The Personal Insurance Guide for Beginners

admin // November 21 // 0 Comments

Insurance has become an essential part of modern financial life. If you own a car or a motorcycle, your state requires that you carry insurance. Mortgage companies require homeowners insurance. Many landlords require renters insurance. Insurance is a necessary part of modern living but not everyone fully understands their policies or what they are paying for when they buy insurance. With insurance policies weighing in at dozens of pages, it’s hard to imagine that anyone reads and understands every word in the policy.

To make sense of the coverages on your home and auto insurance policies, you’ll need to be familiar with some key insurance concepts.

  • You need to have an insurable interest. The ability to buy insurance is dependent on what’s called “insurable interest”, which refers to your potential for a financial loss. For example, if your neighbor’s car was damaged or destroyed, you wouldn’t suffer a financial loss. The principle of insurable interest is why you can’t buy insurance for something owned by someone else. To look at insurable interest further, you also can’t insure an item for more than your potential loss. A car worth $5,000 can’t be insured for $10,000 and a house that would cost $300,000 to rebuild can’t be insured for $1 million. Insurable interest is at the heart of every insurance policy – even life insurance policies – and creates limitations within your policy.
  • The damage to an insured item must be sudden and accidental. Many people are caught by surprise when their policy doesn’t cover certain types of damage. In general, you’ll want to ask yourself if the damage occurred both suddenly and accidentally. If both items don’t apply, it’s unlikely that your policy will provide coverage. Intentional acts aren’t covered and damage that occurs over time typically isn’t covered.
  • Insurance is governed at the state level. Instead of federal oversight, each state makes its own insurance regulations. Where this is most evident is in auto insurance, where the minimum coverage requirements can differ greatly from one state to the next. Medical coverage if you are injured by an automobile also varies from state to state. The major coverage types and the protections they provide can be discussed, however, because these are largely similar regardless of which state you live in.
  • A peril is a risk. You’ll see the word “peril” many times in your insurance policies. A peril is a risk that can cause a financial loss. Not all perils are covered. Your policy will also have “exclusions”, which are perils that aren’t covered by your policy.
  • Deductibles are the part of an insurance claim that you pay. Most types of insurance have a deductible. A higher deductible can keep premiums lower. However, it’s important to understand that the deductible is real money that must be paid toward a loss. Structure your deductible to be an amount that you can comfortably cover out of your savings.
  • Rates reflect risk of a loss and insured value. Insurers sometimes look at hundreds of factors when determining insurance rates. If these factors indicate a greater risk of a loss, you can expect your rates to be higher. Factors such as credit, claims history, and continuous insurance coverage tend to weigh heavily on rates. Higher coverage limits, of course, can also raise premiums.

Understanding auto insurance

Almost every state requires auto insurance, but the only type of coverage usually required by the state is liability coverage. If you have a loan or a lease for your car, the lender or leasing company will also require that you carry collision and comprehensive coverage. From the lender’s perspective, they think of “your car” as being “their car” until you’ve paid off the loan. Collision and comprehensive coverage protect their financial interest in the car.

Liability coverage

Of all the coverages on your auto insurance policy, liability coverage is the most important, but it often doesn’t get the attention it deserves. You can think of liability coverage as coverage for other people. If you’re at fault in an auto accident, your liability coverage can cover the cost of injuries to others or the cost of damage to the property of others, including other vehicles, signs, guardrails, buildings, and any of the other things we sometimes bump into while driving.

In many states, the minimum requirements for liability coverage are well below what might be considered a wise choice for a coverage limit. For example, the minimum required liability coverage in some states is only $15,000. Look to your left and right at any intersection and you’ll see much more than $15,000 worth of property that can be damaged in an accident. If you’re found liable for injuries or damage in an auto accident, your liability can easily exceed a lower coverage limit and any amounts that aren’t covered by your policy will have to be paid from your savings, from the sale of assets, or from your future earnings. Examine this coverage limit carefully and consider a higher coverage limit.

Collision coverage

Your collision coverage is among the easier coverages to understand on your auto policy. If your vehicle is damaged due to an impact with another vehicle, due to an impact with a stationary object, or due to a vehicle rollover, your collision coverage can help pay for the cost to repair or replace your vehicle.

Comprehensive coverage

Most other risks to your vehicle, including glass damage, hail damage, falling objects, fire, theft, and vandalism are covered by your comprehensive coverage. Comprehensive coverage is typically much less expensive than collision coverage because the claim amounts tend to be lower.

If you have both collision coverage and comprehensive coverage (in addition to mandatory liability coverage), this is what insurers and auto dealers refer to as “full coverage”. Lenders and leasing companies require that you purchase full coverage.

Med Pay and/or Personal Injury Protection

Medical coverage for you and your passengers can vary greatly depending on which state you live in. Some states only provide a basic amount of coverage for injuries due to auto accidents while others provide more comprehensive coverage which can include extras like compensation for lost income. Invest some extra time with your agent to understand your medical coverage. In some cases, a policy can be structured to keep premiums low but can also expose you to thousands of dollars in potential out-of-pocket costs if you are injured.

In what are called “no- fault states”, your medical coverage from your auto policy applies regardless of who is at fault in the accident. The trade-off for faster access to uncontested medical coverage is typically a reduced ability to sue the other parties involved in the accident.

