Recently, I had the opportunity to visit with a friend of mine. Since
I recently opened an insurance agency, he asked me to take a look at
his coverages to see if I could do an “apples to apples” comparison
with what he had and see if I could get him “a better deal.” Since
I’m in the business of writing insurance, it was my pleasure to do so.
He faxed me his declaration pages and I took a look at what he had.
He was insured with a couple of very reputable insurance companies, so
I knew that he was at least somewhat protected. The second thing I
noticed, however, was that his coverages were a complete mish-mash.
Most people, when purchasing insurance, are looking to get a lower
rate. They consider insurance to be one of those “necessary evils”
that goes along with living in the modern age. The state of
California requires it by law, and you can’t close escrow on your home
without it. That’s about all most of us really think about when we
make insurance purchases. There are, however, some very real things
that people, especially homeowners, need to consider when choosing
coverages.
My friend has three vehicles, three kids under driving age, is
married, and owns two homes: one that he lives in, and one that he
rents out. His coverages went something like this: Liability for all
three vehicles 15/30/25, Uninsured motorist 15/30 on two cars, and no
uninsured motorist on the beater truck. Comprehensive and Collision
deductibles at $250 for all three vehicles. He also had $500
deductibles on both of his house policies.
While most people wouldn’t see anything amiss here, as an insurance
professional, and a risk advisor, I see loads of problems. I asked my
friend how he came up with the coverages. After much head-scratching
and thinking back, he realized that he was carrying the same coverages
that he had when he purchased his first car right out of high school.
He got the 15/30 liability because it was all that was required to
drive legally, and he got the $250 deductible because he didn’t think
he could afford more than that if something were to happen to his car
in an accident. He had changed auto insurance companies a couple of
times since then, but he had just asked the agent to do an “apples to
apples” comparison. He had been approached by his various insurance
agents in the past regarding his coverages, but he had blown them off
because he thought that they were just trying to sell him more
insurance that he didn’t need. Basically, he still had “high school”
insurance even though he had graduated years ago.
My friend and I are both a few years removed from high school, but his
coverages had not caught up. The only thing he really knew about his
home insurance was that his escrow company set it up through an
insurance agent that they knew that would provide an evidence of
insurance document in a hurry, since he and his wife had not chosen a
company prior to the closing date. The price seemed reasonable so
they went with it.
In a situation like this, I try to make all of the insurance work
together and cover the most glaring gaps in coverage. My friend was
woefully uninsured on the liability side, and way over-insured on his
physical damage coverages. It’s easier to understand if you look at a
real-life scenario in which the coverage gaps become obvious.
Imagine that my friend is driving out to his job at Edwards Air Force
Base. He’s going the speed limit, but sees a tumbleweed rolling
toward him from the desert. He looks over at the tumbleweed to gauge
if he will be able to miss it. When he looks back at the road, he
sees a minivan stalled in the roadway with its emergency lights on.
There is no way he can stop in time and he rear-ends the minivan going
about 50 miles per hour.
Much to his horror, he finds out that the minivan is occupied by a
woman and her three children. The woman is unconscious and the
children look like they are injured as well.
After the police arrive and the ambulance takes everyone away, he
calls his insurance company to report the accident. Fortunately, he’s
okay, just a little shaken up. He feels terribly about the accident,
however. His insurance company takes the claim and he waits to see
how everything plays out.
In a little over two weeks, he gets a letter from his insurance
company telling him that his coverages will likely not be sufficient
to cover the loss. While he will only pay $250 out of pocket for the
repairs to the vehicle in which he had the accident, the $30,000
provided by his liability coverage will not be NEARLY enough to cover
the bodily injury sustained by the mother and her children.
Right on the heels of the letter from his insurance company, he
receives a certified letter from an attorney representing the mother.
The attorney states that the damages he is claiming on behalf of his
client exceed $250,000. My friend feels a pit in his stomach because
he realizes that to raise that kind of money, he is going to need to
sell one of his houses and put a second mortgage on the other one.
This accident will be haunting him for a long time.
Fortunately for my friend, this is a fictional story. Unfortunately
for other folks, this scenario has been a reality. People have had
their futures destroyed by a tumbleweed rolling down the road. They
only had “high school” insurance. When you are in high school, the
world tends to be pretty forgiving when you make mistakes like the one
discussed above. When you’re on the other side of forty, however, the
world gets a lot less forgiving.
I suggested that my friend make the following adjustments to his
insurance portfolio. First of all, raise the deductibles on
everything to $1000. By doing this, he saved himself almost $900 a
year. In my opinion, spending $900 a year to save yourself $750 in
case of an accident that will probably not happen is a bad use of the
insurance dollar. Also, take the comprehensive and collision
coverages off of the beater truck. He was spending about $250 per
year to insure a $1000 truck. Once again, not a good use of the
insurance dollar. While he could barely afford the $250 deductible
when he was in high school, $1000 would not be too difficult to come
up with in the event of a loss to his vehicle.
Secondly, I showed him how little it would cost him to raise his
liability limits to $250,000/$500,000/$100,000. Essentially what this
means is that if the aforementioned accident scenario were real, he
would probably have been fine from a coverage point of view. The
numbers mean that he has $250,000 worth of bodily injury coverage for
one person, and $500,000 worth of bodily injury coverage for the total
incident. He also has $100,000 worth of coverage for the other
person’s vehicle: more than enough to buy a new minivan. I also
suggested that my friend consider purchasing a personal liability
umbrella policy. In my friend’s case, $1 million worth of extra
liability coverage would cost him only about $250.00 per year.
So how did my friend fare? One would think that with all of this
extra coverage, he would be paying tons more. The interesting thing,
however, is that after all is said and done, he is actually saving
about $75 per year. This is WITH the liability umbrella policy. You
may ask how this is possible.
First of all, my friend got major discounts by bringing all of his
policies to one company. Most major insurance companies offer
multiple-line discounts, and they often multiply when you add
additional coverages like life insurance to the mix. There was major
savings right there. Also, he had the “beater truck” with another
insurance company, so he added multiple-car discounts to the already
substantial multiple-line savings.
Finally, by raising his deductibles to $1000 and eliminating
comprehensive and collision on the truck, he saved a signficant amount
of premium which he then used to increase his liability coverages. As
far as his vehicles go, the stop loss amount is the value of the
vehicle. With the liability portion, there is theoretically no
ceiling to how much you can be sued for. It just makes sense to let
your coverages “graduate.”
If you would like to see how you can graduate your “high school”
insurance, feel free to contact me at (661) 946-4224. My office is at
44309 Lowtree Avenue, Lancaster, CA 93534.
(The “friend” mentioned in the story above is a compilation of a
number of my customers who have benefited from the risk management
approach to their insurance needs).
