Insurance. It’s one of those things we all hate to pay for-until we need it. Only then are we extremely grateful that we have it in place.
The same is actually true of all aspects of this tier – insurance, investing and financial planning, identity theft, and disability or death. None of these are pleasant fun topics that people look forward to talking about and paying for. But they’re key to successfully achieving financial freedom.
After knowing your net worth, getting to know your cash flow, discovering your dreams, and planning to pay off non-deductible debt (if you have any), you need to put the rest of your financial plan onto firm footing by protecting your assets. As I talked about in my emergency planning article, disasters can happen to anyone. Even through no fault of your own, your car can be damaged, your home caught on fire, someone sues you, a family member gets cancer, you become disabled, someone dies, or there’s a disaster at your business. You don’t want one of these disasters to become the reason that you don’t achieve financial freedom-or have it ripped away from you.
“But wait,” you may be thinking, “I’m already financially free. Can’t I self-insure?” The answer is – sometimes/it depends (sorry-I know that’s a very “lawyer” answer). I’ll talk about self-insurance as I go through each type of insurance you need to consider.
A few notes before we get started – I’m not a licensed insurance expert, just a hobbyist. If you want expert advice, please consult an expert. This is for informational purposes only. And none of these are affiliate links. I’m here to help you, not to make money off you.
First, a list of the different types of insurance you need to consider:
- Car insurance – Includes motorcycles and any other vehicle you drive
- Home/Condo/Renters insurance – Covers your home, condo, or belongings/liability in a rental
- Umbrella insurance – important for high-net worth individuals- if you’re FI and don’t have this, look into it! (not applicable for everyone)
- Health insurance
- Disability insurance
- Life insurance – term only please
- Business insurance – Various types of insurance can protect different aspects of your business (not applicable for everyone)
All right, now for a fun and exciting deep dive into the world of insurance! Today I’ll cover your personal property insurance – car, home/condo/renters, and umbrella. Wednesday I’ll talk more about health, disability, and life insurance – followed by a discussion on business insurance.
The Basics This one is likely familiar to anyone who has a car or other vehicle they may drive. Note that the exact types of coverage available vary by state when it comes to protection against the uninsured/underinsured and medical costs. I’ve included links for each type of coverage so you can deep-dive into any you might not be familiar with.
Car insurance insures against a few different types of risk:
- Liability and damage to others – Bodily Injury, Property Damage – Insures against injuries to others and damage to other vehicles when you’re determined to be at fault
- Protection against the uninsured and underinsured (varies by state)- Uninsured Motorist, Underinsured Motorist, Uninsured/Underinsured Motorist Property Damage – Protects you, people in your car, and your car against people that either don’t carry insurance or don’t carry enough
- Medical Costs (varies by state) – Medical Payments, Personal Injury Protection – Pays for medical costs (usually a small amount)
- Damage to your car – Comprehensive, Collision, Towing and Labor, Rental Reimbursement – Pays for damage to your car from “acts of God” like fire/theft/flood (comprehensive), from accidents (collision), towing costs, and the cost of renting a car while yours is being repaired
Should You Self Insure? If you’re financially independent or close, should you self insure? Only against damage to your car, if buying an entirely car or paying for significant repairs wouldn’t be a financial burden. The other aspects of car insurance are there to protect you and your assets in the case of a catastrophic accident. If you’re financially independent you should actually carry higher amounts of these coverages to protect yourself.
How Much To Carry? In some states you can carry very low limits on liability, or very low deductibles on damage to your car. But you should do the reverse-carry high limits on liability and high deductibles on damage to your car. How high?
- For Liability, you can usually get a lot of coverage for a small cost. Carrying even $250,000 per person, $500,000 per accident for Bodily Injury and $100,000 of property damage can likely be only a minor additional cost compared to lower limits. Price out a high amount and then try tweaking it lower-you’ll see what I mean. Get as much as you can – think about how much costs might be in case of a catastrophic multi-vehicle accident. If you have significant assets you’re going to want an umbrella policy to go on top of this.
- For protection against the uninsured/underinsured, and medical payments, usually again the cost of higher amounts isn’t significant. Carry at least as much uninsured/underinsured protection as you do liability. Medical payments and personal injury protection get a bit trickier as you should be protected by health insurance. But think about passengers in your car who might not be insured.
- For damage to your car, you can skip the Towing and Rental coverages if you would be fine paying for those out of pocket. Comprehensive and Collision should be at as high a dedutible as you can pay without decimating your emergency funds. I carry $1,000 deductibles myself. And as your car gets older you’ll want to think about dropping these entirely-if your car’s not worth much, you probably want to self-insure
How to Get The Best Price
Shop around every single year. Car insurance companies tend to give significant discounts for new customers, and raise your rates gradually over time. So every single time you get a renewal notice in the mail, shop around for a better price. If you find a better price, call up your current insurance company and tell them you’re going to switch. They may be able to magically “find” discounts for you so you don’t have to switch. But be prepared to switch every year if needed.
