Insurance: How to Protect Yourself

Insurance baffles many people. Some insurance you are "forced" to carry, such as basic coverage for auto liability and homeowner's insurance, and other coverage you want, but may not be able to afford, such as health and disability insurance, and of course, coverage you hope never to have to use, such as life insurance. Today, we will discuss the risk transfer aspects of insurance, so we will be dealing with those areas of protection that can keep you and your family out of harm's way financially, through the proper use of liability insurance protection.

We will speak today on personal liability, and save other types of liability protection (i.e. E&O, D&O, Business Insurance, etc.) for another day. The three most common insurance policies that provide personal liability protection to your family are Home, Auto, and Umbrella insurance coverage. We will deal with these coverages individually at first, and then tie them together at the end of this post.

Auto Insurance

In California (as well as most, if not all other states), the government forces you to carry at least a basic level of liability insurance. Commonly, this shows up as 15/30/5. What that means is that you must have at least enough insurance to cover:

1. Any harmed individual for $15,000 of personal injury damages
2. All persons injured in a common accident to a total of $30,000 for personal injuries
3. Property damage coverage of at least $5,000 per accident.

As you can imagine, it does not take a very severe accident incur liability in excess of these required amounts. While auto insurance is compulsory, at least 25% of our fellow drivers still have no coverage. The state is cracking down on this by requiring all insurance companies in the state to be linked electronically to the DMV for up-to-the-minute policy status information. If your coverage lapses, is cancelled, or goes out-of-force for any reason, DMV can immediately cancel the registration on your vehicle. It is getting harder to not have coverage, but not impossible.

My recommendation, unless you really have no assets or income to protect, is to always get the maximum amount of coverage that you can afford. As you will find, once you have the basic coverage, it can cost very little to increase your liability amounts, as compared to the amount of coverage that you would receive.

A search at 21st.com provides the following pricing data for a sample policy (42 y.o. male, single, LA County, clean DMV):

Coverage-------------------------------Limit--------------------Premium 
Bodily Injury Liability-----------------$15,000/30,000------$130.00 
Property Damage Liability-----------$5,000-------------------78.00

Bodily Injury Liability-----------------$250,000/500,000---$169.00 
Property Damage Liability-----------$100,000---------------$98.00

As you can see, the difference between the minimum and the maximum coverage for this good driver is only $59 per six months. Less than $10 per month provides over $550,000 in additional protection. Maximizing coverage is a very small investment with a very big upside in protection.

Some other questions for auto insurance concern other coverages, and which coverages might be necessary. Well, if you owe money on your car, your lender will require that you carry Comprehensive (other than collision) and Collision coverage on your vehicle. Collision is the category that pays to fix your car if you are found to be at-fault in an accident in which your car is damaged. Comprehensive covers for theft, vandalism, natural disasters, and any other harm that comes to your vehicle other than an accident. Your lender will tell you the maximum deductible amounts that they will allow.

You also have the option of purchasing Medical Payments Coverage, Uninsured Motorists' Coverage, and optional coverages including coverage for Accessories, Towing & Disablement, and others that vary from company-to-company. My quick recommendations for these are as follow:

Uninsured Motorists' Coverage: Get an amount that matches your liability coverage

Medical Payments Coverage: $5,000 if you don't have health insurance or if you have a high deductible Health Insurance Policy (HSA or MSA Plans)

Accessories: If you have over $1,000 in electronics or a special paint job, you need this coverage

Towing & Disablement: Unless this came with your car, buy it with your insurance. It is probably cheaper than AAA or other independently-purchased coverage, and may be less restrictive.

Homeowner's/Renter's Insurance

Your mortgage company will require you to have replacement coverage for your home. Renters are four times more likely to suffer a break-in, so renter's coverage is highly recommended. Both policies also include liability protection for injuries sustained by visitors or guests to your property, as well as fire legal liability should your property burn and cause harm to the property of others (e.g. The neighboring apartment).

Again, max-out your liability coverage, because it does not cost much to do so. Also, be sure that you get "replacement coverage" for all of your personal property. You don't want to have to accept ACV (Actual Cash Value) or depreciated valuations, plus your deductible, if you should have a theft, fire or other property loss.

Discounts are available if you have a home alarm system with monitoring, sprinklers, smoke detectors, fire extinguishers, and/or other safety-related items. Check with your agent for these discounts, and take the appropriate steps to maximize your protection and savings.

Umbrella Policies

A personal umbrella policy does not protect you just in the rain. An umbrella policy protects you from all insured losses, over and above the amount of your other coverage. For example, if you purchase $1 million of umbrella protection, you have just increased all of your liability protections by $1 million. This means your auto is now $1.25 million instead of $250K, and your home is now $1.50 million instead of $500K.

Umbrella policies can be issued in amounts up to $5 million, but any amount over $2 million will probably require additional underwriting. Ask your agent how much coverage is appropriate for your situation.

It is unlikely, although possible, that you could have an exposure that will exceed these coverage amounts. If you do find yourself involved in a lawsuit that could exceed these amounts, have an attorney send a letter to the insurance company advising them to settle within policy limits if they should have the opportunity. This will further protect you, but see an attorney for legal advice if this happens to you.

Summary

Your auto, homeowners'/renters', and umbrella policies exist to shift the responsibility for losses from your family to the insurance company. Hopefully, you will never need to file a claim against any of these coverages. However, if you ever need to file a claim, you will be glad that you protected yourself as fully as possible.

Be sure to review all of your coverages with your agent at each renewal opportunity, in order to ensure that your coverages are appropriate and that you are receiving all savings to which you are entitled. We will discuss other types of insurance in future articles, but if you have any questions, be sure to post them here.

Until next time, be careful out there!