Underinsurance is a longstanding and persistent issue for many Americans. Sometimes, it’s unavoidable when you don’t have the cash flow required for disaster-proof coverage. Go as far as you can with the money at your disposal. Your insurance should protect your finances, not sink you into unmanageable debt.
For those on the other side of the spectrum who intentionally risk underinsuring their assets, it’s another matter. Rolling the dice and losing can have disastrous effects.
So, is being underinsured a hazard caused by your economic situation? Or are you purposely leaving yourself, your family, and your property unprotected?
If you responded yes to the latter, it’s not too late to rectify the problem. Don’t wait until you face a disaster and the gaps in your insurance cause you to drown in debt.
In Part 1, we explored the risks of being underinsured. But knowing the problem is one thing. Avoiding it or fixing it is another. So let’s review the practical steps of avoiding underinsurance while not overpaying for insurance.
I | What is Overinsurance?
Overinsurance means you’re paying far more than is required to replace your lost property.
If you’re driving an old buggy worth $3000 to replace, $10,000 auto insurance is overkill. If you run a small business out of your home, with no specialized equipment, and you are the sole employee, your coverage will differ from someone who does.
All the same, some agents may sell it to you. One of the notable causes of overinsurance is agents who convince clients to purchase more coverage than they need. Then there are all the extras insurers offer to sweeten the deal. Most of these add-ons aren’t free and are likely unnecessary.
Your insurance policy should match or come as close to the replacement cost of your property. Determining the actual replacement costs can be tricky. An item’s value in 2021 is not likely to be the same in 2028. Market costs fluctuate, and things lose or gain value over time.
Bear all these factors in mind when buying, renewing, or expanding your policies.
II | Protecting Your Home From Underinsurance
Create and maintain a home inventory to track your personal property.
As I mentioned in Part 1 of this underinsurance series, you can’t adequately cover your assets unless you understand what they are. Create and maintain an inventory list to organize, document, and keep track of your household items. Include receipts and photos for added proof of ownership.
Insurers won’t take your word for it if you suffer a disaster. They require evidence to weed out false insurance claims. Those receipts and appraisals document the replacement costs of your personal belongings. Having this proof cuts some of the red tapes of the claims settlement process.
If creating a spreadsheet turns you off, use a home inventory app. These apps provide a database where you can enter prices, descriptions, warranty information, and photographs, among other details. Update your list regularly so it’s always current.
Know your coverage limits.
Insurers set the coverage limits for your personal possessions as a percentage of your homeowners policy. This percentage typically ranges anywhere from 20% to 50%. Your policy’s contents component falls under the same deductible as the structural coverage. Most insurance carriers provide an “all perils” deductible.
Suppose your personal possessions include high-value items like art, antiques, jewelry, or any collectibles. Chances are, you’ll surpass your insurance coverage limit. Should this be the case, purchasing extra coverage in endorsements and riders will be your only recourse.
Notify your insurance provider and update your policy if you’ve undertaken any renovations or expansion.
In 2019, U.S. home improvement expenses amounted to about $407 billion.
Renovations add value to your house. It’s another common cause of underinsurance most homeowners overlook. Each addition you make, every upgrade, widens the gap between your original insurance needs and your present. For this reason, you need to upgrade your policy as well.
Not all renovations and remodeling projects increase the value of your home. Here are some that do:
- Expanding your home;
- Building a shed or detached garage;
- Adding a home office for your business;
- Building a pool;
- Adding a deck;
- Installing a woodstove;
- Upgrading your kitchen;
- Remodeling your bathroom.
The construction materials used are also a factor. Black quartz and granite countertops, skylights, stamped concrete driveway, etc.
Contact your insurance agent and review your current insurance levels.
Review your liability coverage.
Setting up a trampoline isn’t considered remodeling, but it does affect your policy. We would call it a liability, as is a pool or a woodstove, or even adding a dog to the family.
Liability insurance comes as part of your homeowners policy. It covers any injuries or property damage you, a family member, or a pet may cause. Claims pay for:
- Replacement or repair of damaged property;
- Medical bills;
- Lost wages;
- Death benefits;
- Legal fees for a lawyer and compensation if you’re sued.
The U.S. is a litigious society. We can file lawsuits for almost anything, and many pounce on the opportunity whenever possible. Failing to make the necessary adjustments could lead to inadequate coverage for damages and injuries, leaving you open to a lawsuit.
