Examine and Improve Your Asset Protection
Let’s review your Auto, Home, and Liability insurance
Asset Protection 101: Auto, Home, and Liability Insurance
An asset is defined as property owned by an individual that has economic value. However, assets must have a certain degree of value, whether real or perceived, in order to be considered worthy of protection. This is why we purchase insurance protection for our home and not for a pair of sneakers. Further, your decision to protect a specific asset hinges upon your ability to replace the item. If the asset, in this case, a pair of sneakers, can be easily replaced, protection makes no economic sense. Nevertheless, this concept of replacement value is what should be at the forefront of your mind when making an insurance purchase.
Think about it this way:
- If your car were to be stolen, would you want a check for just the amount that you need to get by, or a check for the full replacement value of the car?
- If your home were to suddenly burn to the ground, would you want the insurance company to send you a check to rebuild half of your old house? Or would you want a check for the full replacement cost of the house?
- If you were to become permanently disabled, would you want your income to be drastically reduced every month to a level that would give you just enough money to “get by?” Or would you rather continue to receive a monthly check that reflected your full income before the disability?
- What if you were to unexpectedly die? Would you want your spouse and children to receive a check to just cover their needs, and not a penny more? Or would you want them to receive a check for 100% of your human economic life value?
It is obvious that most of us would prefer to receive full replacement value on our assets, income, and lives, if disaster were to suddenly strike. Yet, this is where most people get it wrong today on insurance. Instead of buying the kind of insurance coverage that they would really and truly want, they focus solely on “premium costs” and not “replacement value.” Why? Because most people fear being over-insured and paying too much for something they may never use than they do in being underinsured and at risk.
The truth is that most people are woefully underinsured or improperly insured today.
Property and Casualty Insurance
For the average American family, basic asset protection simply refers to buying insurance coverage on their vehicles (cars, trucks, RV, boats, motorcycles, etc.) and their real estate holdings (primary residence, second home, rental properties, etc.)
Let’s discuss both of these.
As you are reading this article, I urge you to take out your auto insurance policy and compare what I am about to say to what you currently have to make sure that you are adequately protecting yourself and your loved ones.
On your auto insurance declaration page, you will see a few numbers. The first set of numbers that I want you to notice is your limits of liability.
These numbers will look something like this: $25,000/$50,000/$25,000 or 50/100/50.
Let’s break down what these three numbers mean using our example of $25,000/$50,000/$25,000.
The first two numbers, in this case $25,000 and $50,000, are referring to bodily injury liability limits.
Assuming this level of coverage, if you were to get into a major auto accident in which people were injured, each injured party would receive a maximum payout of the first number, or $25,000. The second number represents the total amount that the insurance company will pay out for injuries, per accident. In this case, $50,000 is the absolute maximum to be paid in hospital fees and any other injury-related costs, per accident. If several people are injured in an accident, and you are at fault, you will more than likely be sued for any injury-related damages in excess of $25,000 per person with a $50,000 cap. While this may sound like a lot of money, you would be surprised how fast you can go through $50,000 in a hospital stay.
The last number, in this case $25,000, refers to the total amount that your insurance will pay out for property damage, per accident. Property damage refers to any other vehicles, buildings, etc. that were damaged in the collision. This means that if your car totals another automobile worth $50,000 in an accident, and you were at fault, you will be on the hook for the remaining $25,000 that the insurance company does not pay out.
You should know that each state sets its own minimums of what limits of liability each licensed driver must carry at all times. These numbers can be found on each state’s insurance commission website.
The Five Lowest State Minimum Requirements
Pennsylvania – 15/30/5
California – 15/30/5
Oklahoma – 10/20/10
Florida – 10/20/10
Louisiana – 10/20/10
Mississippi – 10/20/5
You know those cute car insurance commercials on television telling you to switch coverage to save money? They are often able to reduce your rates by lowering your limits of liability.
The next number to pay attention to on your declaration page is your deductible. This is the amount that you will have to pay out-of-pocket in the event you have to file a claim with your insurance company. You can decrease your overall insurance costs simply by raising your deductible. While this would not be advised for someone who has no liquid savings, for those who make it through Level Three and build their DSL (Diversified Six-Month Liquid) Savings reserve, this would be a good idea. What is the point of having a cushion of cash in the bank set aside for emergencies and at the same time having a $250 deductible on your auto insurance?
The final number that I want you to notice on your declaration page is the amount that you are paying for uninsured motorists coverage. If you do not currently have uninsured motorists coverage, I would urge you to run, not walk, to get this in place immediately. This is a very powerful addition to your auto coverage that, in effect, allows you to hold your own insurance company liable in the event that someone without insurance coverage causes damages to you, or your automobile. If you do not currently have this type of coverage, an accident with an uninsured driver, which is not your fault, could become a nightmare scenario. Obviously, insurance companies are not eager to promote this coverage as it gives you, the insured, the power to “sue” the insurer if necessary.
