It’s Fire Season: Are You Adequately Insured?

If there’s one weakness I find in most people’s finances, it’s that they don’t have sufficient homeowner’s and auto insurance coverage. Yet it’s the insurance we’re most likely to use, and so inexpensive for what it offers.

I think one reason people are so underinsured is that we are introduced to this kind of coverage when we start driving, a time when we’re young and don’t own anything. So we want the cheapest insurance we can find, and marketers oblige us by touting their product by price. So by the time we have accumulated assets, such as a home, and have something to lose, we’re still thinking like that broke young driver. 

Ideally, you’d have an insurance agent you trust, and you’d sit down with them once a year or so to review your coverage. But most people don’t. I encourage you to find one – ask friends for referrals – and then book that appointment. Take along a net worth statement and a list of special items you own, and be sure to ask the following: 

• If your home was completely destroyed, would the insurance be sufficient to rebuild it and replace all your possessions? I’ve had builders tell me that Southern California homes cost $200 - $250/square foot to rebuild. Apply that amount to the square footage of your own home and then check your coverage. With home prices appreciating over the past few years, most of my new clients are underinsured. The Wall Street Journal covered this in their August 26th issue, and suggested a replacement-cost calculator at www.accucoverage.com which for a $7.95 fee can help you assess the amount of coverage you need. 

• If you were sued for everything you’re worth, do you have sufficient personal liability coverage? This is where the net worth statement really comes in handy. It tells us how much you have to lose, and is a great starting point to discuss liability coverage. It may be difficult for a judgment creditor to tap your retirement funds in an employer’s plan (see my blog entry on Asset Protection and Retirement Plans), but all your other assets could be up for grabs. Once you max out the coverage offered under the individual auto and homeowner’s policies, your insurer can give you additional coverage through a personal umbrella policy, sold in million dollar increments. Don’t panic – it’s really inexpensive, about $200 per $1 million of coverage – and is one of the basic tools in a financial planner’s kit to protect middle class and wealthy clients. What’s more, it typically offers a wider range of coverage than the personal liability offered under your homeowner’s plan. 

• What about uninsured driver coverage? This is the coverage that protects you should you be involved in an accident with someone who does not have insurance. In the past few months I’ve seen a lot of clients with very low amounts of this coverage – say, $30,000 – when we know that auto accidents can cause much higher amounts of damages. Interestingly enough, these same clients have attachments to their policies from their agents, showing that they had to sign a form to acknowledge that they refused higher levels of coverage. Clearly, the industry is concerned about these lower coverage levels. And why would you want to be covered for less if hit by an uninsured motorist? 

Remember, now that you have something to lose, it’s wise to consider whether those things are adequately insured. Only buy the amount of insurance you need…but most people need more insurance than they have.

Delia Fernandez, MBA, PFP