You buy insurance hoping never to need it. But if you ever did have to file a claim, would you really know what your policy covers and, more importantly, what it doesn't?
Have you even looked at your insurance policy in the last year? Have you ever reviewed the policy? If you had a big loss, do you know what you will actually collect?
If you answered no to any of these questions, you could be in for a costly surprise when you need to file an insurance claim. But you're not alone. That's why it is so important to review an insurance policy—especially one you may not have looked at for quite some time—on a periodic basis.
A recent telephone survey of a nationally representative sample of about 1,000 people was conducted for Trusted Choice, a consumer brand of the Independent Insurance Agents & Brokers of America. Respondents answered questions about their personal insurance policies. The results were alarming, indicating a stunning lack of knowledge by consumers of their own insurance coverage.
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To that point:
—Almost 40 percent of respondents weren't confident they have adequate coverage.
—About 40 percent said they don't know what's in their policies.
—Only about 60 percent of those surveyed said they do any research before buying insurance.
So it's no wonder consumers make big mistakes. Let's review some of the more expensive ones to avoid.
About 1 in 7 drivers on the road has no auto insurance. What if one of them hits you? Other than suing, you have to rely on your own uninsured/underinsured motorist coverage, which protects you if the other driver doesn't have adequate insurance.
Not having high enough limits yourself can leave you in real financial distress, especially if you were severely injured. In such a case, your policy will pay, but only up to your limits. Your financial impact could be in the hundreds of thousands of dollars. Think about those medical expenses, lost wages and possible construction costs to make your house wheelchair-accessible.
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Yet the insurance survey also found that only about 25 percent of consumers said they considered policy limits the most important factor when they bought insurance.
By way of comparison, ignoring policy limits when buying insurance is like disregarding location when purchasing real estate. Since inadequate limits don't become an issue until there's a claim, many policyholders are gambling—they just don't know it yet.
Have you placed your home in a trust? Did you forget to tell your insurance agent?
That could result in no coverage and could cost you upward of hundreds of thousands of dollars. That's because your home is no longer insured, since the owner—the trust—is not on the policy.
Sound confusing? Just wait until you have a claim. An insurance policy is a contract based on the information provided on the original application. Making changes to property ownership without advising the insurance company can invalidate the policy because it conflicts with the basis on which the insurer issued coverage.
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Trying to avoid estate taxes by not insuring your valuables and collectibles now can prove costly if you have a loss. They need special coverage, and not insuring them provides no protection.
Some people don't want a "paper trail" on valuable heirlooms because they're afraid that will increase the value of their estate and result in higher taxes.
However, under current estate rules (and taking advantage of the estate tax credit), a married couple can pass up to $10 million to their kids, so there may be no need to hide assets by not listing them on your insurance policy. However, most homeowner policies require a "floater rider" to provide higher limits for specifically mentioned valuables. For example, a $20,000 diamond watch could be excluded or limited to a value of $1,000 or less without that extra coverage.
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Also, if you think you may have an estate-tax problem, consider putting your life insurance in a trust. Most people don't realize that while the beneficiary of a life insurance policy is not subject to income taxes, the value of the proceeds can be included in your estate unless steps are taken to remove it from the estate while you're alive.
One common technique is to set up an Irrevocable Life Insurance Trust. That's where the trust owns the policy and is its beneficiary, and the insurance premiums are "gifted" each year to the trust to pay for the coverage. Trust beneficiaries can be specified, as with a life insurance policy.
But don't wait to establish the trust, as there is a three-year tolling period when life insurance policies are transferred to a trust. A trusted financial advisor can help you.
Lifestyle changes also impact insurance coverage.
Take one of your biggest assets: your home. Is it properly protected? For example, leaving your home unoccupied for an extended period or renting to a tenant can result in a claim being totally denied because these situations can violate the policy's terms.
Unoccupied homes are more likely to incur damage when no one is around to maintain the property (think water pipes freezing in the winter when the heat's turned down). Or the renter—a college student, for example—doesn't take care of the property or represents different moral hazards.
"When you don't know what you don't know, having periodic conversations with your insurance agent or financial advisor should alleviate some … risks."
As the property owner, you can be sued for what goes on there. Also make sure your liability limits are sufficient. Liability coverage in your homeowners policy protects you if you are sued. Check that "defense costs" are included as well.
Many people do not know that some disasters, such as flood, earthquake and sewer backup, are not covered in a standard homeowners policy and usually require separate coverage. Think about the devastation any of those events can cause. Losses of tens of thousands of dollars can occur in just moments.
The additional cost to cover these events is usually very reasonable relative to the possible expense of repairs.
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Most insurance agents will raise these issues, but many homeowners procrastinate and never add the coverage. Many mortgage lenders will require the homeowner to take flood insurance if they live in a flood zone. But once the mortgage is paid off, homeowners often drop the policy.
When you don't know what you don't know, having periodic conversations with your insurance agent or financial advisor should alleviate some of these risks. Make sure your policy reflects your life.
—Steven J. Spiro is a chartered life underwriter, chartered financial consultant and a principal at The Excelsior Group.
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