Insurance: How to Reduce The Risk, Protect Yourself and Your Family
The financial well being of yourself and your family? No, of course you don’t. But . . . how do you know, truly know, you aren’t?
Let’s go back to “regular” gambling for a moment. At that weekly poker game, you have a pretty good idea what you have to lose. The money in your pocket, mainly. Maybe a friend will float you a loan if you’re broke and want to keep playing. But it’s nickel-ante, for crying out loud! How much could you lose?
And that time you went to Vegas. You budgeted $500 for gambling. You hoped you’d come home in the black, but you were prepared for the alternative. After all, those giant casinos weren’t built on the winnings of people like you.
“Regular” gambling -- you have a handle on that. The risks. The potential rewards. But what about that other kind of gambling? Losing your house? All of your assets? Everything you’ve worked for all these years? What about that?
With “regular” gambling, you probably played a mental game that could be called “How much?” How much can I afford to lose tonight, this weekend, whenever? You were comfortable with that.
Maybe your answer changed in the process and maybe your losses were a bit more than you were initially willing to accept, but you survived the experience and probably learned from it.
What Can Go Wrong? Imagining Worst Case Scenarios
Let’s talk about your reallife now. Yours and your family’s...and the “other kind” of gambling that people do.
This other kind of gambling is more than just about “How much?” It’s also about “What if?”
“What if?” is a game that involves imagining worst-case scenarios. Hardly a pleasant thought, but how can you know what you’re gambling if you don’t consider all the risks?
Could something happen today that would cause you to lose your house? Maybe. It happens to people every day. Could something happen tomorrow that would rob you of your ability to make a living? Possibly. It happens to people every day.
For some of our readers, the answers to the two previous questions are either “No” or “Almost certainly not.” But how do you know? Let’s play “What if?”
This could happen...You’re driving your car. You lose your concentration on the road and go through an intersection, not seeing that the light has turned red. Could happen to anybody.
Unfortunately, as you go through the intersection, you encounter another car that is proceeding across your path because the light for this vehicle is green.
You broadside the other car. Later, you find out that the driver or a passenger (it doesn’t matter which) is a famous person who has been seriously hurt. This famous person makes millions and millions of dollars a year, and because of this accident, this person will not be able to earn that living, at least for a while.
This person has suffered an economic loss and also probably will endure pain and suffering because of his or her injuries, the recovery period and the inability to work.
So this person sues you. How much can he or she get from you? Everything you have.
This could happen...Look at this example another way. Say youare the one hit by something proceeding through a red light. Say you are unable to work for months, even years.
What kind of a hardship would this cause you and your
family? What could you lose? For some, the unfortunate
answer is . . .
Everything you have. Do you like to gamble?
Everyone Takes Some Risks with What They Own...the Question Is: How Can You Best Protect Your Family and What You Own
There’s really no way insurance can protect us from all the “What ifs?” and, even if it could, few of us could afford the cost to buy insurance for every possible calamity. Some of us are willing to accept a lot more risk than others are.
∗ Example. California was basically ground zero in the United States for earthquakes in the latter part of the 20th century. A major one hit the Bay Area in 1989 and an even more major one struck the San Fernando Valley in 1994.
Yet, most Californians, even those in and around San Francisco and Los Angeles, don’t have earthquake insurance. (The standard homeowners policy does not cover damages caused by quakes.) Most Californians, about 80%,have decided to take the risk that their residences will not be damaged or destroyed by an earthquake.
Most people who live on hills or cliffs elect to take the risk that their homes won’t slide down the hill, cliff or embankment. The standard homeowners policy doesn’t cover such losses, either. Landslide insurance -- it usually is called “difference in conditions” -- is very costly and few insurers are willing to provide such coverage.
In the last two paragraphs, there were references to homeowners deciding or electing to take the risk of damage to their residences caused by earthquakes or landslides.
∗But how did these people come to these decisions? (And how should you make your decisions?)
Did they determine that the insurance was too expensive?
Did they reach the conclusion that the likelihood of either disaster was too low to justify paying for insurance?
Or, more likely, did they even know that they don’t have coverage for earthquake and landslides? It’s a “homeowners” insurance policy, after all. Why wouldn’t it provide coverage for any disaster?
How many of these people actually knew they were “assuming the risk” for earthquake and landslide losses to their homes?
∗TIP. THE BEST WAYS TO KNOW WHAT KINDS OF AND HOW MUCH PROTECTION YOU SHOULD HAVE ARE:
Be a SMART consumer. This book is designed to help you do just that. Routinely consult the advice of a professional property & casualty insurance agent.
How Much Protection is Enough Protection for Yourself & Your Family? Ask an Expert
assume?
You talk to a professional, someone who understands risk and can assess your willingness to assume it. Someone who can tell you whether you have enough insurance, based on your aversion to risk, or too much.
You talk to an insurance agent, someone who understands what coverage is out there and what is right for you. You talk to an insurance agent who has expertise in the specific coverages you need and the risks you face.
∗ Tip. Just like you don’t go to a foot doctor for a severe headache, you don’t go to an agent who doesn’t specialize in the coverages you need -- homeowners, auto, umbrella, disability, life and long-term care.
This guide will explain each of these types of insurance in detail, what they cover, what they don’t cover, who they are appropriate for, etc. But before determining if you need these coverages -- some, like homeowners and auto, are often required -- you must understand what you have to lose
and what risks you are willing to accept. However, before you can do this, you need to be aware of every -- every! -- risk you face.