Get the closest estimate possible for rebuilding your home.
Hitting the exact mark on your home’s replacement cost takes finagling. Goods and services appreciate and are dependent on what’s happening in the market at the time. Work with a qualified evaluator for the best costing possible.
If you cannot pay for an evaluator, check your local builder’s association for a rough calculation of how much it would cost per square foot to rebuild.
Your home’s style, building material, and labor will determine the final cost and the square footage.
III | Protecting Your Vehicle From Underinsurance
Don’t settle for the state minimum bodily and property liability insurance programs.
State minimum required insurance (SMRC) offers the cheapest legal means of driving on the road. It does not protect you in the event of a significant incident. Its fundamental purpose is to compensate third parties affected by your mistake.
Yes, it does afford you legal fee coverage, but the total sum doesn’t stretch very far. You’ll still face massive out-of-pocket costs.
In California, the minimum required is:
- $15,000 for injury/death to one person.
- $30,000 for injury/death to more than one person.
- $5,000 for property damage.
Consider the above figures with today’s market appreciation.
Since the law’s inception, medical bills and the cost of repairing and buying a new vehicle have increased. If you cause some minor scrapes and dents, your state liability might be able to cover most of it, but what if you meet in a severe accident?
You can increase your liability protection without adding comprehensive or collision policies.
The average state minimum rate in California is $606. Increasing your coverage to 50/100/50 costs on average $752 or about $63 per month. That’s a $146 difference or a 24% increase in your insurance premiums.
Weigh the advantages of the extra $146 in the grand scheme of having sufficient coverage.
Make sure you have enough personal injury coverage.
Although you’ll see bodily injury and property damage liability insurance mentioned the most, there are four types of SMRCs.
- Bodily injury liability
- Property damage liability
- Personal injury protection (PIP)
- Uninsured/underinsured motorist coverage
While SMRCs differ state-to-state, almost all require the first two—bodily and property. If not explicitly stated as a requirement, personal injury protection is a voluntary option.
PIP covers medical expenses for you, your passenger’s or pedestrian’s injuries after an accident, no matter who is at fault. Depending on the policy structure, it can cover income loss, rehabilitation, and other expenses.
MedPay is a substitute requirement for PIP in some states. However, it doesn’t cover lost income, and the coverage limits are typically lower than PIP.
Check your health insurance before deciding on your personal injury limits. Health care costs are super high, and you don’t want to set your coverage amount too low.
Protect yourself against uninsured and underinsured drivers.
With about 43 million uninsured drivers in the U.S., close to 13%, tracking down violators costs time and money. Despite the efforts of state insurance departments and insurance companies, some slip between the cracks.
You won’t know if you’ve encountered one of those millions of uninsured/underinsured drivers until you meet in an accident.
Underinsured and Uninsured Motorist Coverage (UM/UIM) covers the damages caused by a driver with inadequate or no coverage. It also applies if you’re a victim of a hit-and-run collision or if you hit a pedestrian.
Don’t skimp on collision coverage.
Collision coverage covers your car for physical damages caused by accidents with another vehicle or inanimate object. Popular objects include trees, mailboxes, guardrails, light posts, and road signs.
It’s an optional policy you can include with your SMRC for added protection and comes with an insurance deductible. The limit of your deductible reduces your monthly premium. But remember, a high deductible means higher out-of-pocket costs before your policy activates.
Car financing and leasing companies require collision coverage as part of their application process.
If you own your car and it’s over 10 years old, you can reassess whether or not you need to keep the coverage. Should the coverage cost plus the deductible exceed the car’s replacement cost, drop it. Watch out for overpaying on insurance.
If you’re insuring a new driver, collision insurance is a good option for beginner fender-benders.
Don’t swipe left on comprehensive coverage without proper assessment.
Comprehensive insurance policies cover your car for non-collision accidents and damages. Some of these incidents include:
- Falling objects (trees and branches)
- Natural disasters
- Vandalism
- Vehicular theft
It’s another optional coverage with a deductible and a smart choice if you live in high-risk areas for wildfires, floods, earthquakes, and high winds.
Each auto insurance option is different and offers provisions for various disasters. How you pair them is up to the coverage level you require and something you’ll discuss with your agent or broker.
IV | Protecting Your Business From Underinsurance
Know the value of your business.
