Unit 10:
Renters, Homeowners, & Auto
Insurance
One of the areas experts recommend we cover in our planning is risk. Even if
you do well in the other two areas, spending and capital accumulation, you can
be ruined financially if you don't manage risk. Risk is uncertainty about the
outcome. In this class we will learn about the risks that affect us financially.
Risk Management
Risk management involves identifying and evaluating situations involving risk and
deciding how to handle the risk. The steps of risk management are:
1. Identifying exposures that can lead to potential financial loss. Exposures
are possessions and activities that can expose you to potential financial
loss (such as owning a home).
2. Evaluate potential losses. Look at what perils could happen to you. Perils
are the actual events that cause losses (a fire in your home).
3. Choose a method to deal with the risk. Here are the options:
o Risk avoidance - don't own the item or do the activity.
o Risk retention - cover the loss yourself. We don't need all available
insurances. We'll talk more about that later.
o Loss reduction - prevent as much of the loss as possible. Ways to
do this include exercise, get dead bolts, floss your teeth, wear your
seatbelt, etc.
o Transfer risk - have someone else cover the risk. Usually this is
done through insurance and can be expensive.
o Risk reduction - transfer a substantial portion of the risk. This is
how most people deal with the risk they can't retain. This would
involve getting insurance but paying for some of the loss yourself.
You pay for part of the loss when you pay a deductible or co-pay.
4. Implement the method. Insurance is usually necessary if the loss could be
high. If it could be a medium loss, insurance may still be important. If the
loss could be small, then you may be able to retain the risk and pay for the
loss yourself.
5. Evaluate and adjust. Insurance is not something that you can think about
once and forget about it the rest of your life. As your life changes, your
insurance needs change.
Read the information at the following websites:
Choosing the Insurance You Need
(http://www.urbanext.uiuc.edu/thriftyliving/tl-insurance.html)
15 things you need to know about insurance
(http://moneycentral.msn.com/articles/insure/basics/5174.asp)
Also, another website will let you put in your own information and help you decide
what things you need insurance for. To see what are your risks, go to:
Is Your Financial Security at Risk?
(http://www.urbanext.uiuc.edu/risk/step1.html)
Unit 10:
Insurance
Insurance provides two things: protection and peace of mind. Can you imagine
how much we would all be worrying if we didn't have any insurance? We might
worry about anyone driving a car, our house burning down, having surgery, and
on and on. If we have insurance we don't need to worry about all of those things
all the time.
However, we don't need to get every insurance there is. To decide if you need a
a particular insurance, ask yourself this question, "How devastating financially
could it be if I didn't get this insurance?" If the answer is that it could be very
devastating, you should get that insurance.
It is good to think of insurance as covering the BIG things, not all the little things.
Insuring everything can be very expensive and sometimes the loss is not too
large to cover ourselves. One of the types that we might not need is credit
insurance. Credit insurance generally covers our credit if we die or become
disabled. If you have adequate life and disability insurance, you probably don't
need credit insurance.
I have had students ask me about mortgage insurance. When I ask them exactly
what they are talking about, it is usually not the type of mortgage insurance the
lender requires for the loan. They have usually received offers in the mail for
credit mortgage insurance. The advertisers tell them that they would get this
insurance if they loved their dependents. My students want to know if it is one of
the types they should get. Again, if they have adequate life and disability
insurance, they probably don't need it. Credit insurance will only pay for the credit
it is covering. With life insurance your dependents will receive the money and
they can do whatever they want with it. Maybe they would pay off the house, but
maybe they would rather invest it and use the interest to make the payments.
They have the choice.
Credit insurance might be good for someone who has medical problems and
can't qualify for life or disability insurance. Otherwise, put your money on those
insurances.
There is insurance for just about anything these days. I saw an email that was
selling luggage insurance. You could pay some money every time you flew and
your luggage would be covered if it was lost or stolen. I don't know about all of
you, but buying new luggage would not send me into bankruptcy. Maybe I can
retain that risk.
