Financial Protection Using Insurance to Help Manage Life’s Risks
Risk is part of life, regardless of where you live or the lifestyle you choose. Accidents and other costly mishaps don’t happen every day, but when they do the results can be devastating. With this in mind, a variety of insurance policies can be used to help protect you, your loved ones, and your wealth against some potential worst-case scenarios.
Types of Insurance Home Liability Disability Personal property Auto Life Purchasing insurance can be confusing, because even a basic policy typically includes unfamiliar terminology and legalese. As a result, some people may rush the process and fail to ask the right questions. It’s important to read the fine print in your insurance policies and make sure you grasp the details. Of course, there isn’t a single, all-inclusive policy that works for everyone. The insurance decisions you make should take your age, family situation, and financial picture into account.
It is estimated that two-thirds of homes in the United States are underinsured by an average of 22%. Source: insurance.com, February 21, 2023 When Hazards Hit Home One common mistake is choosing a homeowners insurance policy based on price alone. In reality, a cheaper policy is sometimes a bare-bones offering that could ultimately leave you exposed to a number of risks or without sufficient coverage to rebuild your home if disaster strikes. That’s why it is important to have a clear understanding of the types of coverage that are included — or specifically excluded — so you can compare policy features and costs on a level basis.
Homeowners Insurance Homeowners insurance provides compensation (up to the policy limits) if the policyholder’s home is damaged or destroyed, or if the family’s possessions are stolen or damaged. It can also provide some measure of protection against liability claims and medical expenses that result from property damage or injuries suffered by others on the property. There are essentially 17 named perils against which you can insure your dwelling. Standard homeowners policies cover the first 11, and youmay be able to purchase additional coverage for the others. The next level of coverage includes the basic perils, plus the following • Falling objects • Weight of ice, snow, or sleet • Three kinds of water-related damage from home utilities or appliances (freezing, rupturing, and accidental overflow) • Electrical surge damage Basic perils • Fire or lightning • Smoke • Windstorm or hail • Vandalism or malicious mischief • Explosion • Theft • Riot or civil commotion • Breakage of glass or glazing • Damage caused by aircraft • Damage caused by vehicles • Volcanic eruption
Condominium Insurance Because there are areas of common ownership in a condo complex, the homeowners associationmay have a master policy. The condo association or co-op board should be able to provide information about what the master policy covers so you can purchase a personal policy that helps fill the gaps. Typically, the master policy will cover damage to exterior components such as the roof, stairways, and sidewalks. Some master policies may cover the structure of the unit itself, but not any improvements made to the original design. A standard homeowners policy for condominiums generally covers your personal property plus any portion of the unit you own under the terms of the condo or co-op documents, and it should help shield your family from some types of liability. Anybody Home? Homeowners policies often have vacancy exclusions for vandalism and damage that could occur when a property is unoccupied for more than 30 or 60 days. An endorsement to standard homeowners insurance—or a separate vacant-home policy —may be available that covers unoccupied property for an extended period of time.
Typical exclusions Flood Vacancy Earthquake Sewer backup Nuclear or radiological accidents Sinkholes (damage to land on which a home sits) Environmental contamination Mold remediation (unless it results from a covered event) Normal deterioration/neglected maintenance Intentional damage (by policyholder or family member) Liability or losses related to business activities Damage caused by pets or other animals Dig into the Details A number of perils are typically excluded from standard policies. In some cases, you may be able to purchase additional protection through endorsements (e.g., for sewer backups and sump-pump failure) or specialized policies. Specific exclusions differ significantly by region and even from one policy to the next, so read your documents carefully.
