Insurance is designed to help you recover financially after a loss. Homeowners and motorists should take the time to look over their insurance policies and understand exactly how their homes and cars are insured.
Homeowners insurance is generally based on the replacement cost on the house. While the property value may have decreased in the recent economy, the replacement cost may be more. We suggest for higher end homes, worth $500,000 and up, to have an appraisal conducted by the carrier to determine coverage. Carriers will consider specialty upgrades like crown molding, custom cabinetry or high end appliances when writing the policy. Having an appraisal can save a homeowner from a nasty surprise in the event of a loss.
Additionally, choosing your deductible should be based on your cash flow. If you have a healthy cash flow, it can make sense to maintain a higher deductible. You just need to understand when selecting a high deductible, smaller claims such as broken windows or damage from a leaky pipe, will most likely be absorbed by you because they will typically cost only a few hundred dollars to fix. Homeowners can also often get discounts for home security systems or smoke alarms.
Policyholders can save money with a coinsurance clause. A coinsurance clause establishes the percentage of the home’s value the policy holder must insure. For example, a homeowner with a $500,000 house subject to a 100% coinsurance clause must insure the house for the full $500,000 value. However, insuring the same house with a 90% coinsurance clause would mean carrying a policy limit of $450,000. As long as the amount of insurance purchased meets the coinsurance requirement, you can expect your claim to be paid in full should you experience a total loss. If however the insured does not purchase enough insurance to satisfy the coinsurance clause, the homeowner will be responsible to pay out of pocket for the shortfall.
When deciding whether or not to insure the home for 100% of value or chose a lesser coinsurance requirement, consider the home’s location and the perils that are most likely to occur. If the home is located in an area with severe weather patterns and a possibility of a 100% loss, it is wise to insure the home to full value. We suggest homeowners purchase enough insurance to ensure a “quiet night’s sleep.” In other words, do not let the dollar savings be the driving factor in choosing the coinsurance.
For auto policies, drivers can save on their policies by carrying different deductibles on comprehensive and collision coverage. How much coverage a driver carries can depend on the age and replacement cost of the vehicle. A comprehensive policy covers auto damages from causes such as fire, theft, hail, vandalism or many other events, while collision coverage covers auto damage from a collision with another car.
While the law requires motorist to carry liability insurance to protect other motorists, the economic downturn caused many to lower their coverage to carry the minimum amount. Uninsured/underinsured motorist coverage will cover you if your loss exceeds the maximum coverage of the at-fault driver. For example, consider a motorist who is involved in an accident and the at-fault driver has minimum limits of $25,000. The injured motorist’s medical bills total more than $200,000, exceeding his own policy’s medical limit and the at-fault driver’s limits. An uninsured/underinsured motorist policy will override the injured driver’s medical coverage to pay the medical bills. This coverage works similar to how an umbrella policy extends the limits on a homeowners policy.
We recommend homeowners and motorists review their policies to determine if they have enough coverage to replace their home or car in a loss. By opting for more than the minimum coverage, insurance can also protect your assets from a lawsuit if you are the at-fault party. While it is possible to save money when purchasing insurance, you should be sure you are not assuming unnecessary risk.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