There are several things that affect the cost of insurance. Insurance is expensive
enough, we ought to try to at least keep the costs as low as we can and still have
adequate coverage.
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Deductible - a deductible is the amount you pay out of pocket when you
have a loss. For example, if your deductible on your auto insurance was
$500 and you got in a wreck, you would first pay $500 of the loss and the
insurance company would pay the rest. Having a higher deductible will
lower your premiums.
Co-insurance - this is when you also pay part of the loss, but it is usually
written in percentages. For example, you may have health insurance that
is 80/20 coverage. Meaning that your insurance company pays for 80% of
the loss and you pay for 20%.
Loss reduction - there are things that you can do that will reduce the loss
and therefore insurance companies are willing to lower your premiums. If
you don't smoke you can get lower premiums for life insurance. Good
grades can lower auto insurance.
Type of coverage - any extras that you have will raise the cost of your
premiums. If you want to have earthquake insurance on your home it will
cost extra. Some things may be worth paying extra for, you need to look at
the possible loss.
The insurance company - shopping around can be one of the most
effective ways to reduce your insurance costs.
Unit 10:
Renters Insurance
One of the types of insurance you may need to get is renters insurance. If you
are renting and the building burns down, your possessions in the building will not
be covered. When you purchase renters insurance it covers your possessions
only, not the building. Do all renters need renters insurance? I don't think so.
Again, you need to look at the possible losses.
When I was a single student renting an apartment, I had very few possessions. If
my possessions were gone it would not have been a great loss (except for those
really neat record albums-you know, they are round and you can listen to music
with them). Later, when I was married my husband decided to go back to school
and we decided to rent a home. We had already owned a home and we had a lot
of stuff (including those old records). This time it would have been a great loss to
us if our possessions were destroyed.
Renters insurance is usually not very expensive. If often ranges from $10-20 a
month. If you think you might need it you can probably afford it. Read the
information at the following website:
Common Questions About Renters Insurance
http://www.insweb.com/learningcenter/articles/rent-comquest.htm
Unit 10:
Homeowners Insurance
If you own a home you need to have homeowners insurance. If you have a loan
on that home, the lender will require it. There are two parts to homeowners
insurance, property and liability.
Property coverage - will cover your possessions, including the home. You need
to have enough coverage to cover the cost of rebuilding the home, not the
purchase price. You don't need to insure the price of the land it sets on.
Make sure you have replacement cost coverage. This will pay to have your
possessions restored to you as they were when you bought them. If you get
actual cash value your possessions will only be covered as they were. How
much is a 4 year old television worth? Even if you paid $400 for it 4 years ago, it
is probably only worth $25-50 now.
Look at your belongings and see if you have anything out of the ordinary,
because it might not be totally covered. If you had your Grandmother's wedding
ring and it was valued at $5,000, it may only be covered for $1,000. Most policies
have limits for things like jewelry, collections, office equipment, furs, etc. If you
need more coverage you can purchase an endorsement for that item.
Liability - will cover injuries or damage caused by you, a member of your family,
or a pet. Our insurance company won't insure us if we have rollerblading ramps
in our yard. We don't now, but we did before we got this current insurance. Why
wouldn't they cover us for that? There were a lot of neighbor kids that liked to
play on them. It was very dangerous. If a neighbor kid gets hurt on our property,
we can be liable. Even though we have great neighbors and they themselves
might not hold us responsible, their insurance companies are likely to come after
us. Something like a broken arm might not be a huge deal, but what if the child
became disabled and had huge medical bills along with equipment costs and
possibly even some coverage for pain and suffering? We could have been liable
for all of that. It is important to have good homeowner liability coverage.
