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Property & Casualty Insurance: What You Need to Know
Property and Casualty insurance protects against loss related to things that you own (Property) as well as things that can happen to others because of your actions (Casualty). Property Insurance commonly includes protecting your home and its contents and your auto. Casualty Insurance protects you from a liability (something you owe to someone) due to a harmful event you caused. These types of insurance should not be overlooked – failure to cover these risks could result in a large financial loss that you may not be able to afford.
There are three types of insurance that constitute Property & Casualty Insurance: Homeowners Insurance, Auto Insurance, and Umbrella Personal Liability Insurance. The key elements of these coverage areas are explained in further detail below.
Homeowners Insurance covers damage to your home’s interior and exterior, loss or theft of things you own, and personal liability for harm to others that happen on your property. There are three possible levels of coverage for your property:
- Actual Cash Value: Covers how much an item is currently worth. For example, if you bought a sofa for $4,000 ten years ago that today is worth $500, and it has been rendered useless due to water damage in your home, it’s current value before the water damage ($500) is what you would receive.
- Replacement Cost: Covers what you originally paid for the item. In the sofa example above, you would receive $4,000.
- Guaranteed (or Extended) Replacement Cost: Covers what it would cost you today to get the same item. In this case, if that same sofa sells for $6,000 today, that is the insurance payout you would receive.
As you can imagine, the premium cost for each type of coverage above increases with the value you would receive due to a claim.
A careful analysis of your home, its contents, and any valuable items you may own (e.g., jewelry, artwork, furniture, etc.) is needed to help determine which coverage to select since the value of many of these items are not included in a standard homeowners policy.
In addition to covering property, a homeowner’s policy also includes liability (casualty) insurance. This would provide funds if, for example, someone trips and falls on your property and sues you for damages as a result.
There are three main parts of an auto insurance policy:
- Collision Insurance: Covers the repair or replacement of your car in the event of an accident.
- Comprehensive Insurance: Covers the repair or replacement of your car in the event of theft, vandalism, fire, water, etc.
- Liability Insurance: Covers claims for third-party personal injury and death-related claims as well as damage to another person’s property due to an accident you caused.
Umbrella Liability Policy
An umbrella liability insurance policy is a separate policy that provides liability coverage in excess of the liability coverage that your homeowner’s and auto policies provide. For example, assume your homeowners and auto policies each provide $500,000 of liability coverage. An umbrella liability policy for $3,000,000 could be purchased, giving you total liability coverage of $3,500,000 for an accident either at your home or caused by your auto. While this may seem like a lot, consider that someone who sues you for a serious injury (even death) will likely do so for several million dollars. Notably, this coverage is fairly inexpensive and provides a great amount of “peace of mind” for a low cost. Consider additional umbrella coverage in the case where you have a pool, a summer home/boat or similar things that could potentially result in an accident that might bring an expensive lawsuit.
Managing Premium Costs
For each type of insurance, you will need to evaluate the tradeoffs between premium costs and deductibles in order to arrive at a policy priced to your needs. A deductible is the amount of loss you are willing to incur before the policy coverage begins. It is a form of “self-insurance” that means you will pay for this amount of loss yourself. The higher the deductible, the lower the premium. A lower deductible (less paid by you) will result in a higher premium. Evaluate a range of premium/deductible options to help you decide.
Property and Casualty policies can differ widely in terms of coverage and costs. Finding the right plan at the right price does not have to be an overwhelming experience if you have professional guidance in getting there. Your Round Table Wealth Advisor can help you do that.