First, I want all my readers to know that I believe that insurance is one of the most cost-effective ways to transfer risk of financial loss from all types of causes of loss.
What can cause a financial loss? A legal judgment, a fire, a theft, an earthquake, a flood, a major break
in the plumbing inside of a house or in an upstairs condo that leaks into the units below, a death, a
disability and needing others to care for you 24/7 at some point in your life.
Three examples of how insurance is the most “cost effective” transfer of financial risk
Example 1: Would you rather pay a premium of $1,964 or out of your pocket a legal judgment for $10,000,000?
One of my client’s son was severely injured by an at-fault driver that caused a permanent and life-long
major brain injury requiring 24/7 lifetime care. The son who was injured was eighteen years old at the
time of the accident. A lawyer I know successfully sued the at-fault person and got a court judgment for
almost 10 million dollars. The at-fault person did not have in place what is called a Personal Umbrella
Liability policy but had the financial assets to write out a check for the almost 10 million legal judgment.
How much would it have cost to buy 10 million of personal umbrella liability? One of my current clients
who has a 10 million personal umbrella liability policy that covers two homes and three cars pays only
$1,964 per year. Can anyone you know find a way to invest $1,964 for today, tomorrow or at anytime
and get a ROI tomorrow for 10 million needed to pay a legal judgment? Nobody that I know that works
as a financial planner or stock broker can achieve this type of ROI. I think everyone would agree writing
out a check for $1,964 is a lot more “cost effective” and less painful financially than writing out a
personal check for 10 million dollars out of your own personal funds to satisfy a legal judgment.
Example 2: California Authority Earthquake (CEA) Insurance and Additional Living Expense Coverage
Whenever I meet a potential new client, I always begin with an audit of all the in-force policies and
never provide just a quote because of my style of doing business being focused first on the right
coverage and after that, how to find the right coverage most competitively priced.
One of my new clients showed me his existing CEA Earthquake Insurance policy. He had not looked at it
in awhile and apparently neither was his agent paying any attention either. One of the important coverages to have for earthquake insurance is coverage to pay for the cost to live
elsewhere, i.e., the rent you will have to pay, until you can repair your home or decide to move and buy elsewhere not to mention even higher food costs if you can’t cook at home for awhile.
The CEA policy had on it a maximum limit of $1,500 to cover his additional living expenses, enough to
cover a few nights and meals at a hotel. This is the minimum that has to be offered but the CEA offers
you the choice to choose higher amounts with the maximum available of $100,000. After it was
determined the CEA was the most appropriate earthquake policy to keep, I pointed out to these new
clients that $1,500 is not a lot of coverage to help pay for additional living expenses and that the CEA
offers up to $100,000. How much extra per year does that cost? $138 buys $100,000 of coverage to help cover you additional living expenses. It makes sense to me and my clients to pay the CEA $138 to cover up to $100,000 in additional living expenses which is highly likely to happen if your home is destroyed in California's next major earthquake.
Example 3: A quick but powerful way to avoid underinsurance after California’s next Worst Wildfire in California History
A non-profit insurance consumer group, United Policyholders, which was established in 1991 after the
Oakland Firestorm, and I was involved in its creation and remain involved with UP, goes to the locations
of California’s wildfires to meet with policyholders having insurance claims challenges, usually a result of under insurance leaving many without enough insurance money to rebuild their homes.
In UP’s survey after the 2017 North Bay Fires, it was determined that the average amount of
underinsurance was $317,000. I asked myself this question, how much more would it have cost to buy
the average amount of $317,000 in underinsurance?
Here is what I found. I ran an estimate of insuring a home in Santa Rosa for $300,000 with a $1,000
deductible and the annual premium was $1,049 with a $1,000 deductible. Thank I asked the question,
what would it cost to raise the home’s insurance dwelling limit from $300,000 to $600,000 at the same
$1,000 deductible or higher amounts. Here are the numbers:
Many people I meet have typically a $1,000 homeowner deductible. Over time, not only is this not cost
effective, but you can use a higher deductible to buy more coverage to avoid being underinsured if your
home burns down. If the average amount of underinsurance was $317,000, an additional $300,000
could have been purchased for even a lower premium than it would have cost to insure a home for
$300,000 in less coverage. For between $91 less per year up to a maximum of $622 extra per year,
more likely only $124 for the $5,000 deductible option, most homeowners can buy for about $10 per
month and extra $300,000 in home insurance coverage to rebuild their home. What is more “cost
effective”? Borrowing the $300,000 shortfall, cashing in assets under management for retirement or
other purposes, or writing out a check for about $10 a month or $124 per year with a $5,000
deductible?
If you are reading this blog, more than likely you have a coverage gap that you don’t even know about
that could possibly one day cause you a financial heart attack.
To find out how to avoid a coverage gap, and how to use your insurance dollars in a “cost effective” way to avoidable a preventable potential financial heart attack from underinsurance, please contact me at david@davidshaffer.com to start the process. We create customised Asset Protection Plans using the
appropriate property and liability insurance policies along with risk management recommendations.