Helping you OPTIMIZE your insurance.
Insurance42 on Facebook
Nov 11th
If you’re interested, take a minute to check out our new Facebook page. I hope the facebook page will be more interactive allowing actual discussions.
When do you need liability coverage?
Apr 27th
Most people carry some liability insurance. If you drive a car in the U.S. you are required to have liability coverage. It’s a reasonable requirement, in my opinion. There’s a chance you’ll injure someone else, causing them great loss. They’re going to try to collect that cost from you and most people don’t have hundreds of thousands of dollars to pay for personal injuries. But most people can afford car insurance.
Also, if you have house insurance, you also probably have a significant amount of liability insurance as well. Auto insurance covers you only when you’re driving. Home insurance liability coverage is much more broad, but still has limitations.
The most significant risk of incurring liability most people will take is driving an automobile. If you look at our vehicular fatality statistics you may wonder why we drive at all. But I don’t suggest you worry about that. When you look at the fatalities per 100 million miles driven, you see the rate is quite low and so your chance of dying is small. But you still take on more risk of injuring someone than most anything else you do.
But you are still at risk of injuring someone, whatever you’re doing. You could accidentally knock over a ladder, bump into someone, or injure someone during sports. Even if you’re just sitting on the couch, the UPS guy could slip on your walkway, then sue you for injuries.
The risk for each of these is extremely low for most people. But it’s still there.
What risk are you actually taking?
Apart from your own personal guilt, you run the financial risk of someone suing you. Unfortunately we live in a lawsuit happy world. Even if you win the lawsuit, you’re going to incur substantial legal costs. And this could cost you any assets you have: your home, your savings, your retirement, even your future income.
If you have no significant assets and little potential to earn much in the future, then you have little to no financial risk. If you have significant assets, then they are at risk.
How much of a risk am I taking?
You will notice above that there are many different ways you could incur personal injury liability, most of which you’ve never thought of. Almost everyone one of those scenarios is extremely unlikely. But when you add them all up, they are still small but significant.
The amount of loss you may face depends on how much harm you cause and who you harm. If you hurt Alex Rodriguez and he can’t play baseball anymore, that’s a huge loss. Imagine if you wrecked a bus full of professional athletes. But there are few people like ARod and most people are very unlikely injure one of them.
For the other hundreds of millions of people in the US, you mostly face the same amount of risk, the risk of seriously harming or killing a normal person. Now, it still matters what happens to them. Some injuries are more expensive because they require expensive care throughout the rest of their life. I have a distant relative who lost a leg in a car accident many years ago. She gets a new prosthesis every so often and regular care, all from the settlement.
But the vast majority of injuries will be under 2 million dollars. Actually, very few are over $1M, but that number is growing as America becomes more rich and healthcare can do more things and becomes more expensive.
The other factor is what liability insurance is available. Most people can pick up their first million dollars of liability coverage fairly cheaply. The same goes for the second million. After five million liability coverage becomes significantly more rare and more expensive.
Oddly enough, you can cover your most common liability risks cheaper than the less common.
A Misconception
I want to address one misconception. You may think if you have $1M in assets then you need $1M in liability coverage to protect those assets (or $100K then $100K or $5M then $5M). This is not the case. The amount you’ll need to pay will be the lawsuit minus your insurance. If the judgement against you is $1M and you have $1M in insurance, you pay nothing. But if the judgement against you is $2M and you have $1M insurance, then you pay $1M out of pocket.
Unfortunately there’s no way to protect $X of assets through insurance because there’s no limit to the possible judgement against you. What you can do is protect against the most common risks.
So when do you need liability coverage?
If you have significant assets, then you need liability coverage all of the time, in all situations. I say this because you can get coverage for just a few hundred dollars a year. Large personal injury judgments are still rare, but the low cost justifies liability coverage, if you have assets you want to protect.
How do I get coverage all of the time?
Unfortunately, no insurance covers everything. They all have exceptions. But the best you can do for a reasonable price is to have car insurance + home/renter’s insurance + umbrella insurance. Umbrella insurance covers the gaps between your car and house insurance.
Insurance information on the web
Apr 19th
The Internet is a large place full of the good and the bad. There’s a lot of information on insurance too, good and bad. Here are some resources I find helpful.
Wikipedia is always one of my goto places. The articles on car insurance and house insurance are informative. Granted, their focus is not like this site, which is to give you the pertinent information you need as a consumer as clearly and precisely as possible. Wikipedia talks about the history of insurance, insurance in different countries and many other things you may or may not care about. But like I said, the articles are informative. There’s also an extensive list of the types of insurance.
