I’m Okay; The Car Isn’t: A Primer on Insurance Coverage

“Um, Dad? Hi. I was driving to work and someone hit me ….” “Yes, I’m okay ….” “They’re okay ….” “The car isn’t.”

My first car accident at age 16. A “T-bone” to the driver’s-side door that I never saw coming. Fortunately for me, and more so for my dad, he had taught me well. I knew to move the car, and myself, safely off the road; to call the police after checking for injuries in both cars; and then locate the insurance card in the glove compartment to exchange information with the other driver.

The word insurance might evoke an ill feeling for some of us, for others a sense of sheer boredom, still others avoid having a discussion about insurance at all costs.

We know. We understand. With more forms of insurance out there than we have fingers to count on, it is certainly a daunting and seemingly esoteric topic. We’d like to simplify that for you. But first, keep in mind our basic philosophy about insurance:  Bear the risks you can afford; insure those you can’t.

Here is a list of the general policies that we feel most everyone should have and common types of each:

Health Insurance

Know your deductible and maximum out of pocket costs. Be sure you have sufficient emergency fund or health savings account balances to cover these costs if needed. Understand how much of the provider’s charges are covered after your initial co-pay (i.e. 100% , 80%, etc.). Know what type of plan you have and the related coverage. The most common types of plans offered include:

• HMOs (Health Maintenance Organizations):  Allow you to see any doctor in the network of providers. If you see a doctor outside the network you will be required to pay the full cost of their service
• PPOs (Preferred Provider Organizations):  More freedom to choose your providers than an HMO. You do not need a referral to see a specialist, but you will have higher out-of-pocket expenses if you see a doctor that is out of the network.
• HDHPs (High-Deductible Health Plans):  Typically much lower premiums but your out-of-pocket expenses will be higher. A health savings account is a tax-advantaged savings account often associated with a HDHP; the money you (or your employer) put in the account can help you pay for health care costs.

Vehicle Insurance

This includes auto, motorcycles, boats, watercraft, golf carts … and airplanes! Most states (including NC) require auto coverage for all vehicles on the road. At a minimum, be sure you have liability coverage, personal injury protection, and uninsured or underinsured motorist coverage. Depending on the value of your car, you may also want to consider collision and comprehensive insurance.

• Collision Coverage: Covers the cost to repair or replace your vehicle if it is damaged in an accident with another vehicle or object (like a tree or fence). If your car is paid off, collision coverage is optional.
• Comprehensive Coverage: Covers the cost to repair or replace your vehicle if it is stolen or damaged in an incident that is not a collision (like vandalism or a tree falling on it). This is optional coverage that can be added to your policy.

Collision and comprehensive coverage can increase your insurance premiums quite a bit. If your car is only worth $4,000, it might not make sense to pay the additional cost for this coverage. Rather, you can save the money toward a new car when the need arises (be it from an accident or simply because it’s time to replace it). Additionally, each year make sure all vehicles are listed properly; remove any vehicles that you no longer own.

Homeowners or Renter’s Insurance

Discuss with your agent what items are included (and excluded) from coverage. Renter’s insurance should cover the cost of your personal property and your liability if a visitor is injured while on property. Be sure your policy covers enough to rebuild or replace your home if it is completely destroyed. Know the difference between replacement value and actual cost value:

• Actual cost value is equal to the replacement cost minus any depreciation. This value is the standard that most insurance companies use when reimbursing for losses.
• Replacement cost is the value to replace the property with comparable material and quality (unless the cost to repair or replace is actually less). Generally, payment on the replacement cost is the most favorable from your (the policyholder’s) perspective.

Disability Coverage

Review the monthly benefit that would be payable to you and how long it would be paid to you. Understand how the insurance company defines disability. If you are a professional (for example, a surgeon), be sure you are protected for your ability to work in your specific occupation.

Life Insurance

Keep track of the death benefit. Review an annual illustration of the policy (if it is whole life) to ensure it is performing as originally outlined. Life insurance can be used after your death to help pay for the final burial and funeral expenses. It can also help to offset the loss of your income to your survivors. Determine if you should have a term or whole life policy:

• Term Life Insurance:  Provides coverage for a specific amount of time. There is no associated cash value, only a death benefit which would be paid to your beneficiaries at your death.
• Whole Life Insurance:  The coverage is intended to build cash value. Think of it as an interest-bearing account with a death benefit. It is designed to build cash value in addition to the death benefit during your life. Because of this building cash value, whole life plans are more expensive than term life plans.

Umbrella Insurance

Often referred to as excess liability insurance, it picks up where the coverage on your other insurance leaves off. The added coverage is useful for individuals who have significant and/or very expensive assets and are at significant risk of being sued. Those who own potentially dangerous things on their property, such as a pool, trampoline or dogs, or those who engage in activities that increase their chance of lawsuits should consider an umbrella policy (such activities can include volunteering, being a landlord, coaching kids’ sports, and serving on a nonprofit board).

While you may not think your assets have changed in the last year, other changes to your circumstances or to the insurance policy may warrant a second look to make sure everything is in current order.

• Have your circumstances changed? Some life events that can impact your insurance coverage include: change of address; acquiring or selling a vehicle; adding a new driver; a home renovation; market rate increases in the value of your home over time; marriage; divorce; having children.
• A review of your policies could reveal additional discounts available to you based on home improvements, bundling insurance, or a safe driving record.
• Insurance companies regularly update their products and offerings. You may be eligible for additional features in your plans that could save you money in the long run.
• Your insurance premiums may have increased in the last year. A review is a good time to find out why and determine if any increases are unwarranted.
• Be sure to discuss with your agent the appropriate level of coverage for each policy. How much is “enough” based on the value of the assets being covered? For instance, a homeowner’s policy will include a limited amount of coverage for “valuables” in the home, but if you are an avid coin collector, those coins may need to be covered under a separate policy to ensure their coverage in the event of a disaster.
• If you do not have a separate umbrella policy, you may want to increase the liability coverage for your car and homeowner’s insurance if you have significant assets.
• If you have an umbrella policy, review the amount as your net worth increases to ensure you still have sufficient coverage.
• Review the deductibles on all of your policies. You can save some money by selecting a higher deductible policy, but make sure you will be able to pay that amount if/when the time comes.

Thankfully the individual who struck my car that day so many years ago was insured as well. My car was declared totaled after the insurance assessment but, fortunately, finding a replacement car was made less painful by the insurance payout. It’s why we have insurance. For the days when we’re driving along in life and get blindsided by the unexpected.