Plenty of Americans have homeowners insurance, and most have auto coverage. Yet many people hardly give their policies a second thought until the need arises. This can lead to misunderstandings about what’s covered, what premiums are based on and so forth. Here are some areas of confusion:
• Most homeowners insurance policies cover natural disasters, right?
It depends. Standard coverage does include wind damage, including that from hurricanes and tornadoes, said the Insurance Information Institute. However, they don’t typically cover flooding, including water damage from a hurricane, so read your policy carefully to learn its limits. Standard policies cover fires, including wildfires, as well as hail and lightning strikes, but typically not earthquakes. Beyond the actual dwelling, homeowners policies also usually cover detached structures such as a garage or gazebo.
• Only the wealthy need umbrella policies.
Since upscale individuals have more assets to lose, umbrella coverage makes sense for them. But it also could be smart for less-affluent individuals, such as young adults with low current assets and modest incomes but higher future earnings. “It’s not just about what you’re worth,” said Jim Fiske, a senior VP at Chubb. “It’s about what you could owe.”
Umbrella policies provide additional liability protection beyond the monetary limits on your standard auto or homeowner coverage. This can be helpful if you cause a major accident and are subject to a large legal judgment. Your regular auto coverage might pay up to $250,000 to people injured in a crash you caused, but if damages exceed that, umbrella coverage would kick in.
Besides, these policies are reasonably inexpensive. Coverage starts at $150 to $300 for the first $1 million and often declines for additional million-dollar increments. Fiske, who spoke recently to members of the National Association of Personal Financial Advisors, suggested that everyone in the audience should carry $5 million in coverage.
• The color of your car helps determine the premium you pay.
False. However, the type of vehicle does. The Insurance Information Institute lists a vehicle’s make, model, engine size, age and current value among the factors that help determine premiums. Other factors include a vehicle’s cost to repair and likelihood of theft and, obviously, a motorist’s age and driving record.
Small cars aren’t necessarily the cheapest to insure, even though they tend to cost less. Premiums can be just as high or higher due to the possibility for worse injuries. Still, 40% of respondents in a survey by insure.com assumed premiums were lowest on small vehicles.
• Insurers don’t examine credit records to assess applicants.
That’s generally false. “Credit scoring is highly predictive of future loss activity,” said Fiske. “It’s actuarially sound and part of practically every insurance company’s methodology.”
The idea behind using credit scores to assess the risks posed by individuals reflects their responsibility, or lack thereof, in managing financial affairs. An insurer might deny coverage to applicants with low credit scores, but it also could reward others with reduced premiums.
Not all insurance companies evaluate credit the same. Some use proprietary models, and many look to cover certain types of drivers or homeowners. “Some may target only those with the best scores, with no recent accidents or traffic violations, while others may seek out people with a less-than-perfect record,” said the Insurance Information Institute.
Credit scoring isn’t allowed for all policies in all states, including California.
• You should insure your home based on its market value.
This is another common misconception that 52% of respondents in the insure.com survey believed. But market value doesn’t equal replacement cost or the cost to rebuild, which can be substantially higher. The value of furnishings and other personal belongings also should be considered when determining coverage amounts.
Roughly two in three U.S. homes are underinsured by 25% or more, said Fiske, citing a study by Marshall & Swift/Boeckh. Some homeowners haven’t updated their coverage to reflect remodeling or other improvements. Others don’t recognize how high construction costs can be. Yet “many insurers leave it up to individuals to determine the amount of coverage,” Fiske said.
• Self-driving autos will lead to lower auto-insurance premiums.
It might happen. Self-driving vehicles have proved highly reliable, especially when compared against human motorists who text, tailgate and speed.
However, real-world insurance-loss results aren’t in yet, so the question is still up in the air. “Even if (driver-less cars) were introduced tomorrow, it will take 20-plus years” to have actuarially sound information, Fiske said.
Source: USA Today