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Insurance Basics
Insurance Basics
You’ve been saving for years and making good progress toward your retirement and other investment goals. But a single catastrophic event — like major storm damage to your home or a serious car accident — can quickly derail your financial plan. That’s why having adequate insurance protection is a cornerstone of financial wellness.
Many different types of policies are available. To help ensure you have all the protection you might need, it’s important to understand the options.
Homeowners insurance. A homeowner's insurance policy can protect you from losses due to fire, theft, storms and other perils. And when there’s a mortgage on the property, it’s typically a lender requirement.
Renters and condo insurance. Both of these types of policies can offer some of the same protection as homeowners insurance but are tailored to the specific needs of renters and condo owners. Condo owners, for example, don’t need as much structural coverage as homeowners. Renters primarily need insurance to cover belongings — and certain liability claims — and it’s often the least expensive of the three types of policies.
Flood insurance. Damages caused by flooding are generally excluded from standard insurance policies, so you’d most likely need to purchase this type of coverage separately. Even homes outside of flood zones can be susceptible to flooding.
Auto insurance. Car insurance can protect you from unforeseen losses resulting from accidents, storms, theft and vandalism — as well as property damage and injuries to yourself or others. Coverage requirements can vary by state, so it’s important to carefully review the terms of your policy.
Boat, motorcycle and RV insurance. Operating watercraft and vehicles other than your car carry unique risks and require separate policies of their own. They may also include coverage for belongings stored on them.
Health insurance. Preventive care, as well as treatments for diseases and other conditions such as diabetes and asthma, are covered by private or employer-provided policies. The Affordable Care Act guarantees 10 essential health benefits, including mental health treatment, maternity care, lab work and ambulatory and preventive services.
Life insurance. Purchase this type of protection to safeguard the financial future of those you love should the unthinkable happen. Term policies typically cost less and pay a benefit for a certain number of years, while whole life policies cover an entire lifetime and can accrue cash value.
Umbrella policies. You can obtain extra liability coverage beyond the limits of other policies — such as homeowners and auto policies — with this type of insurance. Umbrella coverage is often sought after by higher net worth individuals with more assets to protect.
Disability insurance. If you’re unable to work due to illness or injury, short- and long-term disability coverage can help protect your income. You may have a policy provided through your employer, but you can also purchase disability insurance individually.
Pet insurance. This type of policy can help offset expensive veterinary treatment for your pets. But be sure to look into what conditions or treatments are excluded.
Insurance Can Be Complex, So Get Help
While your declaration page can give you an overview and a good starting point for understanding your policy, many important details are in the fine print. That’s why you should understand the specifics and do your homework on:
- Coverage limits.
- Any exclusions.
- Your deductible (what you have to pay out of pocket before coverage begins).
- Whether your policy reimburses according to actual cash value (depreciated value) or replacement value (cost to buy new).
- Any waiting period before coverage kicks in.
Effectively knitting together adequate protection from a variety of policies can mean the difference between financial security and financial peril. With such high stakes, it can be highly beneficial to get advice from a qualified financial professional or licensed insurance agent to help ensure you have the types and amounts of coverage you need. The time to act is before disaster strikes — because insurance helps protect your financial future … and the things you value most.
Are You Underinsured?
Are You Underinsured?
For some, insurance is just one more item on their financial checklist. Whether you mortgage a home, buy a car or start a business, some type of insurance is usually required. But what if, despite paying all your premiums on time, your coverage comes up short when you encounter a loss?
There are at least three ways you might be underinsured:
- Not carrying insurance for new risks as your life circumstances change.
- Having a policy with coverage limits that are too low to cover a potential loss.
- Failing to notice policy exclusions that don’t protect all your assets.
To avoid finding yourself in one of these situations, it’s important to understand where your coverage may be insufficient — or lacking altogether.
The Home Valuation Problem
Prices, especially on homes, can rise and fall dramatically. In most cases, the insurer will pay for damage to your home up to the limit set in the policy. But what if that upper limit is no longer enough to replace your home when prices for materials and labor go up due to inflation or other causes?
Some policies include “extended” or “guaranteed” replacement coverage. It’s not uncommon to see materials and labor jump in price following a natural disaster that damages multiple homes. Extended coverage will increase the maximum amount the insurer will pay, adding a percentage — 20%, for example — to the stated policy limit. Guaranteed replacement is just that: You are guaranteed to get enough money to rebuild your home no matter what it costs. Naturally, both options will add to the cost of your premium.
The Value of Valuables
The valuation problem also applies to your possessions. For personal property coverage, you can choose between replacement cost and actual cash value. Replacement value means the insurer pays to replace your belongings with new comparable items up to your policy limits. If you lose your home in a fire and you had an older iMac sitting on your desk, you’ll get enough to purchase a new iMac. However, if you choose the actual cash value option, you’ll get the current cash value of that computer — as determined by the insurer — meaning purchase cost minus depreciation, which is going to be less than the cost of a new comparable model.
Change in Circumstances
If you previously had no one financially dependent on you and then get married or have a child, you may be underinsured as a family if you have no life insurance to replace your income should something happen to you. Your children or other family members may develop conditions or needs that your existing coverage is insufficient for. Or perhaps there are now grandchildren you want to include as beneficiaries. Think through all the people in your life who you might want to provide for in the event you’re no longer around.
Get Help from an Expert
As with all things related to insurance, seek out a knowledgeable agent or speak to a financial professional for advice to get the coverage you need at the best price and terms. Be sure to read part two of this discussion, where we’ll examine policy exclusions, protection against lawsuit risk and the importance of understanding your health insurance deductibles.
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