How Much Insurance Is Enough?
What kind of answer do you get when you ask folks how much insurance you should have?
Ask an insurance agent, and they might tell you to buy as much as you can afford.
Ask an underwriter, and they might tell you to buy as much as they’ll approve.
Ask a customer, and they might tell you they want only as much as they really need – or as much as the law requires, or as little as they can get away with.
When people choose insurance (homeowner’s, property), they come up with the value of the property and get enough insurance to cover the risk. Simple. When they choose insurance to cover their own vehicles, that’s simple too. California law mandates coverage.
But in general, how much insurance is enough? Is there a case to be made for minimum liability limits? Is it possible to have too much insurance?
Insurance needs to change, to grow, shrink or otherwise be modified over time.
After all, what works for young people doesn’t necessarily work in those in middle age, and few of those choices can work for seniors.
Over time, your insurance needs change. You buy new cars. Your income changes. Your career changes. You add to your family. Family dynamics change. A young person attending college has different insurance needs than a family of ten. A hobby farmer has different needs than a commercial grower.
Insurance protects our assets.
Ask people why they choose insurance and you get answers like this:“I have to have auto insurance, or they’ll take my license,” or “my bank made me buy insurance to get a mortgage,” or “my mom and dad told me to buy this policy from our agent,” or “I just like Lemonade.”
Of course, those are all terrible reasons to buy insurance.
The real reason we buy insurance is because we don’t have the cash on hand to replace the asset covered by the insurance. You’re told by your bank or your agent to buy homeowner’s insurance, but that’s not why you buy it. You buy homeowner’s insurance because you don’t have the money to replace your house or the things in your house if it is damaged.
How are liability limits determined?
Replacement cost can be relatively easy to figure out. A house has a tangible value. Count the amount of wood, blocks, bricks, panes of glass and other items that go into rebuilding a house. A car has a value that you can calculate. The laptops, televisions, cell phones, and furniture in the house all have a specific cost to replace them.
Liability limits, on the other hand, are a bit harder to pin down because we don’t always think about what we’re protecting with it. Liability insurance helps to protect the items that make up your net worth. Liability insurance protects us when we are somehow involved in someone else’s loss or damage. We own the home where they tripped over the skateboard and fell down the stairs. We invited them over to dinner and served a meal that made guests ill. We drove the car that created the accident.
So how much insurance should you buy? How much risk do you want to take? Keep in mind that once liability limits of a policy are exhausted – or when there is no coverage – you can become personally responsible for those damages.
It’s not how little you need, but what will properly protect you if something happens.
I don’t recommend to anyone that they get the minimum limit they can find, and there aren’t that many people who need the most insurance they can afford. One way to determine the right balance is to look at the assets at risk today and projecting those assets into the future 3-5 years. In other words, look at your life today, then project yourself forward 5 years. Will you need more, or less?
It’s not an exact science. Some people just want the policy they’ve seen on TV, and that’s it. In the end, it’s all about meeting customers’ needs and alerting them to future needs. That’s my job. I’m an insurance professional.
Contact me for solutions.
Contact me today for a wealth of information. Together we’ll take the first steps to begin determining your liability limits. I’ll have some quick and easy questions to get you the answers you’re looking for!
If you have any questions, or would like to explore your personal insurance solutions with me, please call (530) 661-0666 or email me at aromo@vanbeurden.com.
Some content provided by Insurance Journal
