Look, we all need insurance. None of us want to pay for the privilege, but we all want the benefits.
So how do you buy insurance? With homeowners insurance you buy enough insurance to fully rebuild your home if it was to burn down. You don't want to build 3/4th of your home. You want the whole thing back the way it was, before the fire wiped it out. You might even want to build a little nicer house, too bad the insurance company will not over-insure you. Now determining the value is a bit tricky, but your insurance company will not allow you to insure a $200,000 house for $1,000,000.
Seems simple.
How about your car insurance? If you drive a 2006 Ford F150 Supercab truck and you decide to insure it, you will want a 2006 Ford to replace the one that gets totalled in an accident. Now you may only NEED a Nissan Frontier, heck you may only need a Ford Escort, but you aren't insuring what you need but what is lost.
For the same reason an insurance company will not allow you to over-insure your house, they won't allow you to over-insure your car. If you drive a 2005 Dodge Intrepid, you can't buy insurance so if it gets wrecked you get a Porche.
So this brings us to life insurance. How much life insurance should you buy. I am here to tell you right now people a lot smarter than me (insurance actuaries) have determined how much you can buy. These really smart people won't let their insurance company sell you anymore than you are worth. For people under age 40, it is pretty common to be able to buy 20 times your annual income but no more.
Think about. If you earn $50,000 a year and you wish to replace the $50,000 with insurance proceeds, assuming you can earn 5% on your money you need a bucket with $1,000,000 in it. $1,000,000 kicking off 5% a year equals $50,000. $50,000 times 20 is $1,000,000.
Now if you search the internet you are going to find hundreds of different formulas, estimates, and equations on the 'right amount' of insurance. Forget it.
You will find two schools of thought generally. One says you need to buy 5 to 10 times your income in life insurance. Quite a spread don't you think? If you make $50,000 a year you they say should buy between $250,000 and $500,000 worth of insurance. What a joke? What amount should you buy? Neither is enough to keep your family living the same lifestyle they were before your death.
The other school of thought is called the needs analysis. Total up your family's needs and their is the amount of insurance. If you search ten needs analysis websites, you will probably find 10 different needs analysis formulas. Which one is right? The other problem is that your needs change constantly. Do you really want to recalculate your needs annually?
Life insurance isn't rocket science. You don't need scientific equations to calculate an amount of insurance. Buy as much as you can so you are sure your family will will be taken care of. So they will remember you with love for the foresight and for the protection you gave them rather than with contempt for putting them out on the street.
I recommend buying life insurance in the amount to fully replace your income in case you become another cardiac arrest statistic. You buy life insurance because you want a shed in the backyard that will be full of all the food clothing, and shelter your family will ever need. You can also see the registrar of the university showing you the tuition of his college.
Friday, February 16, 2007
Friday, February 9, 2007
The pitfalls of bad home insurance!
Let's face it. Not all insurance is created equally. There is good insurance and there is bad insurance. Some times you don't find out the difference until it comes time to collect.
Heed my warning: You Must Make Sure You Have Replacement Cost On Your Homeowners Insurance For Your Personal Property.
Look, insurance for property can be summed in one of two statements.
ACV: Actual cash value - This insurance is bad insurance. It would pay you the diminished value of your stuff if something happens to it. As an example: your 32 inch television you bought 4 years ago for $500.00 is now worth about $100.00 This insurance would pay you only $100.00.
Replacement cost - This is good insurance. When you buy a 32 inch television you want to be able to replace it with a 32 inch television. This insurance will pay the replacement cost so you can buy a similar television to the one that you lost.
Always buy replacement cost on your contents.
Heed my warning: You Must Make Sure You Have Replacement Cost On Your Homeowners Insurance For Your Personal Property.
Look, insurance for property can be summed in one of two statements.
ACV: Actual cash value - This insurance is bad insurance. It would pay you the diminished value of your stuff if something happens to it. As an example: your 32 inch television you bought 4 years ago for $500.00 is now worth about $100.00 This insurance would pay you only $100.00.
Replacement cost - This is good insurance. When you buy a 32 inch television you want to be able to replace it with a 32 inch television. This insurance will pay the replacement cost so you can buy a similar television to the one that you lost.
Always buy replacement cost on your contents.
Wednesday, February 7, 2007
Will You Be Able To Rebuild Your Home After a Fire????