When I need to know the definition of a term, I usually plug it into google. Sometimes it’s better to have a site that’s compiled a list of terms. Luckily the Insurance Information Institute (iii) has a glossary. Speaking of the iii, it’s main site is chock full of information. There are publications you can purchase, a blog, and sections for many, many topics.
If you know of other good sources of insurance information add them to the comments below.
6 steps to getting the best car insurance value
Apr 12th
1. Know the types of coverage available
This means understanding liability coverage, knowing the difference between collision and comprehensive, and understanding uninsured/under-insured motorist coverage. You’ll also want to know about automatic rental coverage.
2. Know your state’s minimum coverages
Besides knowing the minimum you can carry, you’ll also know what your state considers to be basic coverage. It might be helpful to check other state’s requirements too. Here’s a nice clickable map with the minimums.
3. Determine the coverages/amounts you need
Decide how much liability coverage you need, whether you need uninsured/under-insured coverage, and whether you need collision, comprehensive, or no coverage for damage to your car. Also decide how often you rent and therefore how much automatic rental coverage is worth to you.
4. Get several auto insurance quotes
The most important factor to have on your side when selecting a product or negotiating is information. Fortunately car insurance companies will give you their rates basically free (it costs you some time). So get at least three quotes for the coverage levels you’ve selected. Just call agents listed in the phone book in your area.
5. Determine your deductible
I would almost always go with a higher deductible as it normally offers a better value. But don’t assume this. Check the price difference and determine how many months you’ll need to go without a claim to save up the deductible to make a determination. And then actually save the difference . . . in a savings account.
6. Select the best value insurance offer
Don’t automatically go with the cheapest available. Consider the agent since you’ll deal with them come claim time or if you have questions. Also consider the reputation of the company.
Advice on getting the best car insurance rate
Apr 5th
I’ m looking to put together a guide on buying car insurance. I know I will include a section on understanding the exact amount of coverage you need, as well as getting competitive quotes. I will also go over the pros and cons of the different avenues of buying (online, physical meeting with agent, etc.).
Does anyone have any other questions they want me to answer or tips you think I should include? If so, post them in the comments below.
Car rental insurance lessons from Seinfeld
Mar 28th
Do you remember the episode where Jerry rents a car. This may jog your memory.
Jerry opts to purchase the optional insurance. (Note: It’s a bad idea to tell the rental agency you intend to damage the car.)
Later in the episode George wrecks the car. Jerry isn’t concerned because he bought the optional insurance. But he finds out the policy doesn’t cover other drivers. ”What do you mean it doesn’t cover other drivers? It’s a rental. That’s who’s driving it. Other drivers!”
I wouldn’t recommend getting your insurance advice from a Seinfeld episode. But there is an important lesson here. The policies that rental agencies sell are often restrictive. Very restrictive. You need to factor this into your decision.
For more are about car rental insurance check here.
Homeowner’s Insurance Exclusions
Mar 13th
Every insurance policy has exclusions and limitations.
A “cause of loss” exclusion means that although your property is normally covered, if it was damaged or lost in a specific way the insurance company doesn’t compensate you. One example of an exclusion is nuclear warfare. If a nuclear incident occurred in a populated area, the insurance company would never be able to cover the damage caused, so that type of damage is excluded. Here are some other things that are generally excluded or limited:
- Earthquakes or any kind of land moving event
- War (what is it good for?)
- Government regulation that has the affect of costing you money
- Flood water, seepage, or sewage; rain is generally covered, but water that comes from on or below the ground is not
- Damage that occurs after a claim, if you don’t try to prevent it
- If you rent part of your home
- Anything related to business use
- Mold
For some of these items there’s not much, if anything, you can do. You could try to live somewhere without war, but I wouldn’t call that solid insurance. Here are some things you can do.
You can buy earthquake insurance. It’s expensive. If you live in an area prone to earthquakes this may be a good idea. If you don’t, you’re paying a lot for something that has a small chance of happening.
Regular insurers simply don’t offer flood insurance in the US. In the US flood insurance is offered through the National Flood Insurance Program which is a part of FEMA. It also may be a good idea to install a sump-pump and/or a one-way valve to prevent sewer backup.
Perhaps the most important point here is that when you file a claim, you’re responsible to take reasonable measures to prevent further loss. If your roof is leaking and you file a claim, you need to put a tarp on the roof or something to prevent further water damage. If someone kicks in your door and burglarizes your house, you need to fix the door. Otherwise your insurance company will not have to pay you for losses incurred after you file the initial claim.
