This is the third of a five-part personal financial planning series sponsored by the Peery Institute of Financial Services. The next installment, about getting out of debt, will appear in the Fall 2005 issue.
Securing your nest and other assets may be among the most important financial decisions you make. This bird’s-eye view of insurance options should help you decide if and where you need some reinforcing.
It often takes a dramatic news report of a mud slide destroying homes, hurricanes thrashing the coast, or a twenty car pile-up along a fog-shrouded highway before most of us really think about property and casualty insurance. Watching a teenage son or daughter take the car may be an even more palpable reminder.
Health insurance receives our attention when we begin to age, start a fitness regimen, or are threatened by disease.
Insurance may not always be a high priority, yet a misunderstanding or miscalculation of its protective powers could be debilitating. A recent Harvard University study showed that costly illnesses trigger half of all bankruptcies. When it comes to property, casualty, and health insurance, our focus should not just be on the “here and now.”
PROPERTY INSURANCE
Most homeowners policies provide three types of protection: structures, personal property, and liability.
Structures
This protects for damage from fire, smoke, lightning, wind, water, freezing, or vandalism. To determine how much insurance you need, consider how much it would cost to rebuild your home at today’s prices. Natural disasters like earthquakes, floods, and hurricanes may require special coverage.
Almost 25 percent of all recent flood insurance claims have come from areas not normally considered high risk. Because it usually takes at least thirty days for a policy to take effect, don’t wait until the threat of damage is imminent. Check with the U.S. Geological Survey or the Federal Emergency Management Agency (1-800-358-9616) for maps showing the earthquake and flood risks in your area. There are nineteen thousand communities eligible for federally sponsored flood insurance for your home or business.
Too many homeowners take a passive approach toward safety and disaster prevention. Many protective measures—child safety measures, electrical surge protection, energy efficiency, lightning protection, family safety measures, fire prevention, home security, water damage prevention, and wind and hail safeguards—will minimize or eliminate loss, injury, or damage.
Personal Property
In most cases a policyholder will be reimbursed for damage or theft of personal property, regardless of whether the loss occurs on the protected premises or elsewhere. There may be some limitations, however, to property that is more permanently away from your premises. It’s a good idea to inventory and/or photograph household items. For items of unusually high value, look into getting a specific endorsement on your policy to insure those items.
Liability
Homeowners insurance generally provides compensation for liability claims and medical expenses that result from property damage and personal injury suffered by others. The coverage applies whether an accident occurs on the policyholder’s property or while away from home.
If a guest or their private property is damaged while on your property, the liability portion of your homeowners insurance will pay for losses up to the dollar amount of coverage you have purchased.
Make sure your guests’ medical expenses will be covered if they are accidentally injured on your property, and don’t forget to insure a second or vacation home.
Lastly:
- Check the size of your deductible
- Review it annually
- Consider a reimbursement for additional living expenses if you can’t live in your home due to a covered loss
- Inquire about coverage during construction or remodeling
- Check the small print for “exclusions and limitations,” which describe events or losses not covered
Commercial Insurance
Commercial property insurance protects your business property in case of theft, damage, fire, or other disasters. Inventory equipment, tools, supplies, and other property. Record the market value and, if applicable, the serial numbers of each item. The premium’s amount will be driven by the degree of risk that items can be destroyed or stolen. Safeguards such as security systems, fire resistive buildings, and good property management will reduce premiums.
Commercial Liability Insurance protects your business from lawsuits involving allegations of the business’s negligence that caused damage to a third party. This coverage usually does not protect for normal “business financial risk” but rather limits coverage to damage resulting in either bodily injury or property damage to another person. Premiums for this coverage are usually based on either the company’s sales volume or payroll and will vary in direct proportion to the risk of your company’s activities. A fireworks manufacturer, for example, would bare a far higher premium than a local retail establishment. It is critical that you review the limits of the liability coverage you carry. A good rule of thumb is to make sure liability limits are at least the size of the company’s net worth.
Business interruption insurance is designed to provide a business with critical cash when a company may be temporarily out of business due to property loss. Costs for such coverage are usually minor in relation to the property coverage. If your business is home-based, you will need additional property insurance because most homeowners policies don’t cover or only minimally cover business losses to such things as fax machines, computers, and other office equipment.
CASUALTY INSURANCE
Auto Insurance
Depending on where you live, you are required to carry liability coverage, no-fault coverage, or both on your automobile. Liability pays for damage caused to others. No-fault coverage pays you and your passengers for medical and related expenses caused by accident injuries, regardless of fault, usually up to a defined limit. Even in states where coverage isn’t required, drivers must, by law, be able to pay for damages they cause.
Discounts are awarded for good driving records, safety features, and certain makes and models of cars with the lowest rates of theft, collision repair costs, or medical claims arising from accidents. Driving fewer than 7,500 miles a year usually qualifies for a 5 to 10 percent discount. Premiums are lower for anti-theft devices. Turning fifty or fifty-five can trigger another break. Even your occupation can make a difference. For example, California educators, engineers, scientists, and mathematicians can receive a 10 percent discount. Students with good grades usually save about 10 percent. Three years without a ticket or accident usually qualify the driver for the lowest premiums available. Good credit also decreases rates.
