Year-end Planning

Have you checked your insurance coverage lately?

Tax deductions and investment returns may take center stage, but don't forget to include insurance coverage on your financial planning checklist.

All too often, the safety net that protects your assets in the event of injury, illness, damage or death gets short shrift.

That can be costly, said Loretta Worters, spokesperson for the Insurance Information Institute, noting that coverage needs to change with every life event.

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Absent an annual review, it's tough to determine whether you're paying too much, paying for coverage you no longer need or are underinsured—which exposes your family to risk.

"Anything that happens in your life can affect you from a financial and insurance perspective," Worters said. "Make it a New Year's resolution to avoid costly insurance mistakes and save money on your coverage."

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If you've tied the knot, purchased a home or have a teenager at home who's ready to drive, it's important to assess your coverage needs anew. Life insurance may be relevant if you've started a family, or it may be time to eliminate that expense if you're ready to retire.

The newly divorced should be particularly cautious where insurance coverage is concerned, Worters explained.

Stay secure after the split

The costs associated with starting over, including legal and living expenses, often result in higher debt and lower credit ratings, which insurance companies factor into their premiums. But dividing assets can increase risk exposure as well.

"You should remove your former spouse from your policy as soon as possible in case they get sued or into an accident, so you won't be held liable," Worters said.

Make sure, too, that you stay current with insurance bills before the divorce is final.

"If your former spouse is in arrears and the policy gets canceled, you could end up with no insurance when you need it," she said.

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It's also prudent to shop for lower rates, said certified financial planner Tom Fisher, founder and principal of Fisher Financial Strategies.

Start by asking your current providers what discounts exist.

Many reward for good credit, loyalty, paying your annual premium as a lump sum (rather than in monthly installments) and for bundling coverage, Fisher said.

"You might get a break on premiums if you purchase home and auto together through the same company," he said.

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Auto insurers may also reduce premiums for teen drivers with GPAs of 3.0 or better. And many employers offer discounted group pricing, Fisher said, especially on life insurance.

While every case is unique, families with young children should generally have life insurance coverage for up to six times their annual salary, Fisher explained.

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Once you secure the lowest rate for your existing providers, shop the competition either online or through a broker. Just be sure to provide the same information for each to ensure you're comparing apples to apples.

Price alone should not dictate your decision, said Worters at the Insurance Information Institute. She noted that quality and financial strength—an important indicator of the company's ability to pay future claims—are even more important.

Ask for recommendations from friends and family who have dealt with claims before, and determine the financial health of any insurer you're considering by checking its rating on Standard & Poor's, Moody's and AM Best.

Anything with an A rating or better is ideal.

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The best way to lower your insurance premiums regardless of coverage type or provider, however, is to raise your out-of-pocket deductible.

By raising your homeowner's deductible from $500 to $1,000, for example, the Insurance Information Institute estimates you can save an average of 25 percent on your annual premium.

Don't cut corners

"Call your insurance company and ask how much it will lower your premiums by raising your deductible, and then determine whether you want to assume that much financial risk," Fisher said.

Whatever you do, don't cut corners on coverage.

When property values plunged during the 2008 housing crisis, many homeowners made the dangerous decision to lower their homeowner's coverage to reflect current market values, Worters said.

Homeowner's insurance should instead cover actual replacement cost, according to the Insurance Information Institute, including the structure of your home, your personal possessions, the cost of temporary housing if you're forced to live elsewhere during repairs and your liability to others.

"Many homes are still underinsured," said Worters, noting that construction costs continued to rise even as market values fell. "That can be a huge problem, because if you have a fire in your house, you're now going to have to pay the difference between what your home is insured for and the cost of construction."

Similarly, if you're looking to save on your auto insurance, think twice about reducing your liability, which pays for damages to another person if you cause an accident.

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Instead, lower your collision and comprehensive coverage, especially if you have a car that's older. The Insurance Information Institute recommends consumers have $100,000 of bodily injury protection per person and $300,000 per accident.

Lastly, those with significant assets or greater exposure to risk (e.g., a pool in your yard or an all-terrain vehicle) may wish to consider a liability umbrella policy, which is designed to pick up where auto liability and homeowner's liability leave off, said Brett Woodward senior vice president of NFP P&C Private Client Group, a property and casualty insurance brokerage.

Insurance is one of those things you buy but hope you never need. But we all need to have it.
Tom Fisher
founder and principal of Fisher Financial Strategies

"Say you have $250,000 coverage on your auto policy, you injure someone, and your legal liability is $500,000," he said. "The $250,000 is paid by auto, and the rest is provided by your umbrella policy."

Reviewing your insurance coverage is not exactly a picnic, but it is a key component to protecting your assets.

With your finances top of mind and your assets on the table, there's no time like the present to get it done.

"Insurance is one of those things you buy but hope you never need," Fisher said. "But we all need to have it."