Read the information at the following website:
Homeowners Insurance
http://www.insweb.com/learningcenter/qa/homeowner-a.htm
Unit 10:
Auto Insurance
Auto insurance also has two main parts. The liability portion covers bodily injury
and property losses to other people. The liability portion of auto insurance is
often quoted in three numbers like 25/50/15. This is covered in the book on page
285. Go back and read it again if you didn't get it the first time. The numbers that
I wrote, 25/50/15 are the requirements for the state of Utah. That is very low
coverage. If you injured someone, how quickly could $25,000 disappear in
medical bills? Very fast. And if you injured more than one person, how quickly
could $50,000 be used up? The last number is for property damage. There aren't
very many new cars on the road worth only $15,000. If you had only the
minimum required insurance for the state of Utah and ran into an Suburban and
an SUV, how much would you have to pay out of pocket if the insurance
company would only pay $15,000?
Most experts recommend at least 100/300/100. This will give you a lot more
coverage if you are responsible for someone else's losses. The sad thing is that
many people don't know how inexpensive liability coverage is. They may be
under-insured because they think they can't afford to increase their coverage. I
have had students tell me they only had the minimum coverage and talked to
their agent about increasing it to the recommended level. Often it costs them only
about $10-20 more every 6 months. It is time for you to check your coverage and
make sure you are adequately covered.
The next part of the auto insurance covers your own losses. Collision covers your
vehicle in a collision or rollover. Comprehensive covers your vehicle if it is
damaged due to things other than collision or rollover such as fire, theft,
vandalism, hail, or wind. In some parts of the country hail can cause major
damage to vehicles.
If you have an older vehicle, you may not want to have collision or
comprehensive coverage on it. We have an old truck our teenagers drive. We
don't have collision or comprehensive coverage on it because it is not worth it.
After we paid our deductible there would be little left for the insurance company
to pay. This helps keep our premiums down, especially with teenage drivers. We
have a newer van that would be a hardship for us to replace and we do have
collision and comprehensive coverage on it.
Uninsured or under-insured coverage is also important for you to get. If you get in
a wreck and it is the other person's fault, but they don't have insurance, who will
pay for your loss? If you have uninsured or under-insured coverage, your
insurance company will pay for the loss.
There are other parts of auto coverage to consider such as medical coverage
and personal-injury protection. Some insurances offer things like glass
replacement and towing coverage. You will need to discuss these with your
agent and decide if they are worth the extra costs for you.
Read the information at the following website:
Private Passenger Automobile Insurance
(http://insweb.com/learningcenter/qa/auto-a.htm)
Unit 10:
Auto Insurance - Cost Factors
There are several things that affect the cost of auto insurance.
Family situation. This includes things like how many drivers and how many
cars. If you have three drivers and three cars, they will each need to be a
primary driver on a car. If you have teenagers as primary drivers, it is very
expensive.
Where you live. If you live in a city you will likely pay more than if you live in a
more rural setting.
Distance to work. If you have a long commute, you will likely pay more.
Driving record. The worse it is, the more you will pay. It may even be hard to
get insurance if your driving record is bad enough.
Type of car. More sportier models and models that are stolen more often may
have higher premiums attached. Before you buy a car it is good to ask your
agent how much the insurance would be on that car. You may be able to afford
the car but not the insurance.
Credit history. We already discussed how having a bad credit history can raise
the cost of your premiums.
The company. Try shopping around. It can make a big difference.
Discounts. You may be able to get discounts for things like good grades,
multiple policies with the company (homeowners or life also), safety feature
(like air bags), defensive driving classes, etc.
Your deductible. If your premiums are too high, consider raising your
deductible. If you do have a loss, you will need to pay more, but your premiums
will be lower in the meantime. Some people raise their deductibles and
increase their coverage. It would be better to have good coverage when you
got in a wreck and have to pay a higher premium than to have a lower
deductible but still have to pay a lot out of pocket because your coverage
wasn't high enough.
Unit 10:
Umbrella Policies
Because today's society is lawsuit happy, some people have decided to have an
umbrella policy. This insurance will cover losses that go beyond the coverage of
an auto insurance policy or a homeowner's policy. Read the information at the
following website:
Personal Umbrella Liability
(http://www.insweb.com/learningcenter/qa/umbrella-a.htm)