Uninsured and underinsured motorist coverage

Recent data indicates that up to 13% of motorists are uninsured. Another sizeable percentage may be underinsured, which means they don’t have enough liability coverage to pay for the damage they may cause to other vehicles or injuries they may cause to other people in an auto accident. Uninsured and underinsured motorist coverage allows your policy to cover the shortfall if the other party involved in an automobile accident doesn’t have enough liability coverage or is uninsured.

It’s important to note that personal property stored inside of your vehicle is not covered by your auto insurance policy. If a laptop, cell phone, or other types of personal property are stolen from your vehicle or damaged in an accident, most auto insurance policies will not cover this loss but may cover damage to the vehicle itself depending on the coverage types you’ve purchased.

Who is covered by your auto policy?

In most cases, when you lend your vehicle to someone, you are also lending your auto insurance coverage. However, this provision is intended for occasional use. If you have other licensed drivers in your household who are not covered by your auto insurance policy or another auto insurance policy, your insurer may require you to add those drivers to your policy.

What is a total loss?

If your vehicle is covered by collision or comprehensive coverage and the cost of repair due to a covered claim exceeds 70% of the vehicle’s value, it’s likely that the vehicle will be deemed a total loss. In most cases, the insurer will take title to the damaged vehicle and pay you or your lender for the insured value of the vehicle.

Business use is not covered

Now that ridesharing has become nearly ubiquitous in many parts of the country, it’s important to understand that a standard auto insurance policy does not cover business use of the vehicle. Your insurer may provide an optional rider can add to your policy that can provide coverage or it may be necessary to purchase a business auto policy to provide coverage for business use.

Coverage is provided as Actual Cash Value

Apart from classic car insurance, most auto insurance policies provide coverage as actual cash value, which means that the insured value of your vehicle depreciates each year based on age and/or mileage. During the early years of an auto loan, this can create a situation where you are underinsured in the event of a total loss. New cars depreciate most rapidly during the first few years after their purchase.

Understanding home insurance

Home insurance is a broad category that includes both homeowners insurance and renters insurance as well as policies that fall in between, such as condo insurance.

Your home insurance policy provides some key coverages as well as some smaller coverages that often hinge upon claims that apply to a key coverage.

Dwelling coverage

Your house itself is covered under the dwelling coverage section of your home insurance policy. In most cases, dwelling coverage provides replacement cost value coverage for covered claims, which means that your insurer will not reduce the claim payout based on age. Roofs are a common exception, however. Most home insurers apply a depreciation schedule to roof claims.

If you own a condo, the dwelling coverage on your policy only applies from the studs inward. The condo association owns the building itself, which will be covered by a separate policy.

If you are renting, dwelling coverage does not apply to your policy. The landlord owns the building and is responsible for insuring the building itself.

Personal property coverage

Your belongings are covered under a separate section of your home or renters insurance policy. Typically, most personal property is covered on an actual cash value basis, which means the insured value is depreciated due to age. It is possible to cover some valuable items, such as jewelry or collectibles, for their full replacement cost. Discuss this with your insurer or agent to be sure your valuables are fully covered.

Cars or other insurable vehicles are not considered to be personal property and must be insured under a separate policy.

Personal liability coverage

Your home insurance policy will usually include coverage for personal liability as well as coverage for your home and personal property. Your personal liability coverage provides protection against lawsuits if someone is injured due to your actions or negligence. Typically, your coverage will also include the cost of your legal defense and the cost of your defense does not diminish your coverage amount. Most home insurance policies provide at least $100,000 in personal liability coverage. However, increasing liability limits is typically an inexpensive change to your policy and the starter limits provided by most policies may not be enough to protect you in many liability lawsuits.

Your personal liability coverage doesn’t only apply at home; you’ll have coverage everywhere you go but the personal liability coverage from your home insurance policy cannot be applied to auto accidents.

What’s not covered by a home insurance policy?

Every home insurance policy contains a list of exclusions, which are risks that the policy does not cover. Wear and tear and maintenance-related damage generally are not covered by home insurance policies. Willful or illegal acts that create damage also aren’t covered.

Another important exclusion to be aware of is that floods are not covered by a standard home insurance policy. Water damage from indoor sources may be covered, but water that touches the ground before entering your home will be classified as a flood, and damage from flooding won’t be covered.

It’s also important to note that business activities are not covered by a home insurance policy. You may have a small amount of coverage for equipment stored in a home office but that’s typically where your business-related coverage ends. If you’re a business owner or entrepreneur, discuss your business insurance needs with your insurer.

The insurance policy review

Insurers recommend that you meet with your agent about once per year to review your coverages. While insurance agents may use this as an opportunity to sell additional policies, for consumers, the value is in learning more about the coverages you have on your policies and which risks may not be covered. The annual insurance review provides an opportunity to change your coverage based on your own changing needs. Maybe you’ve started a family, or your teen is now a driver, or maybe you’ve put an addition on your home or acquired more valuables. Any of these reasons can require adjustments to your coverage types or limits. Ask questions at your annual insurance review. Understanding your options is key to good decision-making when purchasing personal insurance.

It’s common for insurers to offer substantial discounts if you bundle home and auto insurance with the same insurance company. The policies are still separate, but each policy creates a discount on the other policy. With bundling discounts potentially as high as 15% or more, it’s often worth considering combining your coverage with one carrier.

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