Making Cents: How Much Insurance Is Enough?
By: John P. Napolitano, CFP®, CPA, PFS, MST
When it comes to insurance, not many people are happy when writing the check for the premium. But if you’ve ever had a claim that wasn’t insured or denied by an insurer, you’ve asked yourself what was so objectionable about that premium.
Risk is ever present in all of our daily lives. These risks come from driving, owning a home or two, a toy or two (AKA Boat, Motorcycle, Jet Ski,) and top it off with some business property- and you are one walking risk. In general, life goes along pretty good for most with only small amounts of the population ever experiencing a catastrophic loss. As a result, the risk discussion isn’t one that occupies daily chatter when you can talk about sports or the weather, but the dialog should be more than how to save money on premiums. Ask how we can be sure that we have evaluated all of the risks in our lives and made conscious decisions regarding whether to insure, ignore or avoid the risk.
Starting with insurance, many have been trained to seek the lowest price. Low cost is good provided the underlying coverage adequately covers your risks. For example, most states (although not all!) require some bare minimum amount of auto insurance to register a car. These underlying limits are quite low, and may not sufficiently cover you in the event of a loss involving injuries, many people or vehicles. It may feel good when you get the quote, but it may feel awful if your number comes up in a bad situation.
People with assets or income to protect may also consider catastrophic coverage in the form of umbrella liability coverage. There’s no set amount that is appropriate, but I often advise clients to obtain enough to cover their liquid net worth. Ascertain that all of your other policies such as homeowners and autos have their underlying limits maximized or you will personally be liable for the maximum amount of underlying limit that you could have bought before the catastrophic coverage kicks in.
If you think this is getting complicated, add a partner or two to the mix. Whether you own an operating business or rental property with others, you’ve now multiplied the possibility of a liability by just having partners. It’s imperative that your partners also have an in-depth risk plan. If they have a house of cards, and haven’t properly secured risks, you may face the brunt of your partners risk contagion.
Ignoring risks are an option. Quantify the risk and assess your ability to withstand it. For example, due to the high cost of long term care insurance, more people than ever elect to ignore this risk.
Risk avoidance is easier said than done, especially if you have lifestyle risks that concern insurers. Snow mobiles, boating or other high speed recreational activities are great examples. Limiting your ownership of high risk toys is an example of risk avoidance.
John P. Napolitano CFP®, CPA is CEO of US Wealth Management in Braintree, MA. Visit JohnPNapolitano on LinkedIn or uswealthnapolitano.com. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through US Financial Advisors, a Registered Investment Advisor. US Financial Advisors and US Wealth Management are separate entities from LPL Financial. He can be reached at 781-849-9200.