If you’re like many successful people, your home is your largest personal asset. But, nearly two-thirds of American homes are UNDER-insured, per Nationwide Insurance, adding that the average homeowner is underinsured by about 22 percent. This could mean you are unable to rebuild your home to the condition it was in before a major disaster occurred.
Homeowners insurance generally covers your home, the property in your home, as well as the liabilities you incur on your property. As with auto insurance, some people try to save money on homeowners by having high deductibles or bare minimum coverage. Doing so could save you a few bucks, but cause you to be seriously underinsured. It’s very important to know what your coverage limits are and that they are adequate to cover your potential losses. Ask yourself, “If my house burned down today, would my insurance be enough to rebuild it the way it was before? How about all my belongings, art, furniture, electronics?” Talk to your insurance broker today if unsure.
GAPS AND LIABILTY RISKS
Sure, it makes sense to compare coverage options from different carriers. But, going for the cheapest coverage is like everything else in life – you get what you pay for. Why spend the time to do it yourself? Have a reputable, experienced insurance broker on your side who can find the best coverages for your unique needs. A good broker will check in with you more than once a year to see if your assets and liabilities have changed and will review your policy regularly.
REBUILDING IS EXPENSIVE
Underestimating rebuilding costs is a gap we see often. If you’ve recently done significant renovations on your home, you should have your coverage reviewed again. It’s not necessarily that the value of your home has increased, but If you’re like most homeowners in our area—it’s the value of the land that has increased significantly. Be mindful of what it would cost you to rebuild your house now that it’s been newly renovated.
Materials costs are up. Labor costs are up. You may have a beautiful older home with materials that are hard to source or that require expertise to rebuild. While these new, modern homes are nice, you want your home just the way it was… and that may cost more to rebuild than the new house recently built down the street. If your damage is caused by a local catastrophe, and other homes in your area are also damaged, then the demand for labor and material will rise and your coverage could fall short.
REAL ESTATE HOME VALUES
It is also possible to be over-insured if you do not understand what the insurance is covering. If Redfin or Zillow estimate your home could sell for $1.5 million, you likely need much less than $1.5 million in property coverage.
A good broker will explain these risks to you to ensure your current coverage is appropriate.
Underestimating the value of collectibles is another common insurance gap we see, particularly with clients who own fine art. A typical homeowner policy may only cover a few thousand dollars worth of art in the home, a fraction of what those collections are worth. If the art is not specifically covered up to its full replacement value, then any theft or damage to the art collection over your basic coverage won’t be covered. Jewelry, baseball card collections, firearms, and antiques are also examples of collectibles that should be specifically insured and often are not.
REEVALUATE WHEN LIFE CHANGES OCCUR
If you’ve had a significant change in your life such as a new home purchase, a new addition, or for example, your twins just turned 16 and you bought them both cars, you have an abundance of new property to be insured. The best thing to do is find a reputable insurance broker at a local independent company that understands the risks in your area. Sit down with the broker and have them explain your risks to see if there are gaps in your coverage.
Umbrella liability policies are less well-understood than homeowners insurance. The idea is that the umbrella policy sits on top of your other liability coverage, i.e. your homeowners and auto policies. The umbrella will step in during catastrophic liability cases to cover you above and beyond what your other insurance provides. It’s not there to cover losses to your property but to cover your liability if you injure another person or their property.
Let’s say you live in an affluent suburban neighborhood where everyone drives nice cars. Suppose your 17-year-old son is texting while driving your luxury car around town and rear-ends your neighbor, an esteemed neurosurgeon. If the accident caused the surgeon a serious hand injury, you could be on the hook for her lost wages (in addition to pain and suffering) as she recuperates from the injury your teenage driver caused. We could be talking about $1 million a year in lost wages.
Your auto liability policy might only pay the first $500,000 of the surgeon’s claim. That’s when your umbrella policy kicks in to make up the difference. Sure, the chances of a catastrophic liability are low, but if you’re not adequately covered, the liability could wipe out a lifetime of savings and hard work.
By the way, the cost of umbrella insurance is much less than people expect. For instance, a $2 million policy might only cost you $500-$600 per year. But, when you need it, you will be happy to have it.
Insurance terminology can be extremely confusing and complicated. That’s why as advisors, we surround ourselves with local insurance experts who make sure our clients get the coverage that is most appropriate for their needs.
In my next post, we’ll talk about closing the gaps and other strategies for getting the most out of your homeowners and umbrella policies.
WE CAN HELP
If you or someone close to you has concerns about their insurance or personal liability needs, please don’t hesitate to contact us. We offer complimentary initial consultations through our Second Opinion offering and can connect you with local brokers.
James Nevers,CFP® is a Senior Advisor at Soundmark Wealth Management, LLC. James works closely with physicians, business owners, directors and executives at Amazon, Microsoft, and Boeing, and other successful individuals to help them define their financial goals and implement an ongoing financial planning process.