We do not sell property and casualty insurance (auto, homeowners, etc.) but we review it because inadequate insurance could thwart the best of investment strategies. This month I will focus on an oft-neglected corner of financial planning and give you a few tips on that most boring of topics, your property and casualty insurance. The following are what I consider the three most common mistakes individuals make in this area:
Having deductibles that are too low. Many people are carrying deductibles on their vehicles and homes that are far too low. Many people carry $250 or $500 deductibles because that is the level they selected years or decades ago, and they have never changed the amounts. Individuals for whom a few hundred dollars of increased expenses in an accident would be a problem have far more serious and fundamental financial issues than determining their optimal deductible. For the rest of us, there are three reasons to consider raising deductibles:
1) Small insurance claims can lead to higher rates or non-renewal of coverage. This is becoming increasingly true for homeowners coverage.
2) Premium savings can be substantial. In many cases you can “save” the amount of the increased deductible in just a few lower premiums. Remember there is no such thing as a free lunch. Insurance companies price their policies to cover their costs including overhead to process claims. If you raise your deductible, you save them processing costs on small claims and signal through your willingness to assume some of the risk that you may be a less costly customer overall.
3) Hassles are reduced. In the case of a small problem, you can just handle it (or not) at your discretion and leisure, without having to deal with filing a claim.
Failing to carry umbrella liability coverage. Many people with substantial assets to protect fail to secure a personal liability policy. There are three reasons to consider one:
1) A personal umbrella policy is generally very inexpensive (generally only a few hundred dollars per year per million dollars of coverage).
2) Insurance companies won’t write an umbrella policy if the underlying insurance you carry is inadequate. By getting an umbrella policy you are “forced” to increase your underlying coverage to acceptable levels if they aren’t already.
3) Given the low costs, in today’s litigious society do you really want to be without it?
(See Umbrella Coverage for more on how to select the appropriate amount.)
Carrying medical payment coverage. This is not coverage for other people – they are covered by the liability section of your policy when you are at fault. Medical payment coverage is for you or your family. There are two reasons to drop this coverage:
1) Obviously, your premium will be lower without it.
2) If you have adequate health insurance coverage, it is redundant. If you do not have health insurance, you will need this coverage, but you have a larger problem – you need health insurance!
By reviewing your coverage with your agent and avoiding these three common mistakes, you may well be able to both decrease your risks and save money simultaneously.