This is the third and final installment of my series on managing risk with insurance. When I was younger and in my late twenties, I saw many of the insurance products that I now have policies for as a semi-luxury that were really only necessary to have if I was overly paranoid and not sleeping well at night.
As I've grown older and wealthier (and perhaps more cynical), I really value the insurance that we have now and can see how these policies are a small price to pay for peace of mind and a sound bet against the hopefully unlikely events they are meant to cover.
Homeowner's, renter's and umbrella insurance are the final three policies I have.
A few years ago, a wildfire destroyed several homes in an older neighborhood on the outskirts of my hometown. At least two of those homes had NO homeowner's insurance policies because the owners had paid off their mortgages, owned the homes free and clear, and... decided to cancel their policies. The wildfire took every possession they had and at least one homeowner told the local paper their home was their nest egg and they had nothing else saved for retirement. Sad. The neighborhood and surrounding community held a fundraiser for these families which raised a lot of money, but not enough to cover everything they lost. I'm not afraid to say that cancelling their insurance policies on their homes was D-U-M-B. Is it worth it to pay a few hundred to maybe a thousand dollars a year to protect several hundred thousand dollars in a single asset? Absolutely.
If you purchase a new home or have a mortgage, you are almost certainly required by your lender to carry homeowner's insurance. There is usually a basic policy that you purchase that will cover the structure and contents inside the home in the event of loss or damage due to fire, wind, hail, etc. Coverage in the event of a flood or earthquake or fromd damage due to mold or termites are usually not part of this basic policy and have to be purchased as separate riders.
When you purchase a policy, you have to consider how much coverage you want and how much of a deductible you can pay if you need to make a claim. Your lender (if you have a mortgage) will probably require you to cover at least the amount of the mortgage and if you live in a flood-prone area, you will need to carry flood insurance.
I carry insurance on both of our paid-for rental properties and have policies that will pay for the replacement value of the structures. Our deductible for each policy is 5% of the replacement value, which is on the high side, but that means our premiums are lower as a result of us taking on more potential out-of-pocket expenses in the event of a claim. Our policies do not cover the contents of the homes (except the appliances that we own) because the contents belong to our tenants, not us. We also carry a moderate amount of liability coverage (in the event someone tries to sue us because they tripped on our sidewalk, for example) because our homes are rental properties and we need to meet a minimum level to qualify for umbrella insurance.
I also carry renter's insurance because our residence is an apartment we rent. Our building requires us to carry renter's insurance but even if that were not the case, I would still have it. At $15 a month (which is a bit high, but that is due to the state we live in) it is worth knowing that if our building burned or we were burglarized we wouldn't have to start over with nothing. Renter's insurance is fairly cheap considering it will cover all of your possessions if they are lost or damaged in a coverable event. Your landlord can not purchase insurance on your possessions so it is up to you to cover yourself. I also maximize the deductible we have for this policy as it lowers my premium and we can afford to pay a higher deductible.
This is a policy that really is only needed in the event that you have substantial assets and you want to protect those in the event of a liability lawsuit, such as a wrongful death from an auto accident, as those can make claims upon your home, your retirement accounts and even your future earnings (depending on the state you live in). It sits like an umbrella over the liability coverage you have in other policies (homewoner's, auto, etc.) so that if a lawsuit tries to make a claim beyond what those policies cover, the umbrella insurance will kick in. Policies usually start with coverage of $1 million and can go up to $5 or $10 million. As I mentioned in the homeowner's policy section, you have to carry a minimum amount of liability coverage on other policies before you can purchase an umbrella policy, which is typically:
- $300,000 per occurrence for personal liability, bodily injury, and property damage liability on your homeowner's insurance policy
- $250,000 per person for bodily injury and $500,000 per accident on your auto insurance policy
- $100,000 per accident for property damage on your auto insurance policy