Car accidents, natural disasters, thefts, and lawsuits can happen to anybody at any time. Surprises like these are expensive and stressful — and the expenses associated with them start to pile up fast.
As our clients build wealth, we need to make sure they can protect it. That’s where property and casualty insurance comes in (often referred to as P&C insurance). Homeowners, auto, and liability insurance policies pay out when property is stolen or damaged or in case of legal expenses, allowing them to cover their costs without tapping into their savings too much.
Everyone needs P&C insurance, whether it’s a $20,000 renters insurance policy that would help you replace the contents of your apartment if your neighbor left his stove on and it damaged your apartment, or a $1 million umbrella policy to protect you in case of a major lawsuit. Start where you are and update your coverage as your life changes and your wealth grows.
Homeowners insurance and renters insurance
Whether you rent or own your home, you’ll need insurance to protect yourself in case of damage to your property or theft of your stuff.
Homeowners insurance is required, and typically you buy it during the homebuying process. Many mortgage servicers include insurance premiums in monthly payments and then pay the insurer themselves, so you never actually pay your insurance company directly. Renters insurance may or may not be required by your landlord, but every renter should purchase it anyway.
Both homeowners and renters insurance policies cover damage to your stuff in case of vandalism, fire, and some natural disasters like lightning or something falling on the building. They also protect you in case of theft.
Generally, a homeowners or renters insurance policy should be large enough to cover 50% to 70% of the value of the items in your home. If you’ve upgraded your home office setup during the pandemic, make sure your policy is large enough to cover it! If you have any valuable items that you want fully covered — engagement rings, works of art, musical instruments, specialty equipment for work — purchase separate policies for those items. (More on that later.)
A renters insurance policy typically only needs to cover the contents of your apartment since the building is covered by the landlord. Homeowners insurance needs to cover the home itself too.
Most homeowners insurance policies cover repairs to a home itself in case of fire, hail, or hurricane damage. But if you live in a place where flooding is likely, you’ll need to purchase flood insurance through the National Flood Insurance Program. Californians should note that earthquake insurance policies are available too. Talk to your insurance agent to see if these things are a good idea in your area.
Homeowners policies usually don’t cover barns, gazebos, back houses, or detached garages. If you have another structure on your property, an insurance agent can help you purchase outbuilding coverage.
In addition to the contents of your home and your home itself, homeowners insurance can also provide liability coverage for accidents inside your home. This includes damage caused by pets, like dog bites, and the cost of any necessary legal defense or settlement. Homeowners policies generally cover liability up to about $100,000, so we often recommend that our clients purchase umbrella policies too. (More on that later, too.)
How much coverage do I need?
Actual cash value policies offer the lowest level of protection. These policies pay out the pre-damage value of the property or items, including deductions for depreciation. For possessions, only actual cash value policies are available unless you buy a specific policy for a specific item.
Replacement cost policies pay for the cost of rebuilding or repairing the property up to the policy limit.
Extended replacement cost policies offer the highest level of protection. These pay for rebuilding the property as it was before, even if the cost exceeds the policy limit. This can be helpful in cases of widespread disasters like wildfires, when costs of rebuilding spike because lots of people are trying to rebuild at once.
The other part of renters and homeowners insurance is that it provides some liability coverage as well. This is to help protect you in case of a lawsuit.
Depending on your income and net worth, you may want additional general liability coverage, also known as an umbrella policy. These policies provide coverage above and beyond the liability on your homeowners and auto insurance and can help pay for legal defense and settlement costs up to policy limits in case you’re ever sued. People can be sued for more or less anything, but umbrella policies can be especially important if you own a trampoline, pool, boat, dog, or if you’re a landlord with rental properties.
A $1 million policy is usually a few hundred dollars a year, so we recommend them to all of our clients. If you’re building your net worth, we think you should have protection that goes above and beyond what’s included in your auto and homeowners or renters insurance policy. It’s a relatively inexpensive way to protect your wealth. Check out this article from Investopedia on how umbrella policies work.
Auto insurance is legally required (except in Virginia and New Hampshire), so if you own a car, you’ve probably had a policy since you started driving. It’s required because, if you get into a collision, the person who is determined to be at fault is supposed to pay to repair the damage to all the vehicles involved, as well as any resulting medical bills. That’s often a lot of money, hence the need for insurance.
Lots of drivers don’t have insurance, though. If you get into a crash with an uninsured driver — even if it isn’t your fault — your policy can help you repair your vehicle or buy a new one.
Remember that your insurance policy covers the vehicle, not the driver. If someone else borrows your car and they crash, your policy be on the hook any damage they cause, not theirs. That means your rates could increase if your car was involved in an accident, regardless of who was driving it at the time.
Most personal auto insurance policies don’t cover you while you’re driving a personal vehicle for business purposes. If you use your vehicle for work, make sure you talk to your employer about whether you will be covered while working. If you are self-employed, including driving for a ride-hailing or meal delivery service, talk to your insurance company about getting an endorsement to your policy that covers business use. It will probably increase the cost of your policy by $20 per month or less.
Some auto insurance policies also cover rental cars. If yours doesn’t, lots of rental car agencies offer policies when you pick up your vehicle. Many credit cards also offer collision insurance at no extra charge, but they require you to decline the rental car agency’s insurance policy. There are a few limitations — some countries require you to buy insurance, and renting RVs is a whole different ball game.
The cost of auto insurance varies a lot. It depends on where you live, what kind of vehicle you drive, your driving history, and the specifics of your policy. Shop around for quotes or work with an insurance agent to find the right policy.
How much coverage do I need?
Collision insurance is basic coverage. This reimburses you for damage to your vehicle that results from a crash with another vehicle or an object, including something like a pothole. It’ll also cover the damage to the other driver’s vehicle.
If you’re driving a vehicle that is more than a decade old, you should consider dropping your collision coverage to save money on car insurance premiums. If your car is only valued at a few thousand dollars, it’s usually not worth it to pay a few hundred dollars a year for the collision insurance.
Comprehensive coverage includes collision insurance, plus protection against theft and damage caused by natural disasters. It even includes hitting a deer. (You need to keep your comprehensive coverage regardless of how old your car is).
Miscellaneous items: Jewelry, art, and boats
If you own anything particularly valuable, like jewelry or art, you may want a scheduled personal property policy. These policies extend beyond homeowners or renters insurance and can fully cover specific valuable items, like jewelry or art. Most insurers will ask for a receipt or appraisal to determine the value of each item.
Neither homeowners nor auto insurance covers boats (a question that trips everybody up on the CFP® exam!). If you have a boat, you’ll need to purchase marine insurance. An umbrella policy can offer additional protection.
Shopping for property and casualty insurance
There are dozens of insurance companies, from national brands like Allstate and Geico to specialty providers. (I like Lemonade for affordable renters insurance coverage because it’s quick to get a policy through their app. This saved me when my cell phone was taken in Chile and the electronics coverage kicked in.)
Shopping around for one type of insurance is pretty straightforward, but if you want to use the same insurer for several types of coverage, comparisons get harder. Some insurers offer discounts if you bundle multiple policies together through them.
I recommend working with a local independent insurance agent who can shop multiple insurance carriers for you and then present a few different options. Ask family and friends for their recommendations. And feel free to shop around yourself! Your insurance needs will change throughout your life, so you may be working with your agent for years to come. Make sure it’s someone you like and trust.