The transition from the end of one year to the beginning of the next is often a period to make financial adjustments. It’s a great time to consider increases to savings programs, rebalance or change allocations as appropriate, and review beneficiary designations and other details.
“Review auto and homeowners insurance” is a catchphrase on many of these lists — an item noted and glossed over. Going over what your property insurance covers doesn’t have the cachet of investing. People are more excited about the possibility of growth than they are about preventing loss.
Nevertheless, a year-end is a good time to conduct a checkup and to work on better understanding what your property and auto insurance covers.
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Assessing Your Auto Insurance
The big three items to review on auto insurance are deductibles, liability limits, and named insureds.
Your auto policy’s deductible is the amount you pay out-of-pocket for claims under collision or comprehensive insurances. Claims under your liability coverage are generally not subject to the deductible. Typical policy deductibles run from $250 to $1,000 per occurrence.
Lower deductibles reduce your exposure, but at a cost. If you can afford a larger out-of-pocket expense you might chose a higher deductible to lower your premium. Note that if you have a car loan you may have a cap on the maximum deductible the lender will allow.
Increasing your deductible increases the risk that you will have to pay that amount if you make a claim.
You need to consider whether the premium savings are worth the increased exposure to best understand what your auto insurance covers monetarily.
Understand Your Liability
Liability limits usually need to move in the other direction. It’s far more common to see people with insufficient liability coverage than it is to see people with too much coverage. Liability coverage protects you if you cause injury to another person or damage to someone’s property. It protects you against claims brought against you for damage you caused.
In no-fault states, payments are made by respective companies without the necessity of first determining fault. In many states, uninsured motorist coverage also falls under liability.
When states mandate liability coverage, the mandated limits tend to be low. Often when people are first obtaining coverage, they’re more focused on premium then they are on risk; they purchase what’s most affordable — not what’s most appropriate.
Often years go by and they still have the low liability limits of a recent college grad, but the means and associated risks of being more affluent.
Liability limits of tens of thousands per person or per occurrence aren’t sufficient for someone of even modest means. The costs of causing injury or damage are simply too great for low liability limits. Make certain that your liability limits are appropriate to protect your assets against claim.
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Named insureds, also called other insureds, is who else besides yourself is named as driver on your policy.
This can greatly affect the premium. Adding your teenagers can run your premium through the roof. Removing them once they’ve moved out can be a great relief to the budget. You may not need to have them as named insureds on your policy if they have a car with their own coverage; speak with your agent about the most cost-effective way to manage teenagers and coverage.
Be careful of duplication of coverage. You may find that you are covered for towing or rental car through multiple channels and don’t need duplicate coverage through your insurance policy.
Checking Your Homeowners or Renters Insurance
The biggest mistakes with homeowners insurance tend to be deductible levels and coverage levels. Similar to your auto policy’s deductible, your homeowner’s policy also has a deductible that should be reviewed to make sure it is still appropriate for your situation.
The level of coverage here is a different issue.
Your homeowner’s dwelling limit is the coverage for your actual home. These limits can get out of whack in some cases.
In areas where real estate values have appreciated rapidly, your policy may no longer cover the now higher value of your property. Many agents are good at helping you keep up with this, but you should review and make sure this coverage level is still appropriate to protect the full value of your asset.
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In some cases it can be off in the other direction. Some policies have built in escalation where the limits move up each year. If you live in an area where real estate prices have declined or remained flat, your coverage may have grown while the value didn’t. You could be paying for coverage you don’t need.
Homeowner’s or renter’s insurance personal property protection covers the contents of your home against loss. This limit should be reviewed regularly to make sure it is still appropriate, especially if you have extensive jewelry or other collections.
Liability coverage can also be an issue. Unfortunately, in our litigious society your worth is a major factor in how much coverage you need. Lawyers don’t tend to sue poor people, but they’ll line up to sue the wealthy.
Verify that your policies’ liability limits are appropriate for your situation. If you need higher liability limits, it may be appropriate to consider an umbrella policy. An umbrella policy works as additional liability insurance on top of your auto and homeowner’s liability coverages
What Does Your Property Insurance Cover? Final Thoughts and Considerations
Part of any property insurance year-end check-up should be to verify general information, such as names and addresses.
The benefit of insurance is paying for what would be difficult if you had to incur the loss by yourself. Think cover big, keep premium small. You should absolutely cover that which you cannot afford to lose.
But you should also be aware of premium creep. You’re responsible for making sure you’re not paying for coverages you don’t need.
An additional benefit of doing a periodic review is that you’ll better understand your coverage. This can be invaluable when faced with something that might be a claim. Not having adequate coverage means you’re accepting risk that you shouldn’t or needn’t accept. And being over covered means you are paying for coverage you don’t need or have in duplicate.
Doing a year-end property insurance review can help you spend your insurance dollars wisely, giving you peace of mind to focus on those more glamourous parts of your financial life.
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