In previous blogs we covered insuring “yourself” by reviewing life and disability coverage. Now we’ll discuss insuring your “things,” such as your home, and protecting yourself against liability claims. In the case of property and casualty insurance, consumers have some element of control over costs. You can adjust deductibles upward or set limits on coverage, both of which will reduce premiums. Of course, you may be exposing yourself to additional risk which may not be worth the relatively small savings. In this blog I will discuss some suggestions for making appropriate coverage choices and cover how properties are typically insured.
Our philosophy is that individuals should self-insure the small things through high deductibles, share the risk on medium-size claims through co-payments where available, and transfer the risk on catastrophic events, such as losing your home to fire, or protecting your assets with a $5 million Excess Liability policy. We can illustrate this strategy by taking a look at Homeowners insurance and how to reduce premiums in a smart, responsible manner.
For the past two years, home values have been decreasing at varying rates across the country. Accordingly, many homeowners are asking if they can reduce their Homeowners and/or Excess Liability coverage given the reduced market price. If reducing premiums is your goal, we recommend increasing deductibles for the first $2,500, $5,000 or $10,000 in claims. This will reduce your premiums and prevent you from submitting small claims to your insurance company, which could eventually result in higher premiums or even cancellation. Recent statistics show that an insured will submit one home claim every seven to 10 years, so, statistically, you will likely save money by essentially covering small claims yourself.
As another cost-saving measure, some homeowners are reducing their policies to cover only 80% of their home’s value and/or reducing Excess Liability (Umbrella) coverage. Neither is a good idea. While the value of many homes has declined, the cost of replacing homes has not. If you have a total loss of your home and you have only 80% coverage, you could be subject to a co-insurance penalty, which would reduce the amount you collect by 20%. The same applies to partial losses. For example, if you have $800,000 in coverage on a $1 million home, and you have a $200,000 claim, the insurance company can reduce your claim by 20% and pay you only $160,000 ($200,000 minus the 20% penalty of $40,000).
With regard to Excess Liability coverage, the bottom line is that you can be sued by anyone for anything. Perhaps the suits will have little or no merit, but why take the risk? If a suit is successful and you are underinsured, your assets could be at risk. Don’t take the chance and make sure you have an Umbrella policy for $1 million to $5 million.
Also, for homeowners with coastal property, expect costs to rise based on the markedly higher risk posed recently by hurricanes. The National Hurricane Center expects the current active hurricane cycle to last another 10 or 20 years. As a result, many companies are cutting back coverage in coastal areas. In 2006, Allstate announced it would no longer write policies in New Jersey. Those who continue to write policies in coastal areas are requiring storm protections such as storm shutters, and are working with legislators to toughen building codes and educate consumers about what they can do to protect their homes from catastrophic storms.
Many homeowners also believe that their Homeowners policy automatically protects them against major floods. This is not the case. Even if you are in a low-risk flood zone, we recommend you buy a flood policy since up to 25% of flood claims come from low-risk areas. If your community participates, you can buy through the National Flood Insurance Program, which provides protection for homes valued up to $250,000. Since many homes have values larger than that, you can also look into Excess Flood insurance. Rates will be based on your flood zone, your home’s age and type, and the amount of coverage.
Keep in mind that in many cases, you are insuring expensive valuables in the home in addition to the home itself. A good example of this is fine art. Art may not only be at risk in catastrophic events such as a fire, but also during transit. Perhaps you are moving it from one home to another. Think about all the risks involved along the way and the risks the shipper may face in delivering the art from one place to another.
One last category is fraud and embezzlement coverage. Recently, a significant number of smart, wealthy people became enmeshed in Ponzi schemes that defrauded them of a portion or all of their wealth. Some Homeowners policies come with optional supplemental coverage that provide some protection against this type of criminal fraud.
Thomas A. Orecchio, CFA, CFP, ChFC, CLU, AIF is principal and wealth manager at Modera Wealth Management in Westwood,NJ. From portfolio management and tax planning alternative investments and estate planning, Tom assists physicians through truly comprehensive wealth management. Mr. Orecchio can be reached at TomO@ModeraWealth.com.
Tom Orecchio examines the principles of wealth management and financial planning-from portfolio and tax management to alternative investments and estate planning-to help physicians achieve financial success.