Let’s cut to the chase: With select few exceptions, no one likes talking or reading about insurance. For most, insurance feels like a bill we forgot would be arriving with no sense of enjoyment in paying it. It’s one of the few things you buy which you never hope to benefit from, because that typically means something bad has happened. If you can bear with me, I encourage you to take a few minutes to confirm items that could make a massive impact on your financial situation if an accident were to happen.
Liability Coverage
What is it and why do you need it? Liability coverage provides you with financial protection from accidents or incidents for which you could be considered liable. Examples might include backing into someone’s car in a parking lot, being at-fault for a car accident, or someone tripping and breaking an arm on your property. While you may be a great driver and very careful about fixing anything on your property that could cause injury, even a single incident could be devastating to your finances.
How do you get it? You buy liability coverage from an insurance company and, generally, it is inexpensive. The two primary types are automotive insurance (which the state requires if you’re a vehicle owner) and homeowners or renters insurance. Additional liability protection can be purchased in the form of an Umbrella policy. Umbrella policies usually require you to have the maximum level of liability protection through your auto and homeowner’s policies. They then provide additional protection above and beyond those limits.
How much do you need? In the case of a lawsuit, plaintiffs can seek damages against both assets you currently have and future earnings. Suffice it to say, having enough protection in place is important. As a very general rule of thumb, you’ll want at least enough liability coverage to cover your total net worth (value of bank accounts, investments, home, etc.). For many individuals and families, this will go beyond the policy maximums for auto and homeowners insurance and require additional umbrella coverage on top of that.
What action should you take now? Most likely, you already have homeowners and auto insurance in place if you own a home or a vehicle. Take the time to confirm your liability limits and ensure that you have sufficient coverage. The worst time to find out would be after an accident or incident. If you do not know, reach out to your insurance professional or financial advisor for assistance. While state law requires auto owners to have liability coverage, the minimum requirement (in Iowa) is $20,000 to one individual in an accident, $40,000 to two or more, and $15,000 in property damage.1 For most individuals and families, that’s far less than the level of protection they should have. Additionally, it would be wise to have coverage in place for uninsured or underinsured motorists, in case they don’t have either enough coverage or the assets to cover an accident or incident they caused.
Property Coverage
What is covered and why do you need it? Unlike liability coverage that provides you financial protection in the case where you are at fault to someone else, property coverage covers you and your family’s personal property against losses.
How do you get it? Similar to liability coverage, the most common sources of property coverage are through companies that offer homeowners, renters, or automotive insurance. In addition to those primary forms, almost any valuable product you purchase these days can come with optional forms of insurance, service contracts, or extended warranties.
How much do you need? How much you need primarily depends on how much of a loss you could bear and what the replacement cost would be. There are endless levels of customization with coverage both for homeowners or renters insurance and auto insurance. Due to the number of options and various values of homes and property, this amount can vary significantly between different individuals and families. Some of the key things to pay attention to are: Actual cash value vs. replacement cost (Would the policy pay to replace/rebuild, or would it just pay the value minus depreciation?). Do you have anything that falls outside of or valued over the individual coverage limits (jewelry, firearms, artwork, items in a storage unit, other structures such as a shed or garage)? You should also think about financial coverage for a rental vehicle or hotel and living costs if your home becomes uninhabitable.
Another item to consider is your deductible amount. The deductible is the amount you need to pay before insurance coverage begins. If you have a healthy emergency fund, you can generally afford to have a higher deductible and save on premiums. If you want to have even lower financial risk, consider lowering your deductible.
What action should you take now? Find your policy declarations page and review the coverage for each line-item. Do you have anything that is valued beyond the limits that requires extended coverage? Do you have items stored at a storage unit or an additional structure on your property where coverage needs to be boosted? In addition, take photos of your belongings and create an inventory so that, if a tragic event were to happen, you have everything prepared for the insurance claim. You should also know your deductible amount and be certain you have the emergency fund in place to cover it.
Please note that Foster Group does not sell insurance products.