On New Year’s Eve we saw an enormous fire that destroyed over a thousand homes and businesses in Superior and Louisville. Concurrently, every insurance agent I know is working around the clock to process claims and get their clients taken care of in the face of such an awful catastrophe. While I can’t go back and coach anyone who suffered the fire to make updates to their insurance, we can spend some time today ensuring that you know your policies and understand what they do and do not provide.
Protecting Your Castle – Home Insurance
Your homeowner’s policy is typically broken into several major components plus riders. Those components are:
- Dwelling, literally your home. This is supposed to be at an amount enough to replace and rebuild your entire home at current market rates.
- Other structures, things like sheds and detached garages. Normally limited to 10% of the value of the dwelling.
- Personal property, the contents of your home. Normally limited to 50% of the value.
- Loss of use, which is typically a dollar amount of term of time that a policy will put you up in a hotel, apartment, or rental property while your home is unavailable.
- Personal liability, protecting people from the assorted slips, trips, and falls on your land.
- Medical payments, paying for the medical bills of those people who slip, trip, and fall on your land.
The components above are reasonably standardized; most policies cover those components at “replacement cost,” meaning that even if you bought your home for $200,000 if it would cost $250,000 to rebuild, the policy will pay for it (within the coverage limits). The places people get themselves into trouble here are riders and sub-limits. Certain valuable types of property such as computers and jewelry have their own sub-limits that can restrict payments for loss of use or theft (this is mostly fraud prevention.) However, an area many people get into trouble in Colorado is a sub-limit on their roof. After major hailstorms a number of years ago, many policies introduced an “actual cash value” rider to homeowner’s policies for roof repair. Roofs are considered to depreciate over 27.5 years by the IRS on a residential building. This means that each year you own the property, the roof is considered 3.63% less valuable. So if you’ve owned your home for 15 years and the cost to replace your roof is $20,000, your insurance carrier is only going to pay out $9,110 for the repair, and the rest is coming out of your pocket.
Recommended Action Items: Call your agent (and be patient, they’re probably drowning) and discuss the “what ifs” of your policy. What if someone falls? What if my house burns down? What if a pipe bursts? Get a good idea of the potential causes and costs of claims and understand whether your policy really protects the things you care about most.
Protecting Your Ride – Auto Insurance
No insurance company markets skimping on insurance more than some do for auto policies. If you’ve ever seen an ad where a carrier is boasting of “only paying for what you need,” beware. State minimums on auto insurance vary state by state, but most importantly, state minimums typically only produce a nominal level of liability protection for others, not for you. For example, here in Colorado, the state auto insurance minimums are $25,000 for injury of one person, $50,000 aggregate coverage for all persons injured, and $15,000 for property damage. Now think about a very simple scenario that could occur in Boulder county. You’re driving along when a new Tesla Model S pulls out in front of you. You hit it, killing the driver, injuring the adult passenger in the passenger seat, and the toddler in the back of that car. Well, the aggregate liability coverage you have to meet that family’s sudden need for replacing the dead driver’s income, the injuries and medical care for the passenger, and the potential lifelong disability of the toddler in the back is… $50,000. And to replace that shiny new Tesla? You’ve got $15,000, and last I checked, the MSRP on a new Model S is $94,990 before taxes. Let’s not forget that your car is probably totaled and you skimped on comprehensive and collision insurance. Now consider a more “average” Colorado driver’s insurance. Most drivers carry limits of $100,000 per person, $300,000 for aggregate persons, and $300,000 for liability. This is great but imagine another potential scenario. You rear-end a school bus with a field trip’s worth of eight-year-olds onboard. Not only do you total the school bus (prices range $90,000-$290,000), but all sixty-four kids in all thirty-two ugly brown seats slide two feet forward and bump their heads on the seat in front of them. None of them are seriously injured, but all of them claim to have a headache, and the EMTs responding to the call excitedly pack them all up to the nearest hospital for MRIs and X-rays. Is this getting expensive enough yet to make you sweat that $300,000 liability limit? What about the kids who claim trauma and need therapy? What about those with migraines, or whose school performance suffers, or who claim neck or back pain?