Construction Costs
I am amazed to say that it seems like every year now construction costs are going up and rather quickly. I am certainly no construction expert but sources seem to indicate a continual increase with no relief in site.
We use software in our business to help determine a replacement cost for a piece of property like a home. This software calculates the price it would cost to rebuild a home starting from scratch. I know most people are quite surprised when we tell them the rebuilding price. I've seen some people's homes under insured by more than $60,000 and that's on a home with a replacement cost of less than $250,000. How happy would you be if your home burned down and the insurance company only paid to rebuild 2/3rds of it?
I guess I'm recommending you either get a contractor to give you an estimate on rebuilding your home or you ask your agent to calculate a new replacement cost estimate. While it is ultimately up to you to determine how much to insure your house for, an agent should be able to provide you with some assistance with the figure.
I know we all want to pay as little as possible for insurance, but you want your insurance to actually reimburse you for your loss. Make sure you insure your home properly.
I am amazed to say that it seems like every year now construction costs are going up and rather quickly. I am certainly no construction expert but sources seem to indicate a continual increase with no relief in site.
We use software in our business to help determine a replacement cost for a piece of property like a home. This software calculates the price it would cost to rebuild a home starting from scratch. I know most people are quite surprised when we tell them the rebuilding price. I've seen some people's homes under insured by more than $60,000 and that's on a home with a replacement cost of less than $250,000. How happy would you be if your home burned down and the insurance company only paid to rebuild 2/3rds of it?
I guess I'm recommending you either get a contractor to give you an estimate on rebuilding your home or you ask your agent to calculate a new replacement cost estimate. While it is ultimately up to you to determine how much to insure your house for, an agent should be able to provide you with some assistance with the figure.
I know we all want to pay as little as possible for insurance, but you want your insurance to actually reimburse you for your loss. Make sure you insure your home properly.
Friday, February 2, 2007
How to protect yourself from the damages of a HUGE lawsuit
I've been thinking a little bit more about liability limits.
It seems to me, many types of insurance are easy to shop for. When you buy life insurance there is only so much life insurance a life insurance company will sell you. Generally before age 40 or so, you can buy 20 times your annual income and no more. Life insurance actuaries have discovered that if you are allowed to buy more than that you truly may be worth more dead than alive. (Some companies, due to low interest rates have bumped that to 25 or 30 times your income for now.)
If you want to buy disability income insurance you can generally buy up 60% to 70% or your pretax income in benefits.
If you buy fire insurance on your house, the company will only sell you enough insurance to rebuild your house. They won't sell you enough insurance to build a house with 4 more bedrooms and 2 more bathrooms than your current home. Some of us might be tempted to burn down our home so we could build a much nicer home.
Those are called objective risks. When I can't work because I've got cancer, I know how much income I'm missing out on. If my boat sinks to the bottom of Flathead Lake, I know how much a new boat will cost.
Subjective Risk....explained
The subjective risks of liability opens a Pandora's Box of issues. If I'm at fault in a car accident, I really have no idea how much I'll be liable for until after the matter works its way through the court system. Now if I have good insurance hopefully the company can settle long before I have to go to trial. But that doesn't always happen. Sometimes the insurance company will insist we go to trial. And in some cases, for people that don't buy enough insurance, the insurance company writes the injured party a check for the liability limit on your policy and tells you you are on your own to defend yourself the rest of the way.
Imagine a car accident in which 'John Doe' is at fault. John Doe wanted to drive legally so he bought the state minimum limits of car insurance, in Montana that is $25,000 per person for bodily injury, $50,000 per accident for bodily injury. Now if John is in a serious accident chances are the insurance company is going to try to get the injured party to settle for $25,000. If the insurance company can't, then insurance company is going to write a check for $25,000 to the injured party and then be done with the issue.
One of the nice features of a car insurance policy is that the insurance company will provide you with a civil defense. And they will continue to provide you with that defense until your liability limits have been exhausted. A bonus feature is that the defense usually (all of the companies of which I write private passenger car with for sure) is outside the limit of liability on the policy. So you may have $100,000 per person limit on your policy and in fact the insurance company may pay out the $100,000 to an injured person plus they may provide you with a defense that was in addition to that limit. So they may provide you with $130,000 worth of money when all is said and done.