The process I use takes only about an hour. I go on the websites of various companies, get a quote (usually giving an inaccurate phone number so they don’t harass me), and pop that quote into an Excel sheet. Along with the price, I note any discounts for paying in full for the term, as well as how long the term is (6 months or 12) so I can compare apples to apples. I get quotes for home insurance at the same time so I’ll get whatever discounts apply for carrying both kinds of insurance. Then I’ll look at the best offer overall.
Is price the only thing you should consider? No. You should research the best companies overall. You want a company that’s financially stable and will treat you well if you have a claim. An excellent unbiased source of information is Clark Howard, who reports on what Consumer Reports says. I’ve gone with Amica myself (not eligible for USAA, the other top-rated company). They were among the lowest total cost and best rated.
Other Ways to Save Money
- Watch your credit score. Some companies, in some states, use your credit score to price your insurance. This is where having no score or a low score can hurt you. But remember that some companies don’t use this information, so shopping around is key
- If you’ve had an accident, shop more often. Accidents typically stop counting against you after three years or five years (or sometimes both). Say you had an accident three years ago, but your car insurance doesn’t renew for another eight months. Shop around today instead of waiting for your renewal. The new company likely won’t count that accident against you as much as your current company is
- Tell your company if you retire. When you retire you’ll usually get a drop in price on car insurance. Why? You’re not driving back and forth to work every day, and putting less miles on the car.
- Don’t make small claims (when possible). Every time you make a claim the company is likely going to count it against you at renewal. So if you hit your mirror on your garage door, bump into a tree, or have your radio stolen, just pay for it yourself. Your high deductible should deter you from making small claims anyway. Note that if you hit someone else you should always claim it, even if they say you don’t need to, just in case it turns into something big.
- If you insure kids, shop more often. The best priced companies for adults with solid driving records may not be the best priced companies for teens. Each birthday that goes by for your kids may result in a better rate at a different company, so be sure to shop around. You should price out insuring them under your coverage as well as them getting their own policies.
- Search for discounts. Good student, driver training, defensive driver courses, membership in AARP/AAA, owning a share of Berkshire Hathaway, working for a certain company, being a member of an organization, having a student away from home – all of these and more can result in discounts at some companies. So when you go get quotes be sure to research available discounts.
The Basics: This insurance protects your house, condo, or yourself if you’re renting, from a variety of potential losses. There are several different types of coverage you’ll see on a typical policy, each of which covers something different. For some reason they’re named after letters of the alphabet. Note that even if you’re a renter you need insurance. Again I’ve included links for you to learn more about each type of coverage.
- Coverage A– Dwelling. Applies to Home/Condo insurance. For a home this is the entire structure of your home, not including land or any detached structures like a shed or detached garage. For a condo this is everything from the studs in – from the studs out is covered by your association policy (they do have one, right? And it’s a good one? If your answer to this is “I don’t know”, please go look into that)
- Coverage B – Other Structures. Applies to Home insurance. Covers anything on your property not attached to your house, like a shed, gazebo, or something else. Usually this defaults to a percentage of your Coverage A but you can buy more if for some reason you have a castle in your backyard.
- Coverage C – Personal Property. Applies for Home, Condo, and Renters insurance. This is to protect your stuff-essentially if you took your home/condo/apartment and turned it upside down, everything that would fall out would be considered personal property. Your dishes, TV, clothes, furniture-everything not permanently attached. For Home insurance this usually again defaults to a percentage of Coverage A, but you can get more. This doesn’t cover certain expensive property like artwork, jewelry, and collectibles-those you need to schedule separately
- Coverage D – Additional Living Expenses. Applies for Home and Condo insurance. If a catastrophe occurs and you need a place to stay while yours is being repaired, this coverage will pay the additional cost for you and your family to stay elsewhere. Note that it won’t pay all costs
- Coverage E – Comprehensive Personal Liability. Applies for Home, Condo, and Renters insurance. Protects you against liability claims both on and sometimes off your property. This is what kicks in if someone slips and falls and tries to sue you.
- Coverage F – Medical Payments to Others. Applies for Home, Condo, and Renters insurance. This is similar to liability in some ways, but is for smaller amounts (liability is usually in the hundreds of thousands, and this is in the thousands). It’s to cover a good faith payment in case of an injury to someone on your property. For example, say someone falls down a step and sprains their ankle. This would cover their medical expense so they don’t need to sue you.
Should You Self-Insure? No. If you’re financially independent or close, you’re (1) not going to want a total loss to your home to decimate the money you have saved, and (2) you’re going to need the liability coverage. At the other end of the financial spectrum, if you’re renting and have few assets, you likely don’t have tens of thousands of dollars sitting around to replace all your things if there was a fire in your rental. So no matter where you fall, you should not self insure.