I’ll summarize some other points. If you rent part of your house or do business in it, you need to examine your activities and talk to your agent to make sure you aren’t leaving unwanted gaps in your coverage. You don’t want mold. It’s bad stuff, hard to remove, and generally there are special limitations for losses from mold. It would be best to do everything you can to avoid getting mold in the first place.
How to Prepare for Home Insurance Claims
Mar 11th
Your homeowner’s or renter’s policy will cover your belonging if they are damaged or stolen. Here’s the problem. To collect on a claim, you have to prove what you lost. If your house burns down or is burglarized how are you going to prove you lost a big screen TV, Playstation, computer, painting, etc.? Chances are your incidental evidence (pictures, receipts, manuals, etc.) are kept in your house and may now be destroyed.
So what exactly do you need?
For many things, a picture of the item in your house will be sufficient, as long as the picture proves exactly what the item is. If you take a picture of your big screen TV, you need to see the model number or at least the brand name and be able to determine the size.
But make sure to store these pictures safely, somewhere away from your house.
But a photo isn’t going to prove the authenticity of an original painting or the color and clarity of a diamond. The important thing here is to think ahead. Generally adjusters will be reasonable, but you need to do your best to prove your case. An adjuster isn’t just going to take your word on the nature or quality of an item.
Know your coverage limits.
Most people will know their total coverage amount, for example $50K for all of their belongings. But house insurance policies also contain limits for certain categories like jewelry, guns, coins and stamps.
Take charge of your replacement offer.
What normally happens when you make a personal property claim is the adjuster asks you to prove what you lost, then shops around to find the best deals for replacements. And he’s going to be looking for the cheapest options available. You also need to understand that:
Used items will be priced with used replacements.
That’s just the way things work.
You will be much better off if you research replacement costs yourself.
You need to be reasonable when you quote your replacement costs. The adjuster isn’t going to accept new costs to replace your used clothing. But if you take the time to find reasonable prices, the adjuster is more likely to accept your numbers, save himself some time, and save you from rock-bottom quotes. You can also opt for replacement cost coverage which, as you might guess, pays the full cost to replace with a comparable item, including sales tax.
You get full replacement cost for partial damage to your house only if you’re insured for 80% of the replacement value of your home.
This means if only a portion of your house is damaged, the kitchen or garage, you want to be paid enough to fix all of the damage instead of the depreciated value of the damage. The depreciated value will be less than the replacement cost. If the cost to rebuild your whole house is $200K, you need to have $160K of coverage to get full replacement cost. If you have less than $160K you will receive the depreciated value.
The Basics of Renter’s Insurance
Mar 8th
In my post about understanding homeowner’s insurance, I explained that it covers much more than just the physical structure of your house. Two of the major extra coverages are your belongings and your liability for personal injuries. The good news is that renter’s insurance also offers the type of one-stop-shopping as homeowner’s insurance, including additional living expense coverage.
Here are some things you need to know:
- people tend to undervalue their belongings because they forget to add in everything. They remember the television, stereo, and furniture, but forget clothes, personal items, and the many smaller items we all own.
- standard coverage pays the used/depreciated value for your lost or stolen items. If you want to collect the full cost of replacing your property new you will need to buy the optional replacement cost coverage.
- you will need to choose a liability limit as well. Standard policies include $100K of liability coverage which is not enough for most people. See understanding liability insurance for more information.
- you also need to choose between broad form and special form cause-of-loss coverage. Refer to our post on the differences between basic, broad and special form coverage.
The difference between Basic, Broad, and Special Cause-of-Loss Options
Mar 8th
When you’re purchasing homeowner’s or renter’s insurance you will choose a cause-of-loss option. No policy covers absolutely every type of damage. If you intentionally set fire to your couch after your team wins the championship, you’re not going to be covered.
As you might expect, the more things your policy covers the more expensive it will be. Here are your three options:
- Basic Form – is the most limited coverage and least expensive. It covers fire, theft and a few other causes. Anything besides the few specific coverages is not covered. For obvious reasons, this option is not common and you shouldn’t choose it unless you have a very good reason.
- Broad Form - is more expansive than basic form coverage, but it is still a whitelist approach. There are several types of loss that are specifically covered and anything not listed is excluded. Fortunately, the broad form is designed to cover the most common causes of damage. But you’re not going to be covered from the wacky and unexpected. This is the most common option.
- Special Form – is a blacklist approach which is better. Only a few specific causes are excluded (earthquakes, floods and some others) and everything else is covered. This way you’re covered from the wacky and unexpected. Despite being only a little more expensive than broad form, this option is not as common.
