Insurance is a topic most people are loath to discuss. We all know that we need insurance, but we hate having to pay for it, and most of us don’t really understand what it does. In this column, I’m going to talk about property insurance — a topic many of us on the south shore have had to think a lot about over the past few months. I will leave a discussion of liability insurance and life insurance for future columns.
Property insurance has one purpose: to protect you from financial devastation should your personal property become damaged, lost, or destroyed. If you keep in mind that insurance is meant to protect against financial devastation, and not against financial inconvenience, your insurance choices will become much easier.
How might you suffer a catastrophic financial loss? Well, that’s pretty easy to imagine. Houses burn down due to accidental fires. Cars are involved in accidents. Jewelry gets lost or stolen (and needs to be replaced). And occasionally — hopefully very rarely — a storm like Sandy comes along and causes flood damage.
Each of the above losses can be covered by insurance, but only if you purchase the right coverage. That’s why it’s important to read your policies carefully, and to work with an insurance agent or broker who takes the time to get to know you and your specific needs.
Let’s start with a car accident. Everyone who owns a car in New York knows that they are legally required to maintain auto insurance in order to register a car. So, if you get in an accident you’re covered, right? Not so fast. New York State requires drivers to maintain liability insurance only — and liability insurance generally provides coverage to others, but not to you. In other words, your insurance may pay to fix the other guy's car, but not yours! In order for you to be covered and have your car repaired, you either need to sue the other guy and get his insurance to pay (assuming he was at fault) or purchase your own comprehensive coverage. Comprehensive coverage will pay to repair or replace your car if it is involved in an accident, is stolen, or destroyed by flood or fire. It is what most people think of when they think of “car insurance,” but it needs to be purchased separately.
It’s similar with your homeowner’s insurance. Many policies contain specific exclusions as to what they cover. The biggest exclusion is for damage caused by flood, but there can be additional exclusions, such as coverage for artwork, electronics, jewelry, firearms, or cash depending on the type of policy you purchase. It is possible to get coverage for most of the common exclusions, either with a stand-alone policy (such as flood insurance) or an endorsement to your homeowners’ policy. While most people who live in our area are required by their mortgage bank to have a flood policy, people who own their homes outright may be tempted to let their flood coverage lapse — with expensive results.
In my practice at Coastal Financial Services, I have a very simple philosophy: Take control of the things you can control, and try not to worry about what you can’t. Having the appropriate property insurance in place can help you not to worry about the various expensive catastrophes that might befall you.
A quick caution about cost: It might be very tempting to purchase the least expensive coverage you can find. However, that coverage may turn out to be very expensive when you are not covered for a loss. It is vital that you purchase insurance that will cover you for all likely — and even unlikely — losses that you might face, and this is unlikely to be the least expensive policy you can find.
If you need to lower the cost of your insurance, I’d suggest increasing your deductible. Would a $500 loss be catastrophic for your financial well being? If not, consider increasing your deductible to $1,000 or more. You are likely to save enough money on premiums to pay for the increased out-of-pocket cost of a loss rather quickly. Having an adequate emergency fund <link to my article on emergency funds> may enable you to increase the size of your deductible and save on your cost of insurance.
Having the correct insurance for your property is an important foundation for any of your financial plans. Adequate insurance will help make sure that your long-term plans stay on track, regardless of what unexpected — and costly — things get in the way.
Jesse Lunin-Pack is the Founder and President of Coastal Financial Services, Inc., an independent wealth management practice in Atlantic Beach, New York.
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