Now our friend John has seemingly been fiscally responsible and saved himself a little bit of money on insurance premiums by buying the minimum liability limits. But when the time comes for him to actually use the insurance he finds out just how irresponsible he has been. Once the insurance company settles with the railroad engineer (who won't be working for at least a year and has huge medical bills, physical therapy bills, and pain and suffering) for $25,000 our friend John now must compensate the engineer out of his own pocket for the remainder of the bills. John will probably have to sell his home and car. John will have to cash in his savings. He will probably have to sell his toys, like a boat or motorcycle. And at some point a judge just may insist some of John's wages be garnished to help the Engineer with his bills.
Seems like an unlikely scenario. Does it happen? You bet it does.
I'm not a fan of insurance premiums. I'd rather not pay them just like you probably don't want to pay them. But I certainly want the benefits of a good policy and unfortunately that costs money.
I don't really know how much is enough and I really don't have a good answer on how to help you determine how much is enough. My suggestion is buy as much liability insurance as your car insurance company will sell you on your car insurance policy. Many people should consider adding a personal umbrella liability insurance policy. With this you can add $1,000,000 ore more dollars of insurance.
It seems to me, many types of insurance are easy to shop for. When you buy life insurance there is only so much life insurance a life insurance company will sell you. Generally before age 40 or so, you can buy 20 times your annual income and no more. Life insurance actuaries have discovered that if you are allowed to buy more than that you truly may be worth more dead than alive. (Some companies, due to low interest rates have bumped that to 25 or 30 times your income for now.)
If you want to buy disability income insurance you can generally buy up 60% to 70% or your pretax income in benefits.
If you buy fire insurance on your house, the company will only sell you enough insurance to rebuild your house. They won't sell you enough insurance to build a house with 4 more bedrooms and 2 more bathrooms than your current home. Some of us might be tempted to burn down our home so we could build a much nicer home.
Those are called objective risks. When I can't work because I've got cancer, I know how much income I'm missing out on. If my boat sinks to the bottom of Flathead Lake, I know how much a new boat will cost.
Subjective Risk....explained
The subjective risks of liability opens a Pandora's Box of issues. If I'm at fault in a car accident, I really have no idea how much I'll be liable for until after the matter works its way through the court system. Now if I have good insurance hopefully the company can settle long before I have to go to trial. But that doesn't always happen. Sometimes the insurance company will insist we go to trial. And in some cases, for people that don't buy enough insurance, the insurance company writes the injured party a check for the liability limit on your policy and tells you you are on your own to defend yourself the rest of the way.
Imagine a car accident in which 'John Doe' is at fault. John Doe wanted to drive legally so he bought the state minimum limits of car insurance, in Montana that is $25,000 per person for bodily injury, $50,000 per accident for bodily injury. Now if John is in a serious accident chances are the insurance company is going to try to get the injured party to settle for $25,000. If the insurance company can't, then insurance company is going to write a check for $25,000 to the injured party and then be done with the issue.
One of the nice features of a car insurance policy is that the insurance company will provide you with a civil defense. And they will continue to provide you with that defense until your liability limits have been exhausted. A bonus feature is that the defense usually (all of the companies of which I write private passenger car with for sure) is outside the limit of liability on the policy. So you may have $100,000 per person limit on your policy and in fact the insurance company may pay out the $100,000 to an injured person plus they may provide you with a defense that was in addition to that limit. So they may provide you with $130,000 worth of money when all is said and done.
Now our friend John has seemingly been fiscally responsible and saved himself a little bit of money on insurance premiums by buying the minimum liability limits. But when the time comes for him to actually use the insurance he finds out just how irresponsible he has been. Once the insurance company settles with the railroad engineer (who won't be working for at least a year and has huge medical bills, physical therapy bills, and pain and suffering) for $25,000 our friend John now must compensate the engineer out of his own pocket for the remainder of the bills. John will probably have to sell his home and car. John will have to cash in his savings. He will probably have to sell his toys, like a boat or motorcycle. And at some point a judge just may insist some of John's wages be garnished to help the Engineer with his bills.
Seems like an unlikely scenario. Does it happen? You bet it does.
I'm not a fan of insurance premiums. I'd rather not pay them just like you probably don't want to pay them. But I certainly want the benefits of a good policy and unfortunately that costs money.
I don't really know how much is enough and I really don't have a good answer on how to help you determine how much is enough. My suggestion is buy as much liability insurance as your car insurance company will sell you on your car insurance policy. Many people should consider adding a personal umbrella liability insurance policy. With this you can add $1,000,000 ore more dollars of insurance.
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