[Editor's Note: This is a guest post from R.J. Weiss, CFP, a financial advisor who blogs at The Ways to Wealth. We have no financial relationship.]
Most people don't deal with insurance because they figure they're set. That's until they have to file a claim. Often what they thought was covered–wasn't. As a licensed agent for over ten years, with a specialty in the high net worth market, there are five coverage gaps I frequently find. Fortunately, you can affordably insure against all of these gaps.
5 Most Common Gaps in Coverage
# 1 – Replacement Cost on Property & Contents
There are two primary types of property insurance:
- Replacement Cost
- Actual Cash Value (aka market value)
A replacement cost policy insures your property for the actual cost to replace. For example, if a fire destroyed your $5,000 sofa, you'll get reimbursed $5,000. Then, there's actual cash value or market value. This insures your property for the replacement cost minus depreciation. So, if that $5,000 sofa was 10 years old, it may be worth only $1,500 due to depreciation, which is what you'll get from the insurance company. That's why it's important to have replacement cost on both your property and contents.
# 2 – Guaranteed or Extended Replacement Cost
To make things more complicated, there are different types of replacement cost. What you want to look for is guaranteed or extended replacement cost. A guaranteed replacement cost policy would cover the full cost, no matter the amount. Extended replacement cost is a bit of a partial guarantee. If your home were insured for $500,000, a 150% extended replacement cost endorsement would pay up to $750,000 in case damages exceeded your policy value. Without either of those, your home is simply insured for the amount you said it was worth when you bought the policy.
Why does this matter? Most homeowners are underinsured. About 67% of homes nationwide are underinsured. The average amount homeowners are underinsured is 22%. While this study came from an insurer (Nationwide), similar results have been reported by property appraisers. Estimating the replacement cost of a home is a difficult task. Extended or guaranteed replacement cost provides low-cost extra protection in case of a total disaster.
# 3 – Water Sewer/Backup Coverage
The next coverage where many home insurance policies fall short is water or sewer backup coverage. Any backup of water from sewers or drains is excluded on a home insurance policy. Fortunately, most companies add this back in as an endorsement. However, it's important to check the amount of coverage you have, as this limit is separate. Most often, the amount of sewer or water backup is just $5,000 to $10,000. For someone with a larger finished basement, that may not even cover the cost of cleanup, let alone the need to replacement the contents.
#4 – Uninsured & Underinsured Motorists
Uninsured and Underinsured, also known as UM/UIM, are two separate coverages on your auto policy. Uninsured motorists covers you if you're hit by a driver without insurance. Underinsured gives you coverage when the at-fault driver doesn't carry enough insurance. This coverage is vital for doctors not just because you tend to drive higher value cars. More importantly, it can protect your income. If you were to get in an accident which caused you to miss time at work, there's a high likelihood you would exceed the at-fault drivers limits. With UM/UIM coverage you insurer would then kick in to cover the total damages. It's important to review your current UM/UIM limits, as many insurers offer minimal coverage. Also note, this amount is often different than your total liability limit.
[Editor's Note: Bear in mind that with Uninsured/Underinsured motorist coverage, you may be insuring against risks you have already insured against. For example, if someone in your car is hurt, the guy at fault doesn't have insurance, and he sues you, then your liability coverage should kick in. If you are hurt, you have health insurance. If you are disabled, you have disability insurance. If you die, you have life insurance. If your car is totaled, you have comprehensive insurance or can afford to replace it with cash. My general recommendation for insurance is to insure only against financial catastrophe, but to insure well against it. UM/UIM policies often have limits of $15,000/$30,000. While it would be unpleasant for me to have to fork out $30K, I can certainly afford to do so. The catastrophe is the $1.5 Million liability or my own disability or a $200,000 injury. Now UM/UIM isn't particularly expensive stuff, so if you will feel better buying it, go right ahead, but be sure to read the fine print so you really understand what you're getting. Also, if you're going to buy it, it makes a lot of sense for a high income professional to buy a benefit much higher than the typical one. As I edited this article, I wasn't even sure if I owned this coverage, so I went and read my policy. I do own it. My limit? $300,000/$500,000, the same as my liability coverage (not including the umbrella.) The cost is about $90 a year for our two tanks. But insurance with low limits isn't insurance at all. If you're going to insure, insure well. I think I'll keep it for now.]
# 5 – Umbrella Insurance
The topic of umbrella insurance has been discussed on White Coat Investor. For a few hundred dollars a year, you get coverage over and above your current liability limits. This extends to both your home and auto insurance. This protects you against the rare, large lawsuit that may come your way. Making it one of the smartest buys in insurance for the high-net-worth individual.
The reason to buy insurance is to protect yourself against the risks you can't handle on your own.These five common insurance gaps can all cause tens to hundreds of thousands of dollars in damage. Fortunately, they're all insurable against.
What do you think? Which of these insurances do you not have? Which ones will you now buy after reading this? Any you will drop? Comment below!