Renters Insurance A commonmisconception is that the property owner’s insurance policy will protect the renters. But without personal insurance protection, a renter could be financially liable for damage caused to a rental property (such as a kitchen fire), even if it was unintentional. A renters policy is similar to a homeowners policy in that it covers the policyholder’s possessions against damage that occurs as a result of fire, smoke, lightning, vandalism, theft, windstorm—even a water problem—up to the policy limits. It also provides some liability protection if someone is injured on the property, and it may help pay for temporary living expenses if the rental property becomes uninhabitable as a result of a covered hazard. A landlord policy typically covers only the structure, contents that belong to the owner, lost income resulting from damage to the building, and legal fees and liability coverage in the event that the tenant or someone else is injured on the property. Landlord policies generally do not cover personal property that belongs to the tenants. Source: safehome.org, 2023 Share of homeowners with homeowners insurance Share of renters with renters insurance 94% 55%
Personal Property Endorsements (Floaters) Basic homeowners, condominium, and renters policies commonly have a maximum coverage limit for the combined value of certain property. Theft of jewelry, for example, might be limited to $1,000 or $1,500. There are other disadvantages to the personal property coverage in standard policies, including the fact that they generally protect you only from certain incidents (damage and accidental loss are typically excluded) and may be subject to a high deductible. A Scheduled Personal Property (SPP) endorsement to your homeowners, condo, or renters policy can be customized to cover single items or a class of luxury goods, and it typically covers more incidents (except those specifically excluded), including theft, mysterious disappearance, and sudden, accidental loss. Valuables such as coin and stamp collections, jewelry, silverware, computers, cameras, sporting goods, guns, musical instruments, fine art, and antiques are examples of classes of personal property that might be insured separately.
Preparing to Withstand a Disaster Most Americans live in areas that are vulnerable to some kind of natural disaster. Floods and earthquakes are generally excluded from standard homeowners policies, so you might consider additional coverage. About 90% of natural disasters in the United States involve flooding, but only 30% of homeowners in the highest risk areas have a flood insurance policy. Source: Insurance Information Institute, 2022 Floods. Floods often result from storms, broken levees, spring snow thaw, poor drainage, and the rapid accumulation of water caused by torrential rain. Flood coverage is available from the National Flood Insurance Program (NFIP) and from some private insurers. There is a 30-day waiting period before a flood policy takes effect. Earthquakes. Supplementary earthquake coverage is available through private insurers. In California, it is also available through a state-run program. Earthquake insurance typically carries a deductible based on a percentage of replacement value, ranging from 2% to 20%, rather than a dollar amount. Policy rates and deductibles depend on the age and construction of the home and how likely it is for earthquakes to occur in the region.
Pay Attention to Deductibles A deductible is the amount a policyholder must pay out of pocket before the insurance company pays the covered amount on a claim (up to the policy limits). Standard homeowners policies typically have a flat deductible such as $500 or $1,000. In some states where there is a greater risk of a major catastrophe, higher deductibles may apply to some forms of coverage. A hurricane, for example, may trigger a specific deductible that is set as a fixed percentage, typically starting at 2% and reaching up to 15% of the policy limits. If a property is insured for $200,000 and the policy has a 2% hurricane deductible, for example, the first $4,000 must be paid by the homeowner. Claims for damage caused by windstorms or hail may be structured in a similar fashion. Homeowners Insurance Claims (weighted average, 2016–2020) The average property damage loss during this period was $13,804. Source: Insurance Information Institute, 2022 (most current data available) $11,650 $77,340 Wind and hail $4,415 Theft $11,695 Water damage and freezing Fire and lightning
Getting Ready to Go If a powerful storm, wildfire, or flood is coming your way, there may not be much time to flee. To help your family leave safely with the things you need most —and to stage a quick recovery if your own home suffers damage— it’s best to do some research and preparation in advance. Make travel arrangements. Knowwhere you will go if youmust evacuate, and have a backup option in place. Will you stay with friends or family in another town, or head to a hotel or a community shelter? Keep addresses and phone numbers in a readily accessible place such as a wallet or a mobile phone. Map out a route to your destination, as well as an alternate route to take if roads are blocked or impassable. Identify a safe place to meet and choose a family member who lives in another area to serve as a point of contact in case family members become separated. Write down a list of items to take with you. In your haste, youmight forget things you really need. Remember to add medical supplies and prescriptionmedications; bottled water; clothing and bedding for each household member; one or more flashlights with extra batteries; an emergency battery-operated radio with extra batteries; your computer hard drive or laptop; eyeglasses; photos; and special food or other items for children, disabled or elderly family members, and pets. • Insurance policies and contact numbers • Identification such as drivers’ licenses, passports, birth and marriage certificates, and Social Security cards • Employment information, contracts, wills, deeds, and recent tax returns • Banking and financial account information and account numbers • Evacuation plan information, maps, and your list of items to pack • An inventory of your household possessions • Phone numbers of relatives, neighbors, friends, co-workers, schools Keep your documents together. Some documents may be difficult or impossible to replace, and youmay need them to get your life back to normal. Either take themwith you when evacuating or keep them in a safe location away from your home.
