Covering risks through property/casualty insurance.
In any case, underinsurance, omitted insurance, or poor coverage choices can be financially devastating in case of an unfortunate incident. Comprehensive expertise is not necessarily required of financial advisors, but knowledge of available products and the protection offered can help clients preserve existing wealth.
Most homeowners have this coverage; indeed, some lenders will not commit to mortgages unless insurance is confirmed. Still, there are certain things about home insurance that all advisors should know.
How much coverage is needed? Enough to pay for a rebuild, after total destruction. After all, it's only the physical home, garage, and other structures that might have to be replaced. Land value is irrelevant, for this purpose. As a rule of thumb, home insurance should at least equal the building's total square footage, multiplied by local building costs per square foot. Cost information should be available from a local real estate agent or appraiser. For example, say Jane owns a 2,500-square-foot home and lives in an area where building costs for similar homes are $100 per square foot. Jane might therefore request $250,000 of home insurance coverage.
In addition, homeowner insurance policies usually cover personal property that is stolen or destroyed in a disaster. Standard policies, however, may have modest caps on how much they will pay for certain types of possessions, such as jewelry, silverware, electronics, sporting equipment, and artwork. Homeowners should know that special coverage might be needed.
Home policies also include personal liability coverage, to protect policyholders in case family members (including pets) cause damage to others. There might be a minimum requirement of $100,000 worth of liability insurance, but it's probably necessary to have at least $300,000 worth.
All this coverage can add up; fortunately, discounts may be possible. Homeowners can often decrease home insurance premiums by installing smoke alarms, fire extinguishers, and a security system. Some insurers also offer senior discounts.
People who rent rather than own their home should have renter's insurance for their furnishings and other possessions. Both homeowners and renters should take detailed photos or videos of their valuables, including any antique items. This will help them to obtain proper coverage and subsequently collect a valid amount in case of an incident.
With standard homeowner's insurance policies, coverage is provided for losses from fire, lightning, hail, explosions, and theft. These policies usually do not cover floods or earthquakes; supplementary coverage is explained below.
Many people own or lease cars and need this coverage. Standard insurance includes protection in case of theft, physical damage, and personal liability. Adequate liability coverage may be the primary concern for auto insurance; it is probably more likely that a driver will hit a pedestrian than the family dog will bite a plumber. In addition, the monetary damage that could result from hitting a person is far greater than the repair cost for the automobile. Liability coverage can pay for any injury or damage that occurs if a driver causes an accident, but if the policy's liability insurance limit is too low, the driver could be sued for any damages above that cap.
Drivers also should check on their deductibles for comprehensive and collision coverage. This is the amount they will pay if their car is damaged and no other driver was at fault. Raising or lowering the amount of the deductible can decrease or increase the premium; a higher deductible means a lower premium but more out-of-pocket exposure. (The same principle holds true for home insurance as well.) Insurance companies have much more experience than consumers in balancing premiums and claims, so advisors may provide helpful suggestions.
Both drivers and students with good records may qualify for auto insurance discounts. Moreover, discounts may be available to people who buy both home and auto coverage from the same insurer. Shopping around for better prices may also help; some companies offer a discount for switching from a competitor.
With any kind of coverage, drivers should always have a copy of their auto insurance card and their insurance agent's contact information in the car, as well as a way to record the details of any accident that occurs. Smartphone applications are available to help drivers gather relevant information following an accident so the notes can be e-mailed right away to their agent.
Rental Car Insurance
An auto insurance policy may offer another feature: coverage when renting a car. Drivers who are going to rent a car when traveling should check their auto insurance policies for clauses regarding rental cars. If there are no such clauses, a call to their agent probably will reveal if there are exclusions for rental cars. Is there coverage for long-term rentals? For rentals in a foreign country?
Besides an existing auto insurance policy, car renters may have coverage from a credit card issuer that provides secondary coverage above the limits of the auto insurance policy. Exclusions may apply, so renters should verify the details with their credit care company. Drivers who feel that their coverage is inadequate can ask their auto insurance agent about additional coverage for car rentals.
