The Basics of Insurance

October 18, 2020

In financial planning, we spend a lot of time thinking about, talking about and working toward long-term goals that are integral to attaining the life you want to live.  An important aspect that sometimes gets ignored is protecting your assets and all that you’ve worked for from unexpected events.  That’s where insurance comes in.  Life insurance is a big part of that, but we’ll save that for another day.  Today, we are going to cover auto, home and umbrella policies. 

In the state of Indiana, as in most states, automobile insurance is required.  Basic coverage includes liability, medical payments and uninsured/underinsured motorist.  Liability protects you against claims of property damage or bodily injury to a third party that you caused accidentally while driving your car.  This coverage applies if you are considered to be responsible for the accident that caused the property damage or bodily injury.  Medical payments, as the name implies, will pay the medical bills of the occupants of your car.  This pays regardless of who caused the accident.  Uninsured pays for property damage and bodily injury if you happen to be in an accident caused by an uninsured motorist.  This coverage usually applies in cases of hit and run as well.  Underinsured covers you when the other driver is at fault, but doesn’t have enough coverage for your injuries.

If you want to protect your own vehicle in cases where you are at fault, you can carry collision and comprehensive coverage.  Collision pays for damage caused by accidental impact with another car or object.  Comprehensive pays for damage to your car that is not caused by a collision such as glass damage, falling objects, fire, theft, windstorm, hail, water and vandalism.  Other optional coverages include towing, roadside assistance and rental reimbursement.

Homeowners insurance is similar to automobile insurance in that it will protect you from damage to your home and as well as protecting you from liability.  Dwelling coverage protects your actual home.  Other structures coverage protects building that are not part of the actual house like a detached garage, gazebo or shed.  Personal property coverage will help to replace things like clothing, furniture and appliances that are damaged.  Loss of use coverage pays for housing and other expenses if you have a major loss.  This coverage may also pay for meals and laundry while your home is being repaired or replaced.  The personal liability portion of your homeowners insurance provides coverage for bodily injury or property damage for which you are legally responsible like if a guest falls on your steps or your son throws a ball through the neighbor’s window.  The policy will define which perils are covered and usually includes things like fire, lightning, windstorm, hail, explosion, vehicle, riot or civil uprising, smoke theft and vandalism.  Some policies will also cover falling objects, the weight of ice and snow, freezing of plumbing and accidental plumbing discharge.  Homeowners policies generally do not cover floods.  Flood insurance is a separate coverage that you may want to explore.  Other perils that are often not covered are earthquakes, mudslides, war or intentional loss.

Both auto and home usually have a deductible, which is the amount that you have to pay before the insurance company starts to pay.  A higher deductible will generally result in lower premiums, but will also mean more out of pocket expense if you do have a covered loss.

In addition to auto and home insurance, you may wish to add an umbrella policy.  Umbrella policies are “extra” insurance in addition to your other policies.  For example, say you caused an auto accident and the injured party sued you and won a $4 million judgement.  If you auto policy had a limit of $300,000, you would be responsible for the other $3.7 million dollars.  An umbrella policy would cover the amount above the auto policy’s limit.  You would lose your assets if you didn’t have insurance to cover that.  Umbrella policies are not just for the rich and they usually fairly inexpensive.

The purpose of insurance is to protect against financial loss.  It won’t prevent a car wreck or a house fire, but it can help limit the financial damage of that unexpected event.  It should be considered in your financial plan.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Alderfer Bergen & Co. and LPL Financial do not provide the insurance services discussed.  Please consult your insurance agent regarding your specific situation. 

Securities and financial planning offered through LPL Financial, a registered investment advisor.  Member FINRA/SIPC.