Recovering from Losses About 6% of insured homes were subject to an insurance claim during the period from 2016–2020. It’s likely that many of these dismayed homeowners wish they had beenmore prepared for the claims process. In the stressful aftermath of a burglary, hurricane, or other unexpected disaster, could you recall specifics on all the belongings in your home? To accurately process your claim, your insurance company needs detailed information on all your lost items. Source: Insurance Information Institute, 2022 (most current data available)
Taking Inventory There is no single way to make a written inventory of your valuable items, but it helps to have an organized method, such as completing one room before moving on to the next. You may also want to list your most valuable items first. Make sure to include the following documentation. Record the name, quantity, and description of each item, as well as where and when you purchased it. You could also note the price you originally paid. Detail the brand, model, and serial number of appliances and electronic equipment. Keep sales receipts and/or appraisals for valuable items. Adding Visuals Take digital photos or videos of your home, the furnishings, and your additional belongings. Don’t forget to open the closets and cabinets so the contents are visible. Youmight want to use a software program or mobile app that walks you through the inventory process; it could provide guidance and save time. Consider storing copies of all documentation in a safe place—outside your home or even online—so the information can be accessed fromwherever youmight be staying. As you acquire new valuables, your records will become out-of-date. Take time to review your records on an annual basis. 1 2 3 Make a weekend project of documenting your belongings, and you might sleep easier as the next big storm approaches.
Bodily injury liability coverage helps pay for medical bills, lost wages or income, and pain and suffering for those who are injured in an accident for which you (or someone else listed on your policy) are found legally responsible. It also covers you when you are driving someone else’s car (with that person’s permission) and may help cover your own legal fees, when necessary. Medical payments or personal injury protection coverage helps pay for the treatment of injuries to the driver and passengers of the policyholder’s automobile, regardless of fault. Personal injury protection might also cover medical payments, lost wages, and funeral costs. Property damage liability helps pay for damage you cause to another person’s vehicle or property. This could include not only vehicle repair/ replacement costs but also damage to structures (such as buildings) and stationary objects (such as fences). Remember that a deductible usually applies for these six types of coverage, and compensation is subject to policy limits. Auto Insurance: What’s in Your Policy? Six major types of coverage may be included in a standard auto policy. The first two — bodily injury liability and property damage liability — are required in most states. 1 2 3
Collision coverage helps pay for damage to your vehicle (repair or replacement costs), up to its actual cash value minus the deductible — not the original price you paid — in the event you are in an accident involving another vehicle or a stationary object. Comprehensive coverage helps pay for damage or destruction resulting from incidents that do not involve other drivers or vehicles. Examples include damage from storms, falling objects, theft or vandalism, broken windows or windshields, and hitting an animal (such as a deer) while driving. Uninsured/underinsured motorist coverage helps take care of your medical bills (and those of your passengers) and related expenses when the driver who caused the accident does not have insurance or has inadequate coverage. Nationwide, almost 13% of drivers are uninsured. Source: Insurance Information Institute, 2022 (2019 data, most current available) 4 5 6
Premiums Vary: How Do You Rate? Auto insurance premiums are based on criteria that reflect the policyholder’s perceived level of risk. Of course, the types and level of coverage you choose to purchase (over and above a state’s required minimum liability amounts) will influence premium costs. The following factors tend to influence the cost of auto insurance premiums. Driving record. If you have a clean driving record, you will generally pay less for insurance than will drivers who have had accidents or have been cited for traffic violations. Inexperienced drivers may have to pay more for coverage than will those who have been insured for a while. Credit history. Many insurers use credit-based insurance scores to analyze the likelihood that a person will file a claim. Age and gender. Both age and gender tend to influence the cost of premiums. As a group, women have fewer accidents thanmen, so they may be rewarded with lower premiums. Teenagers and young drivers under age 25 are often charged more for coverage. Number of miles driven. Spending a lot of time behind the wheel could increase the odds of being involved in an accident. Consumers who log more miles during the year will generally pay more for insurance, whereas low-mileage drivers may qualify for a discount. Where you live and/or park your car. Youmay pay more if you happen to live in a ZIP Code where claims are prevalent or in an area that is subject to higher medical or auto repair costs. Source: Insurance Information Institute, 2023
