In life, it’s inevitable that things sometimes takes an unexpected turn — or just plain go wrong. That’s why planning for the unexpected is a key part of any financial plan. In this post we will discuss Property and Casualty (P&C) insurance. P&C coverage basically covers your stuff, and any liability that might come from you and yours being legally responsible for someone else’s injuries or damages. The most common forms of this type of coverage for a family are: Homeowners, auto, personal articles and umbrella.
Property & Casualty insurance
any stuff you own except for your cars, motorcycles (vehicles) or boats
What do homeowners property and casualty provisions cover?
Here are some scenarios where homeowners insurance would come into play:
A visitor falls and breaks their leg at your home.
A worker gets hurt while working on your property and cannot perform their job due to the injury.
You are sued by a visitor after they were injured at your home.
You were robbed.
Your home was damaged due to weather —like a tree falling on your house.
The key components of a homeowners policy are:
Dwelling value - This is the amount that will be reimbursed should you have to repair or rebuild your home. This is a tricky number, and it is the basis for your yearly premiums. This is a classic Goldilocks problem, not too high, not too low … just right. I use several different methods to narrow the number. I start by checking out zillow to get a feel for the total value of the house (this sets a top limit) as well as the square footage of the house. Then I multiply the sqft by a local building multiplier. In Decatur, I see building costs between $175 and $200/sqft. So for a 2000 sqft house * $200 sqft = $400k for the dwelling value. Then I will subtract from the zillow total value, the cost of a tear down. In Decatur, typical tear downs (IE, land) costs around $400k. So if the total value of the house according to zillow is $800k, I subtract $400k and come up with a dwelling value of $400k.
Other structures - are buildings on your property, not connected to the main building, Eg, a detached garage. Other structures are typically covered as a percentage of the dwelling value coverage, like 10% of dwelling.
Personal property - this is all of the stuff inside your home. If you lose your home to a fire, after you rebuild, you will need to replace all of the furniture that was lost. This provision will take care of that as a percentage of the dwelling value. Typically this will be in the neighborhood of 75% of dwelling. It as also smart to walk around with your phone and take a video of the contents of your house, and store the video in the cloud.
Liability - this is the amount that would be covered if you were found liable for someone being hurt. The more, the better. This is typically between $300 and $500k.
When buying insurance, you need to decide on a deductible, the amount that you will need to pay should you file a claim. The deductible is meant to keep you from constantly making claims. So the deductible needs to be an amount that you can come up with in an emergency. The deduct typically falls around $1000-2500. The higher the deductible, the lower the premium. A good deal I helped a client secure was a homeowners quote on a $500k dwelling cost for around $1500/year.
The key components of an auto policy are:
Bodily injury liability - This is described by an amount per person / per accident. Eg, 250k/500k means that each person will get a max of $250,000 of liability with a total coverage of $500,000 in an accident. For example, if you are in a car accident and are at fault (liable), and you have a $250k/$500k limit, then each person in the car you hit can get paid a maximum of $250k. Your insurance will pay a maximum of $500k to the people in the other car. If the amount is greater than $500k — then you would need umbrella insurance (which I highly recommend and I find is often neglected) see below.
Property damage - The amount that is covered to replace your car.
Uninsured motorist -This will cover you (the insured) should you have an accident with someone who has no insurance, or is underinsured.
Auto insurance is highly variable and will depend on the type of car, the age of the car (and the drivers) and your driving record. A good deal I helped a client secure was 250k/500k/100k coverage on two (15k valued) cars, with good driving record for $2k/year.
Personal articles coverage is typically for expensive, hard to value items that are dear to you. You would normally see this on your wife’s engagement and wedding rings and guns/stamps/coin collections. The coverage is not super expensive, typically costing around $100 for every 8-10k of valuables.
is for providing extra liability coverage, should something happen that causes you to exceed the limits on your other coverage.
Umbrella insurance is for providing extra liability coverage, should something happen that causes you to exceed the limits on your other coverage. Typically umbrella comes into play when you get into a car accident. Eg, you have 250/500/100 coverage. You cause a car accident that involves a family of 5, who all end up with extended hospital stays. They will rapidly use the 500k limit that is available to you. An umbrella policy will cover the difference. Generally I see these around $1MM, and cost around $200/year. I highly recommend having umbrella insurance. It’s inexpensive and if you don’t have it and wind up hitting a minivan family of 4 with a $1MM liability, you could lose everything. For ~$200 that’s an easy price for security and peace of mind.
Insurance Guiding Principles
Insure against low probability, high cost issues.
Think about your coverage limits,. This is a classic goldilocks scenario, you want the number to be just right, not too high, not too low.
Shop your rates every 2 to 3 years. Insurers change their rates based on their market.
Know that if you make a claim, your insurance company is going to raise your rates or maybe even drop you.
Bundling your insurance with one company can offer you nice discounts.
If you have insurance through a company that you have seen on ads during the Super Bowl, you may not be getting the best rate.
If you fell asleep several paragraphs ago, or have not shopped your rates in the last few years, contact me. I am most assuredly NOT an insurance agent, but I can give you some recommendations. I have also been having really good luck with a local independent agent, who has been finding clients less expensive rates while getting higher limits! Send me your policies, I am glad to shop them.
**Thanks to everyone who gave me feedback on topics. Insurance was the top choice.