Most people overlook insurances
But... lacking the proper insurances can be one of the fastest ways to losing your wealth.
High net worth follks NEED to have the proper pieces in place. One of the key areas is property and casualty insurance.
In this weeks post, I want to discuss some the most important insurances you need as well as some of the things we look for in the policies we recommend for our clients.
Insurance at its core is an exchange of money to mitigate financial risk in your life. Property and casualty insurance covers your property and protects your assets in the event of an accident.
The property insurance policies that most people will commonly want are:
These policies are used to protect the underlying assets from loss.
Casualty insurance exists to protect you from legal action.
HOMEOWNER’S INSURANCE
Let’s take homeowners insurance as an example to start to breakdown what is found in a typical policy.
The first area to look at is your dwelling coverage.
This coverage exists to protect you from physical damage to your home. In the event a catastrophe happens, this insurance will help cover the costs of clearing debris and rebuilding the home. Usually you’ll want dwelling coverage at a minimum to cover the value of the home. There’s also extended coverages that can exist in the policy that will add to the dwelling coverage typically expressed in percentages.
Next is the deductible. This is the amount that you must pay for a repair prior to your insurance starting to foot the bill. A lower deductible will result in a higher cost to you in premiums. We oftentimes have our clients have slightly higher deductibles since low dollar amount outlays are not the big risk to them.
There are a few other property insurance aspects of a typical homeowner’s policy. They include coverages for your:
These coverages are all examples of property insurance.
The casualty insurance portion of your homeowner’s policy is going to be your personal liability coverage. This might be the most important aspect of a homeowner’s policy in terms of protecting the insured’s wealth. This coverage represents the amount that you are insured for in the event of legal action taken against you stemming from an accident that injures someone in your home or on your property.
For example, let's say you have $500,000 in liability coverage (typically the maximum amount of coverage offered in a homeowner’s policy) and there’s an issue with the railing on your deck. Little Timmy is leaning on your railing and it breaks and he falls and breaks his arm. Timmy then sues you for damages because of the injuries suffered on your property and it’s determined that $1,000,000 of damages are to be awarded to Little Timmy. Your casualty insurance covers half of the bill. You are on the hook for the excess $500,000.
There are options like umbrella insurance that sits on top of your casualty insurance to help mitigate some of that risk, but we’re not going to get into that in this article.
Ultimately, when I look at insurance policies, I’m looking for things that make sense for the client. I want to ensure that your liability coverages are maxed out and then umbrella is added on at least up to your net worth. I want to make sure that dwelling coverage matches the value of your home or more. If you have a finished basement, we want to make sure that your sump backup and water discharge coverage makes sense. If I’m working with someone with a very high net worth, maybe we want to increase the deductible to lower the premium costs. Once you reach a certain level of wealth, invoking insurance to cover incidental home repairs no longer makes sense. You really want your coverages to protect you from large outlays of cash.
Renter’s insurance works similarly, but it’s going to focus on protecting the assets inside your rental rather than protecting the structure itself.
AUTO INSURANCE
The other primary example of property and casualty insurance is auto insurance. When reviewing auto policies I look for a lot of the same things that I look for in a homeowner’s policy.
One of things that I often see is people shopping for the lowest price possible. For some people this is a necessity, and that’s totally acceptable, however, I often encourage clients to reconsider this mindset if possible.
Auto insurance, just like homeowner’s insurance, isn’t just there to protect the underlying property. It’s a form of financial protection.
Unfortunately, car accidents aren’t an uncommon occurrence. If you happen to cause one, you could be exposing yourself to hundreds of thousands of dollars in damages owed.
This is where your liability coverage will kick in and help cover you.
High net worth individuals will almost certainly want to max out their coverage and rely on umbrella coverage to protect themselves from even larger claims.
Auto insurance liability coverage levels are usually expressed in twos or threes - you’ll probably see something like this: 250/500 or 250/500/250. This would be an example of maxed out liability coverage.
In that example those numbers would represent the following:
Another consideration is the requirements of the state that auto will be insured in. Some states have personal injury protection (PIP), medical payments coverage (MedPay) or uninsured/underinsured motorist coverage listed as requirements in insurance policies.
I almost always suggest that your policy includes uninsured/underinsured motorist coverage. If you are hit and the other driver does not have coverage, they probably cannot afford to pay you for damages. You’ll want protections in place to mitigate this circumstance.
Something to note, if you have a MedPay requirement, you won’t have a personal injury protection protection requirement. The opposite is also true.
Medical payments coverage provides coverage, up to a limit, for injuries to the driver of your car. It also protects you if you are hit by another vehicle while outside of your car.
Personal injury protection coverage includes payments for medical and rehabilitative expenses and loss of income.
Generally, maximums for these coverages set by insurers are relatively low - typically $25,000.
These coverages are required in states that are referred to as “no-fault” states.
In a no-fault state, when injuries occur as a result of an accident, each driver in the accident first makes a claim with their own insurance company to pay for them. From there, the at-fault driver’s liability coverage covers expenses beyond the MedPay/PIP limits
Finally, we’ll cover the property insurance portion of an auto policy. Comprehensive auto insurance and collision insurance will protect your auto from damage and theft.
A deductible is selected for each comprehensive and collision. These are usually raised in increments of $500. The lower the deductible, the lower the threshold for personal expenditure before your insurance will begin to foot the bill.
Collision insurance will pay for the following:
Comprehensive insurance will pay for the following:
I hope that this information is helpful. There is a lot to know about insurance and this is meant to be a general overview. The main takeaway here should be the difference between property and casualty insurance and how to think about each as they relate to your situation. I’d recommend working with a financial advisor or fiduciary to ensure that you are getting the insurances that will most benefit you.
As always, thanks for reading, and we’ll see you back here next week!
Financial Advisor