Source: National Highway Traffic Safety Administration, 2022 (2020 data, most current available) Common Factors in Fatal Crashes Excessive speed Driving under the influence of drugs or alcohol Careless driving Failure to yield right-of-way 19.1% 11.6% 7.3% 6.8% Another Reason to Drive Safely One study found that drivers who filed one at-fault insurance claim in a 12-month period suffered increases in premiums averaging 56%—and a second claim caused premiums to rise by as much as 125%. Premiums were based on a 40-year-old male policyholder with a good driving record. Source: CarInsurance.com, May 23, 2023 (based on at-fault property damage claims of more than $2,000 each)
Recreational vehicle. Although you might be able to add an RV to your auto policy, it may be more appropriate to purchase a specific RV policy. An RV policy typically includes coverage similar to a standard automobile policy, with features suitable for larger, more expensive vehicles and the RV lifestyle. Many insurance companies have special packages for “full timers” (people who use their motor homes as a primary residence). Boat. A boat insurance policy can be customized for any type of watercraft, whether it’s a yacht, power boat, sailboat, fishing boat, pontoon, or other variety. Coverage may include bodily injury and property damage liability, physical damage, and medical payments. The amount of coverage might be tied to the current market value of the boat, the full replacement cost, or a specific amount of coverage agreed upon when the policy is purchased. You might want optional coverage for a range of hazards including theft, fire, flood, vandalism, uninsured/underinsured boaters, and the replacement of personal property kept on board. Motorcycle. If you ride a motorcycle, you need motorcycle insurance. Most states have specific minimum liability coverage requirements similar to those for automobiles. Guest passenger liability may not be included in a standard policy, but it can typically be purchased separately. Standard collision and comprehensive insurance will cover only the factory parts on your motorcycle, subject to deductibles and policy limits. If you have special upgrades or accessories such as a side car, chrome parts, or a custom paint job, youmay want to obtain additional coverage for optional equipment. Specialized Policies for Fun Seekers Here’s what you should know about insuring your investment in an RV, boat, or motorcycle.
Rental car. People often wonder whether their own auto insurance policy would cover a rental, or if they should purchase the insurance offered at the counter. Normally, your existing coverage and deductibles will extend to a rented or borrowed vehicle as long as it is being used for recreation and not business. Consider, though, that if you own an older car, youmay not have collision or comprehensive coverage, or youmight not have enough protection to cover a more valuable rental car that is stolen or damaged in an accident.
Should You Buy an Umbrella Policy? A person who is found legally responsible for causing an injury to someone else could be ordered to liquidate a home or other personal property and turn over his or her assets — including future earnings — to satisfy a judgment. The liability coverage in standard homeowners and auto policies typically starts at about $100,000 and rarely exceeds $500,000. Liability policy benefits can be used to pay jury awards, plaintiff medical expenses, and legal fees, up to the policy limits. An umbrella liability policy offers an extra layer of financial protection. To obtain umbrella liability insurance, you generally must purchase the maximum liability coverage available on your auto and homeowners policies, which act as a deductible for the umbrella policy. A general guideline is to have coverage in place that, at a minimum, matches your net worth. An umbrella policy often includes coverage for situations that are excluded from standard homeowners policies, such as for libel, slander, invasion of privacy, defamation of character, and some types of personal injuries. A home could be the single largest investment you make in your lifetime, and it’s likely that a vehicle is one of your most valuable assets. Therefore, it might be worth the time and effort to review your coverage periodically and evaluate whether it is still adequate for your family’s situation.
