your insurance coverage. If you do any sort of home improvement project, you should let your insurance company, or broker know. On-going construction projects are not always covered by your policy, and if the insurance company is not aware of finished projects, they can reduce the amount paid on a claim or refuse to pay altogether.
Umbrella or Excess Liability Insurance Related
- Umbrella or excess liability extends liability limits on your auto and home policy. Typically, the excess policy will require the insured to carry a certain amount of liability coverage on the underlying home and auto insurance. It’s important to make sure your policies meet those underlying limits, or you are subject to a big gap in coverage.
- For example, consider your umbrella liability requires $500,000 personal liability on your homeowner’s policy, however, you only carry $300,000. In the event of a $750,000 claim, your homeowner’s policy would pay the first $300,000. You’d be on the hook for $200,000 to get to the required underlying limit, and the umbrella would kick in the remaining $250,000.
- Umbrella insurance is cheap and something we highly recommend all clients purchase. $1M, $3M and $5M are common purchase amounts. Your TAAG advisor can help you determine a reasonable amount based on your personal situation.
A sound insurance policy is an important part of a comprehensive financial plan. Insurance is a cost-effective way to protect your assets. While we hope we never have to use it, it’s important that the coverage does what it’s supposed to do in the event of a claim.
Feel free to reach out to your advisor if you have questions about your personal auto, home, and umbrella coverage. We are happy to review and provide input or an introduction to professional brokers who can help.