Recommended Action Items: First and foremost, make sure you have coverage higher than state minimums. If your budget is an issue, know that increasing liability is the cheapest thing you can do on an auto policy. It turns out the much more expensive parts of your auto policy have to do with comprehensive and collision damage for your vehicle. If budget is not an issue, increase your coverage to $250,000 and $500,000 for individual and aggregate limits, and talk to your agent about obtaining an umbrella liability insurance policy. An umbrella policy adds an additional million or several million dollars of liability behind your home and auto policies, and at a cost that is often a fraction of a normal home or auto policy since the umbrella is tapped after the limits on home and auto are maxed out.
Protecting Yourself – Health, Disability, and Life Insurance
We’re all familiar with health insurance and on some level understand the difference between high and low deductibles and out-of-pocket maximums. To keep it brief, your deductible is the amount of healthcare cost you have to pay entirely out of pocket before any insurance benefits kick in where pricing is concerned. You indirectly receive the benefit of negotiated rates for things like medical exams, services, and prescriptions at this level as well; assuming your insurance carrier is good at negotiating rates. Past your deductible, you have some level of subsidy for your insurance costs from that point until you reach your out-of-pocket maximum. With your deductible satisfied, you now only pay a fraction of your healthcare costs until you reach the out-of-pocket maximum. At that point, you essentially have free healthcare (minus your ongoing premiums,) and that’s probably as good a year as any to try to get anything else you might need to be done. However, health insurance doesn’t cover everything; since this is a topic large enough to cover its own blog, we’ll highlight a few important “to knows” about health, disability, and life insurance.
- Affordable Care Act (“ACA”) health insurance is required to cover pre-existing conditions. Discount health insurances such as pooled health plans and assorted Christian health sharing ministries often omit pre-existing conditions from coverage and may exclude illness or injuries based on immoral acts, and not necessarily your own! An example in the news recently was a man hit by a drunk driver at night; the religious health sharing ministry he was a part of declined coverage since the injury was caused by a third party’s drinking!
- Health insurance may or may not cover rehabilitative treatments. While something like medication or surgery might be paid for, there may be exclusions for things like physical therapy. It is also extremely common for health insurance to not cover “alternative medicine” such as Chiropractic, Acupuncturist, or Naturopathic care.
- Disability insurance often has coverage for physical therapy and other rehabilitative treatments, as it’s in the interest of the carrier to get you healthy and off of disability payments!
- Paying for disability insurance through your work has a tricky tax factor involved. If your employer pays the premiums for you as a pre-tax employment benefit, even though the policy might replace 60% of your wages, that replacement is subject to income tax, meaning that your coverage might really be closer to 30% or 40% after taxes. If you pay the premiums out of pocket and without a tax deduction, it obviously costs more to pay with after-tax dollars, but your disability benefits are tax-free.
- Life Insurance: There are four major flavors of life insurance. Term insurance, which is for a limited time. Return of premium insurance, where if you don’t die during the coverage period your premiums are returned to you, usually with interest. Whole life insurance, which is classic life insurance that attempts to accumulate a cash balance equal to the death benefit by age 100. Lastly, Universal Life Insurance, which has a more liquid cash value that you can distribute in the future for other expenses. The bottom line here: 99% of you need term insurance for your life insurance needs; it costs significantly less than the other options and it covers you for the period of time you need it (i.e. while kids are still living with you, while you’re still working, etc.) and isn’t priced to last until you’re 99 years old and probably don’t have much of a need for it anymore.
- Life insurance can have riders for chronic illness, which can help cover costs of long-term care or rehabilitation costs in the event of disability. These are not included in all policies and typically come at an additional cost.
Protect What’s Yours
Whether it’s your home, your car, your life, or your family, make sure you take the time to understand what you’re paying for. Insurance can obviously be a major drag when you keep paying for it and see no benefits because you live safely and healthily, but the worst possible thing that could happen is that you’ve paid for less than you thought, and in the event of an emergency, you’re left wanting.
A Final Note
If you have directly lost your home or job as a result of the fires, or know of someone who has, we are offering pro bono financial planning services to those in need. Please reach out to us directly and we will help from there.