The Key to the Insurance Mystery – How Do You Match Up?

If I had a quarter for every time I heard someone say ‘It’s just insurance’ or ‘just give me the minimum’, I would be a rich person!

One of the biggest mistakes I have seen with Insurance companies is asking the consumer how much they want to pay each month.  Of course we are going to keep the number low because we do not want to pay any more out of pocket than we have to!  This sets a false expectation with the client that they have better coverage than they actually do. The better question should be ‘how much coverage do you need’ then determine the cost and adjust accordingly.

I got into the insurance business because of my passion to educate people on just how important having insurance is.  Take for instance Health Insurance.  Everyone knows the importance of having health coverage, not everyone can afford it, but there are options for those who do not have health insurance.  But when it comes to Auto/Home/Life/Business insurance, there are no alternatives if you do not have insurance, or even enough coverage.  In the event of an exposure, you could be facing thousands of dollars of debt by simply not having enough insurance to cover the liability.

A great misconception is that your responsibility ends with the limit of your insurance.  Not True.  Any dollars in excess of what your insurance covers is up to you.  Your home, auto, income, etc. now are at risk.  Have you ever stopped and thought about how much coverage you have vs. your assets?  Are you prepared to accept the excess liability?  If you are, thats great! If not, you should re-asses the amount of coverage you carry.  If an Insurance Agent says you only need basic/minimum coverage, you should seriously consider seeking out another agent.

Insurance can be your best friend if you truly understand how it works.  Insurance is about transferring risk.  When your involved in an auto accident you want your auto policy to cover the costs, right?  The same goes for your Home, Life and Business. 

Let’s take for example you carry the minimum liability (in CA it is 15/30/5) on your auto.  You are in a minor accident where you rear-end a Toyota Camry.  There is no bodily injury and only $1000 in property damages to their car and $1000 on your car.  You are covered, right? In this case, you are covered after your deductible up to $5000 in property damage.

Now, let’s assume you hit a BMW and both vehicles have property damage in excess of $30,000.  The driver of the BMW ends up in the hospital and his bills amount to approx. $20,000.  You are still covered, right? Sort of.  You will pay your deductible, your insurance will pay $15,000 for the medical costs and $5000 for the property damage.  You are now faced with $4000+ for the remaining medical bills and more than $20,000 for the property damage.  Not to mention any legal fees that could result from being sued. This could all be avoided if you carried a higher liability coverage (the very least should be 100/300/50) for a fraction more in annual cost. I will discuss this more in another article.

This same tactic holds true for all insurance.  “So, how do I determine the correct amount of coverage?”.  The answer is actually pretty simple.  I would first suggest talking with an Insurance Agent who can best help you determine your needs.  To determine what you need for yourself,  first, you have to evaluate what entities of insurance you need.  Secondly, evaluate your assets to determine your net worth(this tells you how much overall liability you need).  Thirdly, insure at the highest liability amount you are able.  If you still need more coverage, the umbrella plan will cover the ‘gap’ between your auto/home/business insurance and your assets.  

For some people the amount of coverage needed is not in their budget.  In that case, begin increasing deductibles and dropping optional coverages until you are at a policy that is more in line with your budget without sacrificing too much coverage.  Lowering liability should only be a last resort when all other options have been exhausted. 

For Life Insurance, use the D.I.M.E.S approach: Debt + Income needed + Mortgage + Education needs – Securities, 401k,etc. = Insurance $$ needed

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