How Much To Carry This one is a huge “it depends”. There’s no right answer here but there are a few things to consider:
- Usually for homeowners insurance they will calculate the cost to replace your home using information like how big it is, the type of home, how old the roof/plumbing/electrical/heating system is, etc. You’ll want to make sure they include anything you’ve upgraded (like flooring, cabinets, etc). They then use this amount to default the rest of the coverages (except liability). Carry enough to rebuild your home
- For liability, carrying extra isn’t very expensive. You can usually get $500k in coverage for only a small amount more than $100k. So carry as much as you need to protect your assets-and if you need $1m or more, get an umbrella policy
- In a condo, you can probably get a good sense of how much coverage to carry by talking with the association.
- For a renter, you’ll want to think about how much you would need if you had to go out and buy all new things. USAA says the average person needs $20k, Allstate says $30k. It could be even more if you’re a family renting a home
How to Get the Best Price
Shop around every single year. You’re going to notice this is a pattern. I use the same method I talked about above – getting a price from a variety of companies on both car and home insurance, putting them into Excel, and comparing the best total offers. After shopping around call up your current company and let them know if you’ve found better offers-they may be able to “magically” find discounts they “forgot” to give you earlier. You’re also going to want a good insurance company-if your home or apartment burns to the ground, you don’t want to be fighting with your insurance company. Again our friend Clark Howard comes through by sharing the Consumer Reports rankings. You’ll notice a lot of the names of the best and the worst are the same. Make sure to carry a high deductible (as high as you can comfortably pay) to save more money. But don’t skimp on your overall coverage.
Other Ways to Save Money
- Watch your credit score. Just like with car insurance, some companies, in some states, use your credit score to price your insurance. This is where having no score or a low score can hurt you. But remember that some companies don’t use this information, so shopping around is key
- Tell your company if you retire. When you retire you’ll usually get a drop in price on home insurance. Why? Someone’s home more often and is able to deter theft/monitor damage.
- Don’t make small claims (when possible). Every time you make a claim the company is likely going to count it against you at renewal. So if you have a few thousand dollars in damage to your home, and you can comfortably pay for it, don’t claim it. Your cost will go up and you might even be “non-renewed”.
- Search for discounts. Anti-theft systems, fire alarms, sprinklers, membership in AARP/AAA, owning a share of Berkshire Hathaway, working for a certain company, being a member of an organization – all of these and more can result in discounts at some companies. So when you go get quotes be sure to research available discounts.
- Know what’s covered-and what’s not. This will save you money in the long run. Things like floods are often not covered. Earthquakes may need special coverage (especially in CA). Sewer backup/sump pumps may need special coverage. If you have jewelry, art, or other valuables you may need to schedule them in order for them to be covered. Pay close attention to the type of insurance policy (named perils vs. all risk-all is better, named perils would be needed for flood insurance, for example), whether it offers “replacement cost” or “actual cash value” coverage (you want replacement cost). Don’t get caught surprised if your home floods and you’re suddenly out hundreds of thousands of dollars because it’s not covered.
The Basics: This coverage acts like an “umbrella” over your car and home insurance (hence the name – clever insurance companies). It’s usually for millions of dollars and kicks in after your underlying car or home insurance pays out its limits. This kind of insurance is needed by anyone with significant assets to protect-like those who are financially independent. One lawsuit could destroy your financial future if you’re not protected. This is sometimes also called a personal umbrella policy, or PUP.
Should You Self-Insure? Well if you don’t have a million or more in assets you don’t need this kind of coverage. You can just bump up liability for your car and home insurance instead. But once you start to approach millionaire status, you should get this insurance. This is especially true if you have teenagers driving your cars-guess who gets to pay if they cause damage to others? Also if you engage in activities that might increase your risk of being sued (say, blogging) this coverage can be valuable. Check out Nerd Wallet’s guide for some more examples.
How Much To Carry Depends how much in assets you have. Remember, this will kick in after your underlying car and home insurance. So if you carry $500k in car liability and home liability, and have a million dollar umbrella policy, you’re covered up to $1.5 million.
How to Get the Best Price Shop around. This kind of insurance tends to be rather inexpensive (a few hundred dollars a year at most). With umbrella policies you’ll most likely want that policy with the same insurer as your car and house. Unfortunately you can’t really shop online for this one, so you’ll need to call up companies instead. I’d recommend shopping for car and home/condo/renters insurance first, determine your top 2-3 companies, and then calling them for an umbrella quote. This is a place where the quality of the company is most important -check the AM best ratings of your top options.
Other Ways to Save Money There aren’t as many here as there are for the other kinds of insurance. Sorry.
I know this got long – thanks to those who are still hanging around! I hope you’re more educated on your insurance options and are now determined to put your financial freedom plan on firm footing by getting appropriate insurance in place for your situation. Have an insurance question or story? Let me know in the comments.