OK, maybe not every risk, but certainly every risk that has even a remote chance of occurring. Your current insurance provides coverage for many risks, but not all of them. Do you know what you don’t have coverage for? An insurance agent can tell you.
How Much Is Enough? It Depends
While it’s one thing to have insurance for specific risks, it’s quite another matter to have enoughinsurance. How much is enough? The answer is different for everybody. It depends on what you want to protect and how much risk you’re willing to assume yourself.
Let’s say you have a net worth of $1 million. (Congratulations, by the way.) That’s the total value of your various possessions: home(s), car(s), furniture, art, stock and bond holdings, mutual funds, etc. One million dollars is also how much you have to lose.
∗Imagine this. Say that famous person you hit in the intersection sues you for loss of income, pain and suffering, etc. Basically, the most this person can get from you is . . . $1 million.
Let’s say your current auto insurance policy has a limit of liability that will pay a maximum of $100,000 to any one person involved in an accident with you. (That’s a pretty common limit, by the way, although not for people with seven-figure net worths.) If you’re sued for $1 million, your auto insurance will pay a maximum of $100,000, which leaves you holding the bag for $900,000.
Ideally, your liability insurance limits should come close to matching your net worth. After all, someone can’t sue for something you don’t have. You may be willing to assume some risk here, believing that you’re very, very unlikely to ever be sued for anywhere near your net worth.
∗ Tip. Remember that your net worth is basically a target for attorneys representing someone who has suffered injuries, lost wages, and had pain and suffering as a result of something you did. In addition, it can cost only a few hundred dollars more a year to have a liability limit of $1 million as opposed to $100,000.
In deciding how much insurance to buy, you must consider what you have and what it costs to provide the level of coverage you’re comfortable with.
Keep in mind that most people who have significant assets and decent incomes can afford to purchase liability limits high enough to equal their net worth. Whether they choose to is another matter.
How Do You Find the Right Insurance Company For the Right Price?
Even if you know exactly how much insurance you want or need, there’s another crucial element in this process. You have to find an insurance company that will provide thecoverage you want at the best price.
An insurance agent can be invaluable in helping find the right company.
∗Note. There are thousands of insurance companies in this country that sell auto, homeowners and other coverages individuals need. No two companies offer all of the exact same policies. Some companies want only certain types of drivers or homeowners. Some offer higher limits. Some
offer what might be described as bare-bones coverage.
∗Note. There are at least six different coverages that are part of auto insurance!
∗Note. Homeowners insurance policies have limits on what they will cover in terms of possessions, particularly jewelry, fine art and computer equipment. Many insurers offer substantial discounts (10%, even 20%) if you have both your auto and homeowners policies with them.
Does the insurance company offer so-called umbrella policies, which provide additional liability coverageover the limits of your homeowners and auto policies? Do you even need an umbrella policy?
How do you find what’s best for you?You could shop on the Internet for insurance. There are numerous sites that have price quotes for auto, homeowners and life insurance policies. But what coverage is available under these policies? And how can you be sure that you’re buying enough coverage?
You could look in the telephone book and find dozens of companies that sell auto, homeowners and life insurance policies. You can call each of these companies and talk to one of their employees.
But does this person know your insurance needs? Can he or she assess how risk-averse you are based on a fairly short phone conversation? Does this person even have a license to sell insurance? And how can this person work for you when he or she is working for the company? Can you imagine a sales representative saying to you, “Frankly, I don’t think we have the kind of coverage you need?”
You could call an insurance agent who represents one insurance company. These companies -- State Farm,
GEICO, USAA, Farmers, the Auto Club, etc. -- are fine, financially sound insurers, but what if they don’t have the coverage you need at the price you want to pay? The agent doesn’t have any options for you. He or she represents just that one company.
∗Tip. Best Option: Select an independent agent who is not bound to just one, single company. If you want the best in terms of coverage options and prices, you should call an independent insurance agent.
Independent agents represent numerous companies, each of which has a broad range of product offerings. These agents do derive their income from their companies, but they are not employees of any insurer. Independent agents are just that.
Once they assess your insurance needs, they can then find the company they represent that has the coverage that best suits you, at the price you are willing to pay.
About price -- it’s not everything. Cheap doesn’t equate to good. Unless you have few assets to protect, the lowestpriced policy is rarely the best deal for you. This doesn’t mean you need to buy the highest-price policy, either. Think Value. How much are you getting for what you’re paying?
∗Tip. Also, be aware that insurance companies are always hungry for policyholders who drive safely, have safe cars, live in new or refurbished homes, and are health-conscious.
Insurers offer a variety of discounts.
Does your car have airbags, antilock brakes? Discount. Is your teenage son or daughter who drives your car(s) a good student? Discount. Does your home have an alarm system? Discount. Are you a nonsmoker? In good shape? Discountsfor life insurance. Your agent can make sure you are getting all the discounts you are entitled to.
∗Note. Your overall insurance program for you, your family, your home(s), your car(s), your assets, your career, even your life, will probably have several components.
Most states require you to have auto insurance with at least minimum liability limits. Your mortgage lender will require a homeowners policy. Everything else is basically optional.
Ultimately, you will decide what to protect with insurance and what risks to assume yourself. In the next few chapters, we will examine the various personal insurance policies, including what they cover and what they don’t.
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