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Insurance
The Value of Insurance
Most people view insurance as an unwanted but necessary expense that they must pay monthly, quarterly or annually. I prefer to view insurance as a pool of money we each contribute to in the event one of us has a loss and needs help recovering from that loss. But, insurance is a contract between the insured and the insuring company. The insurance company isn’t necessarily going to pay for the loss, they are only going to pay for what is covered under the contract. Therefore, it is imperative that you as an insured understand that contract.
Most insurance policies include liability coverage. This coverage protects you in the event you are held liable for injury to another person. The injury is not based on intent but on potentially what you had responsibility for doing to prevent injury. For example, if you are hosting a swim party at your home, the floor is wet and somebody slips, falls and gets injured, you may be held responsible because you failed to prevent the injury. If you are driving and there is a vehicle stopped in front of you and you fail to stop in time and rear end the vehicle, you may be held responsible for colliding with the other vehicle.
Although insured individuals may not fully understand their potential liability, insurance carriers have extensive experience with this type of liability and it is reflected in the premiums they charge. A home with a pool may be charged a higher premium than a home without one. Your driving record, tickets and accidents, will have a huge impact on your current premium. As a business owner, the type of business you own will affect your insurance premiums. Even though you may never have been sued, loss history of the carrier and exposure will affect your premiums.
Most insurance policies cover personal or business property. It is very important to make sure your policy covers the replacement cost of your property, not the actual cash value. A big screen purchased two years ago for $2,000 may be worth only $400 now, but in the event of a loss, will your insurance company give you $400 because it is the current value of your TV, or will they replace it with a new TV? What perils are covered under your current home owner policy? Some policies cover based on named peril bases while other policies will cover based on any peril basis. Did you purchase a brand new vehicle? If so, due to the immediate depreciation when you drive the vehicle off the lost, you may need gap coverage to cover the difference between the actual cash value of your now “used” car and the amount you owe on it. Many home owner policies have limits for certain types of property including cash, collectibles, fine arts, jewelry, electronic devises and musical instruments to name a few. Make sure if you have large amounts of these types of items that you have the items listed or scheduled on your policy.
Deductibles have a large impact on your insurance premiums. The more risk you assume (higher deductible), the lower your premiums are going to be. Having a higher deductible may or may not make sense, depending on the amount of money you save versus the amount of risk you assume. One thing to remember is that you need to make sure you can afford a higher deductible if you choose one.
Since your needs change from year to year, it is vital to make sure you have a conversation with your insurance agent at least annually. You may have purchased additional property, added upgrades to your existing home which increased the replacement cost, or had some life altering event that affects your risk exposure. By having an annual review, you can always make sure that the dollars you spend each year will make sure you are covered in the event you ever do have a loss.