Such research and preparation can help car renters respond when the rental agent offers optional insurance offered by the company. This coverage is extremely expensive on an annualized basis, so avoiding the insurance is recommended if the driver's existing auto insurance and credit card coverage are sufficient. Renters should be wary of any gaps in coverage between their auto insurance and credit card coverage.
Excess Liability Insurance
As mentioned, liability insurance is a key component of homeowner's and auto insurance. Nevertheless, the upper limits may not be sufficient for some clients. If so, individuals can purchase excess liability insurance--known as an umbrella--to increase coverage to $1 million or more. Such coverage may turn out to be relatively inexpensive.
Many people are concerned about asset protection, especially high-net-worth individuals who might be targets of lawsuits. If one of their children hits a pedestrian while learning to drive, they had better have a great deal of liability protection in place. Someone with $6 million in net worth might have a $3 million umbrella, while someone worth $10 million might have a $5 million umbrella. If necessary, the umbrella policy would pay obligations beyond the upper limits of auto or homeowner's liability coverage.
Often, it makes sense to buy an umbrella through the same insurance agent who provides the family's home and auto policies. When discussing this coverage with their agents, people should describe their situation completely. Thus, an umbrella might cover second and third homes, all vehicles, any boats or planes, and so on. The agent should know how many trips are taken outside the United States, for business or pleasure, and which family members are driving which vehicles.
Once an umbrella policy is in place, it should not be forgotten. Important changes should be brought to the agent's attention. If a teenager gets a driver's license and access to the family cars, the agent should be informed. People also should reveal if they buy a new home with a swimming pool, or put a trampoline in the backyard.
As mentioned, standard homeowner's insurance policies do not cover floods. In recent years, flooding has caused damages in all 50 states. According to the Insurance Information Institute, floods and flash floods accounted for $4.3 billion in insured losses in 2016, and that does not include losses that were not insured.
Generally, coverage for flood damage comes from the National Flood Insurance Program (NFIP), which is part of the Federal Emergency Management Agency (FEMA). Flood insurance is available to homeowners, renters, and business owners in participating communities. Even though the program is from the federal government, NFIP flood insurance policies are sold by private insurers. Consumers may be able to get this coverage from the same agent who handles their homeowner's policy. Although many insurers offer NFIP coverage, they do not compete on price; flood insurance rates are equal from company to company and from agent to agent.
NFIP rates are based on several factors, including the building's age, size. occupancy, and whether it is in a designated flood zone. Taking a lower deductible and increasing the coverage amount (structure and content) will raise premiums paid by consumers. Discounts from published rates may be available if a community makes substantial efforts to reduce the risk of flooding.
Historically, NFIP rates have been relatively low to encourage policy ownership; however, the program has been paying out more than it has taken in recently, so rates are rising. The NFIP program, which is scheduled to expire at the end of September, must be renewed by Congress. Renewal is likely, considering the number of properties with NFIP coverage, but changes are likely as well. Advisors should follow the news to see how federal flood insurance will evolve.
NFIP building coverage has been limited to $250,000; for contents, the cap is $100,000. People who want more insurance can go to private companies for policies that cover what NFIP does not or replace NFIP altogether. Insurers offering these policies may require the consumer to have a homeowner's policy from the same company so that, in case of a claim, multiple insurers will not be arguing over who will pay for various damages.
The following are additional types of property/casualty insurance that individuals should consider.
Earthquake insurance. As is the case with flood insurance, earthquake coverage is not included in most standard homeowner's policies. Unlike flood insurance, however, there is no federal program providing standardized rates. People who live in or own a business in an area where seismic activity has occurred may want to inquire about this protection.
Homeowners might find that the company providing their home insurance also insures against earthquakes, either as a homeowner's policy add-on or a stand-alone policy. If the company providing homeowner's insurance does not offer earthquake coverage, the consumer's agent may have some suggestions, especially in areas where earthquakes occur. Shopping around can help, because pricing is not standardized. The key is to have coverage for damage to the structure and contents.