When it comes to auto insurance, many Americans are underinsured, or simply uninsured. The biggest road hazard you may face is an uninsured driver. A few years ago the California Department of Insurance reported that as many as 28 percent of Californian drivers didn’t have any car insurance. Similar numbers have been found in other states as well, making uninsured motorists coverage a very wise option. And these numbers were compiled before the 2008 financial crisis which has led to rampant U.S. unemployment. Studies have shown that the number of uninsured drivers rises in almost direct proportion to the number of unemployed individuals in the nation. The Insurance Research Council has found that nearly one out of every six drivers is uninsured.
The Five States with the Most Uninsured Drivers
If you live in one these states, beware.
New Mexico (29%)
(Source: Insurance Research Council)
The Five States with the Least Uninsured Drivers
In these states, your chances of avoiding an uninsured driver at the highest.
North Dakota (5%)
New York (5%)
Vermont (6 %)
(Source: Insurance Research Council)
The bottom line: Over the years, I have heard a number of heart-breaking stories from those who have not added uninsured motorist coverage to their policy and have lived to regret it. In my estimation, the benefits and peace of mind provided by this additional coverage far outweigh the price.
In my opinion, you want the most comprehensive coverage that you can afford when it comes to auto insurance. Raise your deductible as high as you can comfortably afford. Then, use the savings to raise your limits of liability as high as you can. Finish by adding uninsured motorist coverage to your policy.
What is the point of building up a large amount of assets and income streams in Level Four and Level Five, only to lose them through a cheap and improperly structured auto insurance policy in Level Two, which left you and your assets personally exposed?
Don’t make the mistake of thinking that your auto insurance only covers your vehicle. It can cover you and the assets that you will spend your entire lifetime building.
For most people, the single largest investment they will ever make is into their primary residence. Obviously, the replacement factor is what makes property insurance so vital.
Proper home insurance protects you and your home from loss or damage caused by theft, wicked weather, fire, and other natural disasters.
If your home were to burn down tomorrow, would you want it built back to 70% of its current size? Would you want a check for 70% of its value? If not, then why would you entertain the idea for a minute of having an insurance policy with anything less than full replacement benefits. When you think about insurance, do not focus exclusively on cost, but instead on replacement.
When it comes to property insurance, I believe the best strategy is to purchase full replacement value. You can keep your costs down by raising your deductible as high as you comfortably can afford. Again, with a cushion of liquid savings, a high deductible should not be a problem.
Finally, while your home insurance policy will protect against damage and loss, it may not protect as much as you think. Some policies do not automatically cover your home’s contents, such as your jewelry, from theft. In order for the contents of your home to be properly covered, you may need to purchase a rider policy on your homeowner’s policy. These riders, also known as endorsements, provide you with extra coverage for your valuables, such as your jewelry, fine art, antiques, business equipment, etc. Riders are inexpensive to add to your policy, but must usually be requested.
Also, I highly recommend that you take a video of the contents of your home, especially those items that are particularly valuable. In the event of loss, this recorded video will help you establish what contents need to be replaced when working with the insurance company.
One of the most important types of insurance that you can carry is a personal liability policy. This type of insurance coverage is also known as an umbrella policy because it acts as an umbrella that begins paying out once your home or auto insurance limits of liability have been exceeded. Typically, you can purchase a $1,000,000 umbrella policy for less than $300 per year. While a $1 million liability policy is usually enough for most people, those with more sizeable assets may want to apply for more coverage. These types of policies can be purchased up to $10 million or more.
There are no hard and fast rules regarding the amount of liability insurance that one should have as everyone’s situation is different.
Let me give you a few situations in which an umbrella policy would come in handy.
- Someone slips on your slippery sidewalk while on your property and decides to sue you.
- While entertaining guests at your home, someone drowns in your swimming pool.
- You are at fault in a car accident that permanently disables, or kills, someone.
- You are sued for slander or libel
Imagine working, saving, investing, or building a business for your entire life just to have everything stripped away due to a lawsuit. It happens every single day right here in America.
A good attorney friend of mine once told me: “Jerry, waving a good umbrella policy in front of a lawyer is like waving a juicy steak in front of a hungry dog. When you maintain an umbrella policy, you stave off the lawyers from your personal assets.” In other words, a good umbrella policy not only protects you from liability, simply having it can give you more leverage in a lawsuit.
With lawsuits on the rise, an umbrella policy is an important part of any financial game plan. However, in today’s increasingly litigious society, homeowners are particularly susceptible, and so they should especially consider owning one of these policies immediately.
And while umbrella policies are excellent tools, you should know that they do not cover intentional damage caused by you or your family to any of your assets. Additionally, an umbrella policy will not cover damages relating to your business, or your professional life. For specific business protection, you can purchase something known as a professional liability policy.
In the end, the most important lesson to remember about Level Two is that there are no “do-overs.” Take your time in Level Two. Make sure every piece of protection that you would want in place, is in effect. Make sure your auto and home insurance is properly structured. Raise your deductibles and use the savings to increase your coverage.
Before proceeding, be sure that you:
|– Examine your auto, home, and liability insurance (if you have them).||– Review your premiums and deductibles and make sure you are getting the best deal.||– Make sure each of these areas in your plan looks the way you want.|
When you completed this step, you are now ready to proceed to step two, which is to examine your Income Protection!