Like your household assets, take stock of your business and its value. To prevent underinsuring your company, you need the closest estimate possible for the cost of recovering your lost assets.
Do not set the value of your business recovery at its present value. Consider fluctuating exchange rates, inflation, and other external contributing factors. The business environment changes, and you risk being underinsured unless you account for these shifts.
If possible, consult with a professional valuator.
Consult a financial advisor.
The easiest way of avoiding underinsuring your business is by seeking professional help. Consult a financial advisor from a reputable insurance company for guidance on best practices and insights into the commercial insurance market.
A skilled broker will help you navigate all the jargon and explore the features best suited to your business’s current and later plans. Buying insurance isn’t only about the present; it sets the groundwork for future growth and development strategies you employ.
Reassess your policy every six months.
Never automatically renew your insurance policy. Monitor your internal business changes and review the level of coverage for gaps. Note any overspending as well.
Perhaps you’ve downsized your business. Downsizing means you won’t require as much protection. The reverse is also true. You may need more coverage if you’ve upgraded or bought new equipment, expanded your premises, or signed new contracts. Assess your recovery costs to ascertain which direction to go.
Hiring new employees is also a growth point for review during renewal. Protecting your employees and their personal property during business hours should be figured into your coverage.
Two months before renewal is an excellent time to shop around for better offers from other companies. There may even be opportunities for savings with new features offered by your insurer. Don’t be afraid to make the shift if you find a more suitable option.
Prepare for the worse and unforeseen.
A quick resumption of business after a crisis is crucial. Your downtime gives your competitors leeway to woe away your clients and customers.
Include planning for business interruptions into your insurance plan. Your policy limits should be sufficient to cover repairs, replacement, and ongoing costs for more than a few days. Business interruption coverage takes 48 hrs to activate.
Create a business continuity plan and make adjustments as they become necessary. Businesses and owners who do not plan for the worse take the longest to recover and are often left behind.
Another worst-case scenario to bear in mind are lawsuits. Business liability insurance is your first line of defense against common claims. It covers:
- Bodily injury
- Property damage
- Personal injury (including slander or libel
- Advertising injury
- Your legal costs and settlements
V | Protecting Your Family From Underinsurance
Design your life insurance policy to fit your lifestyle.
If you passed away tomorrow, how much money would your family need to continue living as they do now? Can your death benefits plug the hole your lost income leaves behind? Do you have any debts? A mortgage? Student or Car loans? What about your child’s tuition for college?
Use your family’s needs to decide how much coverage you’ll purchase. How can you safeguard them in your absence?
Update your policy if you experience any significant life changes.
If you added a new family member, it’s time to increase your life insurance coverage. According to a government survey, middle-income, married-couple parents of a child born in 2015 may expect to spend upwards of $284,570 for food, shelter, and other necessities to raise a child through age 17.
As you can see from the list, the estimated cost does not include college tuition. So if you hope to send your child or children to college whether or not you’re around, or perhaps you want to contribute to their wedding, calculate all these into your payout limits.
Don’t rely on group life insurance.
Unlike regular insurance, you don’t have much flexibility with the coverage offered by your employer. Furthermore, the coverage limit is usually low and may not be enough to cover your needs.
Most of all, if you lose your job, you’ll lose your insurance. There’s no refund on the monies you’ve contributed. Converting your group policy into an individual plan is possible, but it’s often expensive.
Because of its limitations, group life insurance is more of a complimentary setup. But, if you can’t afford additional coverage now, start a saving account for a rainy day.
Stay-at-home parents should also be insured.
Childcare is expensive, and California boasts one of the most costly averages for childcare services. If you have an infant at home, you’re looking at an average of $1,412 per month—the same care for a four-year-old is about $956!
Imagine finding that money for child care plus house cleaning service fees. Stay-at-home parents juggle both of these responsibilities, saving their family thousands. Without them and without insurance, the financial burden will fall on a single income.
Conclusion
Underinsurance is a common problem in many households and businesses across the U.S. Adequate insurance coverage protects you and your family’s finances from risks associated with major disasters. Knowing all your assets are protected is the kind of peace of mind you want.
Be proactive in staying out of the statistics.
- Thoroughly research insurance policy options and assess how each of their features fits into protecting you from unforeseen events.
- Purchase the right type and amount of coverage suited for your needs, whether for your home, car, business, or life insurance.
- Review your coverage every six to twelve months and assess if the policy perimeter is still right for you.