Boat and yacht insurance. In some ways, insuring a boat or a yacht is a mix of both home and auto insurance. Watercraft are vehicles, so owners need coverage if they run into something; towing assistance might also be needed. Boats and especially yachts are also large enough to contain personal property (cameras, jewelry) that needs to be insured. Therefore, liability and contents insurance are vital, as well as coverage in case this expensive asset requires repairs.
These policies may have fine points for consumers to consider. Travelers Insurance, for example, offers a choice between "agreed value" and "actual cash value" coverage. The former provides the replacement value on most partial losses involving the vessel, its furniture, fixtures, and electronic equipment. On boats and yachts less than 30 feet long, the latter comes with a "substantial" premium discount; in the event of a loss, any settlement will be based upon a depreciated value.
Valuable items insurance. Sometimes known as "floaters," such policies cover expensive property that can be easily moved, lost, or stolen. Gold and jewelry are obvious examples, but this coverage can be much more far reaching. People might spend large amounts on stamp collections, bicycles, firearms, and other hobby-related items. Often, such possessions can be covered by valuable items insurance for amounts above the limits on a homeowner's policy. Listing new acquisitions in a timely manner may be necessary for inclusion under this coverage.
Protection for expensive items may be added to a homeowner's policy with higher loss limits. For extremely pricey property, a separate policy with even higher limits could be necessary. Some insurers offer nodeductible policies, so that precious objects can be fully replaced, as well as special features such as breakage coverage for fragile items.
Wedding insurance. This can also be called event insurance, as coverage also may be acquired for birthday parties, anniversary celebrations, or bar mitzvahs. Such events can be extremely costly, with severe financial risk if things do not go as planned. The rented location might go out of business, or the groom might come down with a serious illness before the ceremony. In such cases, nonrefundable deposits are at risk, and purchases already made might be a total loss. For these and other setbacks, event insurance can at least provide monetary reimbursement. Extra liability coverage can also be provided, if necessary.
Identity theft insurance. Increasingly, identity theft leads to identity fraud. Besides actual theft of assets from the victim's financial accounts, the victim could be held responsible for purchases made by or loans made to someone else. Even if matters are straightened out, the victim of identity fraud can lose stolen assets, suffer immense stress, be forced to restore a tarnished reputation, and incur substantial outlays along the way.
Identity theft insurance may ease the recovery process. Perhaps most importantly, insurers might provide the services of an expert in reversing the damage done by identity fraud. Out-of-pocket costs may also be reimbursed. This coverage may be added to homeowner's or renter's policies by some insurers.
Better to Have and Not Need
A life fully without risk is practically impossible; as Longfellow wrote: "Into each life some rain must fall." Managing the impact of an adverse event requires careful planning, and financial advisors should be prepared to guide individuals through the process.
Sidney Kess, JD, LLM, CPA, is of counsel to Kostelanetz & Fink and a senior consultant to Citrin Cooperman & Co., LLP. He is a member of the NYSSCPA Hall of Fame and was awarded the Society's Outstanding CPA in Education Award in May 2015. He is also a member of The CPA Journal Editorial Advisory Board. James R. Grimaldi, CPA, and James A.J. Revels, CPA, are partners at Citrin Cooperman.
CHECKLIST FOR PROPERTY/CASUALTY INSURANCE
[ ] Verify that the client's homeowner's insurance will cover the cost of a full rebuild after a disaster.
[ ] Suggest that auto insurance cany the maximum amount of liability coverage.
[ ] Urge clients to check their auto insurance and credit cards to see what rental car coverage is available.
[ ] Remind clients of the need to use umbrella policies for excess liability insurance, over and above the limits on home and auto insurance. [ ] Point out that standard homeowner's insurance policies don't cover flood insurance, but many insurance agents can add this protection through the federal National Flood Insurance Program. [ ] Ask clients if they want or need other coverage for earthquakes, watercraft, valuable items, events such as weddings, and identity theft protection.
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|Title Annotation:||COLUMNS: the financial advisor|
|Author:||Kess, Sidney; Grimaldi, James R.; Revels, James A.J.|
|Publication:||The CPA Journal|
|Date:||Sep 1, 2017|
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