It’s important to review property and casualty (P&C) insurance coverage at regular intervals. Doing so can help save money while still maintaining solid coverage.
Here are a few common mistakes I see when reviewing P&C policies:
Low deductibles
A deductible is the initial financial risk that a policyholder must cover before the insurance company will start paying out on a policy. For example, if the deductible on your car insurance is $250 and your car is damaged, then you will pay $250 towards the repair bill, while the insurance company covers the remaining repair costs (up to the policy’s maximum). Many people choose a deductible and stick with it year after year after year. So the deductible they chose in their 20’s, when they had close to zero savings, might be what they are using in their 50’s. However, if you have an adequate emergency fund or liquid savings, then there are often reasons to consider increasing the deductible.
The first reason is that your insurance company will generally reduce the premium on your policy if you increase the deductible. The savings from the lower premiums can compound over time, and if you can avoid any claims for a few years, you can generally recoup the value of the higher deductible.
Higher deductibles can also help reduce the number of small claims. Insurance companies track all claim activity, and even a small claim can put you in a high risk category for underwriting, which can lead to higher costs over time. By increasing the deductible, you will be incentivized to cover small repair bills on your own and avoid filing a claim. This can also reduce the overall hassle of dealing with your insurance company.
Taken to the extreme, it’s even possible to go with what’s known as a “liability-only” policy. This is most often seen in the context of auto insurance. For example, if you drive an old honda civic with 250,000 miles, it’s likely not worth very much. If the car is damaged, the insurance company likely won’t pay out much above the deductible level. In this case, it could make sense to remove any collision/comprehensive coverage on the vehicle, and just keep the liability coverage.
It’s also reasonable to carry a liability-only policy on a new vehicle if your financial circumstances allow for that. Remember that any insurance coverage you purchase is designed to provide a profit to the insurance company. To the extent that you can self-insure certain risks (i.e. replacing your damaged car), you should theoretically avoid the marginal insurance costs and come out ahead in the long run. Of course, it won’t be fun to write a big check if you crash your car!
No umbrella liability coverage
If you have a large amount of assets, then it’s likely a good idea to carry umbrella liability coverage. This type of coverage offers protection in excess of the liability levels embedded in regular your home/auto liability policies. Umbrella coverage is generally inexpensive (due to not getting used very often), and can provide immense peace of mind in our current litigious society.
Additionally, since umbrella liability coverage is inexpensive, it can sometimes make sense to “replace” some of the liability coverage on your home/auto policy with the umbrella coverage. This merely involves asking your insurance company about the lowest level of liability insurance coverage required on your home/auto policies, which will still allow you to purchase umbrella coverage.
Extraneous coverage
If you have a jewelry policy, roadside assistance coverage, or medical payment coverage, you may consider removing them.
Jewelry policies often cover things like engagement rings, but often the value of those rings is much less than you think (i.e. the diamond market is crazy). On the other hand, many insurance companies offer a discount if you buy a jewelry policy, so sometimes they can make sense.
Roadside coverage through your insurance company is often a bad idea. As mentioned earlier, all claim activity is tracked by your insurance company, including use of their roadside coverage. It’s often a better idea to purchase roadside coverage through a 3rd party such as AAA.
And contrary to common knowledge, medical payment coverage is not for other people. If someone gets hurt on your property, they are covered by the liability section of your policy. Instead, medical payments coverage provides some assistance for your own family’s medical bills associated with a covered event. However, most people can use their health insurance to pay those costs, so the medical payments coverage is redundant in that context.
Talk to your agent and shop around
Some financial advisors sell insurance, but I don’t. I help review coverages and then always recommend working with an independent insurance agent who can help advise on the fine details of any insurance program. This can provide a solid integration of your insurance coverages into your financial plan, while still getting the best expert advice possible. After all, a failure to maintain solid insurance can overwhelm even the best financial or investment strategy.
And be sure to shop around every 2-3 years. You might be surprised how often you can find a better deal when it comes to P&C insurance.