Group coverage provided by an employer is helpful, but it typically replaces only one to two times your annual salary—and is likely to end if you leave your job. An individual policy could provide lasting protection regardless of changes in your career. Two basic types of life insurance Evaluating Life Insurance Needs Would your death cause a financial hardship for someone else? If so, you might consider buying life insurance. Term life insurance offers a death benefit for a specified time period, such as one to 30 years. It tends to be more affordable, especially for younger individuals, but premiums rise with age. Permanent life insurance typically offers lifetime protection, regardless of your health, as long as you pay the premiums to keep the policy in force. A portion of each premium goes into a cash-value account that accumulates on a tax-deferred basis. Youmay be able to borrow against the cash value during your lifetime to help pay for retirement, education, emergencies, or other needs. Loans and withdrawals from a permanent life insurance policy will reduce the policy’s cash value and death benefit. 1 2
The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable. As withmost financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. If a policy is surrendered prematurely, there may be surrender charges and income tax implications. Any guarantees are contingent on the financial strength and claims-paying ability of the issuing insurance company.
How Much Life Insurance Is Enough? Do the Math One guideline calls for life insurance coverage that equals 7 to 10 times your annual salary, but this may be too simple for your specific financial situation. As an alternative, you could calculate a benefit amount that would provide enough investment income (without dipping into principal) to help preserve your family’s current lifestyle and meet their long-termneeds and goals. Given the rising cost of higher education, for example, youmay want additional coverage for your children’s college expenses. Women May Need More Coverage Many households now rely on two incomes, and 7 in 10 households with children rely on a woman’s salary. For women who have a spouse, young children, or even parents who depend on them financially, sufficient life insurance could help replace their incomes and provide essential financial support. And for stay-at-home moms, the proceeds of a policy could be used to help cover the high cost of child care and other household services in their absence. Sources: LIMRA, 2022 53% of men 46% of women have life insurance
Cover burial and other final expenses 89% Transfer wealth or leave an inheritance 73% Help replace lost income 66% Supplement retirement income 62% Pay estate taxes or create estate liquidity 58% Help pay off the mortgage 57% Make a charitable gift 35% Source: LIMRA, 2022 Reasons for Owning Life Insurance
If you wait until you are experiencing health problems to shop for life or disability insurance, you may find that the price is too high or you are no longer insurable. Insuring Your Income A 35-year-old worker who earns $80,000 a year could lose nearly $250,000 during a three-year period of disability, and $2.4 million or more if he or she were permanently disabled. Of course, older or highly paid employees stand to lose muchmore during their peak earning years and may also have higher living expenses to contend with. It could be difficult to support your family if a debilitating injury or chronic illness prevented you fromworking for an extended period of time. Disability income insurance replaces a portion of lost income, up to the policy limits. Benefits may be paid for a specified number of years or until you reach retirement age. Some policies may pay benefits if you cannot work in your current occupation; others might pay only if you cannot work in any type of job. Your employer may offer group disability insurance; if so, it might be wise to take advantage of the coverage. However, group plans tend to offer more limited benefits than individual policies, and you typically would lose your group coverage if you left your employer. Youmay want to purchase an individual disability policy if you are self-employed or your employer does not offer coverage—or to supplement group coverage so that benefit payments more closely match your current income.
Most long-term disability claims are for common, chronic health conditions. Only 12% are for a serious, one-time accident or injury. Nearly one in three is for back, joint, and muscle pain. Average monthly Social Security benefit for disabled workers (2023) Sources: Social Security Administration, 2022–2023; Council for DIsability Awareness, 2021 (most current data available) $1,485 A 20-year-old today has a one-in-four chance of being disabled for at least one year before reaching age 67.
Prepared by Broadridge Advisor Solutions © 2023 Broadridge Financial Solutions, Inc. Is your insurance coverage appropriate in light of your present circumstances? Are there contingencies you may have overlooked? Keeping track of numerous insurance policies and determining whether they still meet your needs are ongoing financial tasks that can easily fall through the cracks. Your insurance professional can address your specific questions and help you compare insurance options.