Eve Pentecost: Keep trouble off your mind with adequate insurance
Mar 05, 2010 | 9750 views |  0 comments | 46 46 recommendations | email to a friend | print
The popular commercial of the dog that almost worries himself to death over protecting a bone, his most prized possession, rings close to home for a lot of us. “Worry just will not seem to leave my mind alone,” are the words of Ray LaMontagne’s song “Trouble.” One small way to alleviate some of life’s daily worries is to regularly evaluate your risks to ensure you are protecting your assets.

Let’s examine a few coverage and cost issues.

When it comes to homeowner’s insurance, occasionally review whether you have adequate home replacement cost coverage on your house and its contents. Replacement cost is simply the cost of rebuilding the structure with materials of like kind and quality at the current price. Actual cash value on the other hand means “replacement cost, less depreciation.” Go to several agents to see what you would get for maximum replacement cost coverage. You need coverage that at a minimum is 80 percent of the building’s replacement cost. The far better scenario would be to purchase 100 percent replacement cost coverage. If you buy coverage for only 80 percent of the replacement cost of the building, any losses would be paid without a deduction for depreciation. In the event of a total loss you would be under-insured by 20 percent.

Also, don’t think that the amount of homeowners insurance should pertain to the loan value or market value. A lender usually requires insurance equal to its interest in your home, reinforcing the mistaken notion that market value somehow coincides with insurable value. That is not necessarily true. Market value relates to the supply and demand for real estate and includes the value of the land on which the house sits, but land value is not part of the insurable amount.

Another important consideration is an umbrella liability policy. Suppose your dear friend is at your home and falls on the slippery sidewalk, rupturing a disc in his back and breaking his neck. Your good friend wouldn’t sue you, would he? Your friend goes to the hospital and is promptly asked how the accident occurred. The friend’s medical insurance then refuses to pay because now they want to pass the blame on to your insurer. The friend is now no longer able to work until all of his medical problems are resolved and he owes half a million in medical bills. Will he file medical bankruptcy? No, he will ultimately have to come after you and your insurance. If you don’t have adequate liability protection, then he may need your assets. The long story short is that you need an umbrella policy.

To qualify for an umbrella liability policy you must first have underlying liability insurance. For instance, an insurer could require you have $300,000 of liability protection through your homeowner’s policy. The umbrella policy is then written as excess coverage.
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