Invest in Your Insurance
Lets face it, most of us see auto and homeowners insurance as a necessary expense. You have to have it to drive a car, or borrow money to buy a house. But most of us simply buy the packaged product delivered by our agent and don't really understand what we are buying. We assume that if anything really big goes wrong the insurance company will take care of it, but we may find out the hard way that we do not have the protection we thought we did.
In the old days people could use their insurance as a maintenance policy. You paid your premium, and little deductible, and insurance would take care of the loss. But nowadays it's too expensive for that! You use it once and you will loose your claims free discount and ending up paying back any small claim over the next three years while your policy is rated. If you need it again the premium jumps even more and this necessary expense can get even more burdensome. That is why, as an agent who prides himself on putting the customer first, I want to inform you about your protection, and how investing a little time can give you the protection you need, and make the money you are spending go as far as possible.
To maximize the efficiency of the money you are spending on insurance you should consider using it primarily for a catastrophic loss. By "catastrophic" I mean a major loss that would be "catastrophic" to your finances. That's not to say $1000 is a small amount of money, but I am betting there are more people reading this who rarely, if ever, need to use their insurance and thus can consider this cost as an acceptable risk. Obviously, the higher the deductible the lower your premium, and the lower this burden will be to you and your family.
First off, there are two parts to auto and home insurance. One, I will call the "structural" coverage which repairs or replaces your asset. The other is the "liability" coverage that protects you from people suing you for monetary damages. Structural coverage is guided by your deductibles. These deductibles are really the amount you are willing to "self-insure" your asset. The structural insurance will repair of replace your asset to its former condition, less your deductible.
For auto insurance, I recommend you use deductibles of $500 for Comprehensive and $1000 for Collision. Comprehensive coverage is for everything except Collision, (generally Fire, Theft and Vandalism), and Collision coverage is understandably the physical impact on your vehicle. Collision comes into play primarily when you are at fault in an accident (otherwise we will have their insurance fix the car), and if you are at fault in an accident you should be more concerned with your Liability exposure, than how much you have to come out of pocket to fix the car.
One note here: If you get hit and the other car takes off, make sure you get a license number so we can either go after their insurance, or cover your repairs with Uninsured Motorist coverage which we should have. If we can't ID them we can't prove they are Uninsured and thus you will have to pay your deductible. Uninsured Motorists represent @26% of the cars on the road in California but are involved in @42% of the accidents, so if you are involved in an accident chances are good they may be Uninsured.
For homeowners insurance, I recommend you use a deductible of at least $1000, if not more. Using your homeowners insurance for any claim of around $1000 or less is not an efficient use of that insurance. That's because your policy is "rated up" for three years if you use it. This means the premium is increased and the money you thought you saved in using you insurance will cost you the same or more over the next three years. I maximize my deductible to $5000, understanding that while it would be painful, chances are it will not be used. I have heard numbers that, outside of the hurricane threatened states, something like 1-2% of the houses across America have a "catastrophic loss. Thus, I am comfortable in the odds that I, like most Americans will never have to use it.
In addition, make sure you understand the replacement values your insurance company will use for your personal property. Most insurance companies say they will use "replacement value" but what they mean is that they will replace your 7 year old couch, with the depreciated value of a 7 year old couch. The industry average for this depreciated basis is 11% per year. Look for an insurance company that will replace you personal property on a new for old basis, of like kind and quality, but brand new!
Earthquake Insurance here in California is a tricky question. If you have it when the big one hits you are brilliant, but if it doesn't, you are paying a lot of money, for disappointing coverage, for a long time, for peace of mind. If you can afford it then by all means buy it!
Now lets turn to the "Liability" area of your policy. More often than not, I come across policies that have less than adequate "Liability" coverage. It's a fact of our litigious society that, should you be at fault in an accident that injures someone, you could face the loss of much more than the cost of your deductible. Since you face more of your liability exposure in your car, lets look at obtaining sufficient protection from that potential calamity.
For example, lets say you are involved in an auto accident in which you are at fault. Today, 90+% of the time the other party will talk to an attorney, just as you might should someone injure you in an accident. That attorney will perform "discovery" on you, where you are required to disclose to them your assets (so they can discover how valuable your are to them), and income (here in California they have set precedents in court whereby 30-50% of your income can be attached up to the next 10 years). Mainly these attorneys are looking at three things; 1) The equity you have in any real property, 2) the amount of your savings and investments, and 3) your average yearly income (we believe four times your annual income is sufficient to protect what may be your greatest asset), When you add those numbers up, and especially considering the rapidly appreciating Real Estate market, many people are surprised to find out they have "assets at risk" of close to $1,000,0000. Yet most people still have much less insurance than that.
If you find yourself facing a lawsuit of a large amount and your policy covers you for much less, you will probably get a letter from your insurance company reminding you that you only have coverage up to the policy amount, and that for any judgments higher than that you may want to hire your own legal counsel, at your expense, to settle the matter. That is the last time in the world that you want to discover that you are underinsured, and your insurance carrier is not going to be there for you. They are going to represent you for free, up to the limit of their exposure, but if your agent hasn't already, you should take it upon yourself to calculate that exposure and make sure you have the insurance company's money on the table, and the protection you are spending your hard earned money for. Often, I have found that higher liability coverage's can be obtained at little, if any extra expense just by maximizing your deductibles.
Homeowners liability exposure is generally limited to "slip and fall" cases. In the case of your home, you obviously would never knowingly invite someone over who would consider suing you for this. Recognizing this and its very rare occurrence homeowners liability coverage is very inexpensive and should be sized according to the "assets at risk". For Landlord policies the exposure is greater and more important that it be addressed in the same fashion.
If you have "assets at risk" exceeding $1.5 million you should obtain higher liability protection available by buying an Umbrella Policy. This is an extension of the underlying Liability coverage of your auto and home policies and comes in increments of $500,000 and/or $1,000,000.
My aim here is to hopefully give you a greater understanding of how to use your insurance more effectively and more efficiently. Many agents contact their customers about these strategies, but it is incumbent upon you to invest the few moments of your time it takes to implement these strategies. Do not wait for your agent to do so as it is your "assets at risk" that you are protecting. By doing so you can get the protection you need, with the lowest cost burden. A good investment in your knowledge of what you are buying, and how to get value for the money you are spending.