HEY YOU, SNAP OUT OF IT! I can see your eyes glazing over and you stifling a yawn! BUT, this is a necessary expense, and if you DON’T HAVE ENOUGH COVERAGE AND REALLY NEED YOUR INSURANCE THAT CAN REALLY COME BACK TO BITE YOU! SO WAKE UP, AND PAY ATTENTION! As many of my clients have heard me say, “Insurance is a necessary expense until you need it, then it is a godsend!” But, what I want to share with you here is how to get the most from this necessary expense. That is, how to get the best value for the money you have to spend on it.
First, Let’s look at your Homeowners Insurance! It is designed for, and is best used as, protection from a “sudden and catastrophic” financial loss. It will prove very costly if you use it as a maintenance policy. That is because, and this is the dirty little secret about insurance, generally, when you use it for anything except a “sudden catastrophic financial loss” your policy will be “rated” up for the next three years and your premium will increase! If you use it again, for a loss that is less than catastrophic (maintenance loss) , it will be rated up even more, and suddenly will be an even more severe financial burden on your budget. The definition of catastrophic here is if the house burns down, versus your kid shifts into drive, instead of reverse, and plows into the kitchen from the garage.
Generally, you want to make sure your dwelling coverage is enough to replace your home if it were a total loss. Insurance companies used to offer “Guaranteed replacement”, but since the Oakland Hills fires in the early 90’s (when they discovered many policies did not carry sufficient coverage to replace the burned down homes) they only offer “Extended Replacement” coverage. The onus (read “responsibility”) is on the policy holder to determine how much is needed to rebuild your home. Then the Carrier offers a fixed , or percentage amount over that Coverage to “take care of any discrepancies” (the Extended Replacement coverage). The best way to determine what is sufficient coverage for your policy is to ask several builders in your area what a good approximate cost per square foot ($/p.s.f) would be to use as a guide. For instance, we have seen $300/p.s.f. here in the Bay Area for a 1950’s ranch home, to over $500 p.s.f. for a Victorian in San Francisco. For homes above 10,000 square feet I have heard of construction costs of $800-$1000 per square foot! Also, remember that quality of construction can have a profound effect on the replacement cost. Even with the financial uncertainty of the past few years reconstruction costs have not reduced much. If you take that $/p.s.f. and multiply it by the square feet of your home you have a good approximation of what sufficient Dwelling coverage should be for your policy.
Your Dwelling coverage is the main coverage in your Homeowners policy. The ancillary coverage’s of Separate Structures, Personal Property and Loss of Use are usually a percentage of that amount and are included in your policy. If they are separate you can simply quantify how much it would cost to replace those assets. Your Liability coverage is generally less expensive, because hopefully you will not have anyone over who would sue you, so make sure you have enough to cover all your assets, (including equity in real property, savings and investments and what can be your largest asset, your income). For good reason (I can get into in greater detail in person), we believe that Liability coverage amounts sufficient to protect your income, alone should be 4 X the annual income of the highest earner in the household. This figure, added to your Equity and Savings and investments, may add up to more than the $1,000,000 maximum that is offered in many Homeowners policies, so look to adding an Umbrella Policy that will provide additional Liability protection over your property and auto policies.
You face most of your Liability exposure in your Autos so it is extremely important to maintain adequate coverage there! If you own a home you need at least $250,000 per person, $500,000 per accident, and then consider an Umbrella over and above that all.
OK, so assuming you now have sufficient coverage to protect you from a catastrophic loss, how can we make it more affordable! That is where your deductible comes in! The higher the deductible the lower the premium! And since you do not want to use it for the small losses (which again, I can explain in person) you want to maintain a deductible which recognizes that you are willing to self insure the smaller losses and use your insurance as efficiently as possible for the larger “catastrophic” losses. For a home you want to have no less than $1000. I have $5000 on my home, knowing that if my bike is stolen out of the garage that will be my burden, but again, using it for its intended purpose, not as a maintenance policy.
For your auto’s I use $500 for comprehensive, and $1000 for collision. Remember, Collision deductibles mainly come into play when you are fault in an accident, and if you are at fault I would be more concerned with my Liability exposure, than how much I have to come out-of-pocket to fix the car. And in today’s Litigious society sufficient Liability coverage is imperative!
Many Homeonwer Policies have sub limits for “theft’ as things like cash, jewelery, silverware, guns, and fine arts, can somehow disappear. Talk ot your broker/agent about this and if you have valuable pieces of jewelry, or paintings, or things that can get up and walk away, you should consider a “Rider” that will protect you from any cause of loss, anywhere in the world, for an amount supported by an appraisal.
The most common Cause of Loss for Homeowners is from water damage. But, while damages from water can be covered, if you do not maintain your roof, or stop leaking pipes before they burst, you could get part of, or all your claim denied. Insurance is not a maintenance policy, so keep up with your properties wear and tear, and do not use it for smaller claims or your policy will be rated up and you may end up paying back anything you think you are saving by using it for small claims. See if your carrier offers Main Line coverage also which can provide funds to replace your main drain to the street for a nominal charge. Many Homes in the Bay area were built in the 1950’s with drains made of clay material, that have a 50 year useful life and today they are in the end of their usefulness and can crack or get blocked easily. This Main Line coverage can offer $10,000 to replace them for @$25.
I wil continue to add to this in the days ahead….