The Insurance Information Institute suggests dropping collision and comprehensive coverage when your car is worth less than ten times your annual premium. The key question is whether you can afford to fix or replace the car if it is damaged and you don’t have collision coverage. As a compromise, consider raising your deductible to $1,000, which can decrease your premium but still protect you financially.
HEALTH INSURANCE
Most people receive health insurance through employers. These group policies leverage volume buying and are cheaper than individual policies, self-employed health insurance, or insurance for small businesses. As healthcare costs rise, more employers are requiring employees to pay more. Generally two types of health insurance are offered: a Health Maintenance Organization (HMO) or Preferred Provider Organization (PPO).
Health Maintenance Organization
This managed care system requires participants to pay a fixed monthly fee for healthcare. In return the participant receives medical services including doctor visits, hospitalization, and surgery for no additional costs, except a nominal co-payment.
HMOs have a network of doctors who participate in their system. Participants usually select a primary care physician from the network who serves as a caretaker for the patient’s future medical needs. The low cost is offset by the fact that not all physicians participate in these plans, and primary care physicians must refer the enrollee to a different doctor for any treatment outside their specialty or expertise.
Preferred Provider Organization
This group of doctors and hospitals work under one system to provide medical services at a discount to PPO participants. By granting discounts to the patients via the insurance carrier, the carrier can extend greater discounts for doctors’ services and lower deductibles and co-payments.
Usually doctors who work in this organization invoice insurance providers directly, and the patient pays for deductibles or a percentage of the services not covered by the plan. Unlike an HMO, PPO patients may use any doctor and don’t have to obtain authorization to see other specialists.
The disadvantage of PPO plans is the out-of-pocket expenses the participant is required to pay, which are higher than an HMO’s.
Health Savings Accounts
To break through the juggernaut of healthcare costs, Congress approved Health Savings Accounts which enable consumers to put money away for future healthcare needs. These tax-sheltered accounts are earmarked for medical expenses. Deposits are 100 percent tax deductible. Unused money stays in the account year after year and grows interest. HSAs can be arranged with banks, credit unions, insurance companies, and other approved companies, including your employer.
Annual contributions cannot exceed the deductible of your regular health insurance policy, and the most that can be deposited in 2005 is $2,650 for an individual, $5,250 for a family.
ADDITIONAL INSURANCE CONSIDERATIONS
Identify Theft
For the fourth consecutive year, identity theft is the fastest-growing crime on the list of consumer fraud complaints. According to the Federal Trade Commission, the average identify theft case takes 175 hours and $1,500 to resolve. To offset this problem, some insurance companies are offering protection packages that cost $20–$60 each year. These policies generally cover expenses of re-establishing credit, re-applying for denied loans, getting a new driver’s license, and obtaining needed legal assistance—including arrest warrants. They also cover a victim’s salary, up to $500 a week for as long as four weeks, if the victim must miss work to resolve the case.
Directors and Officers Insurance or Condo Board Insurance
The startling news that Enron’s board of directors personally paid $18 million to cover fraud charges against the company sends a signal to anyone who serves on a corporate, civic, or community board that property and casualty insurance is essential. Many companies now buy stand-alone directors and officers coverage instead of more comprehensive packages. These policies protect executives from derivative claims—lawsuits brought by shareholders and investors who want to compel directors and officers to repay company money.
Companies sued for illegal personal profiting or misappropriation of funds cannot protect their officers. In our litigious society, boards of local condominium organizations or community and civic groups should also examine what protective measures are in place.
Work-Related Lawsuits: Sexual and Racial Discrimination, etc.
Best’s Review recently reported that more than 403,000 charges were filed by employees to the Equal Employment Opportunity Commission between 1999 and 2003. Claimants received $1.2 billion while the median compensatory jury award for employment practices liability cases rose 18 percent in 2003 to $250,000. Half of all claims were brought against small companies.
According to a Chubb survey, one-in-four privately held companies has been sued by an employee or former employee. Although 75 percent of employee lawsuits are proved groundless, the cost of litigation is significant. As such, employment practices liability insurance is becoming standard at most companies. Premiums are not only determined by the number of employees who need coverage but also by the strength of the company’s own policies and procedures for dealing with complaints. Mergers and acquisitions could also trigger lawsuits because of prospective layoffs.
Choosing a Trusted Advisor
Selecting an insurance agent, broker, or advisor should be taken as seriously as selecting a lawyer, doctor, or medical advisor. Some tips:
- Determine how long the agent/broker/advisor has been in business
- Look for signs of a commitment to continuing education, designations such as Certified Property Casualty Under-writer, Certified Insurance Counselor, or Registered Health Underwriter
- Check with your local insurance commissioners office to see if regulatory action has been taken against your representative
- Check references
The relationship with your advisor needs to be completely candid so an insurance program can be designed to properly protect you.
Insurance may not be the most scintillating topic for dinner-table conversations, but watching the system work when losses occur is very reassuring. Whether it is cleaning up from a disaster such as 9/11 or fixing an automobile, the industry helps us recover from life’s pitfalls. Having appropriate insurance brings stability, security, and the ability to face life with more confidence.
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Article written by Terry H. Buckner, CPCU
Photography by Bradley Slade
About the Author
Terry H. Buckner, CPCU, is president and CEO of The Buckner Company in Salt Lake City. He earned his BS in business management from BYU and his MBA from Utah State University. He and his wife, Lynne, reside in Sandy, Utah, and are the parents of seven children.
