INSURANCE PART 1

The Stoics believe that you should be thankful and grateful for all of life, both the good and the bad.?They remind us that everything that has happened and is happening is bringing us to where we are. It’s contributing to the persons we have become. And that’s a good thing.?They urge us to be aware of and grateful for the setbacks and annoyances because it’s all of those things, interconnected and dependent on each other, that made us who and what we are today.

I agree that we should be thankful.?But we should also be prepared.?The point is that bad things happen and can happen as Murphy’s law reminds us, at the worst possible moment.?Some of these setbacks may be too horrifying to think about: car accidents, theft, hurricanes, floods, life-threatening or chronic illness, fire, sudden death, etc.?They can also cost a lot when we can least afford to pay.?That’s why everyone needs insurance.

The problem for most of us, including yours truly, is that insurance is boring, complicated and for most of us, thankless.?We may never cash in because we pay good money (monthly or annual premiums) now and may never receive any benefit in the future.?Most of us also find it very difficult to decide on the insurance type (life, disability, health, car, home, flood) we need. ?And even if we know, choosing the right one from the many options available for each type and the right amount can be confusing.

We will look at the most basic questions about insurance: what type of insurance you need, what kind of policy will work best for your age and stage in life, and the amount of coverage you should purchase.?However, before we do that, let’s go back to basics.

What is Insurance?

Insurance allows you to live your life and pay someone else to think about and pay, later on, for the many setbacks, referred to above, that may occur.?You pay a small amount of money monthly or yearly to an insurance company which will assume the risk and help you to cover the costs if your house is damaged, your car is stolen or if treatment is needed for minor or major ailments.

The insurance company can afford to assume your risk and still make a reasonable profit because it pools your risk together with that of many other people like you.?The vast majority of those covered won’t experience a disaster at exactly the same time, if at all.?And because each of these people pays just a little bit to the insurance company, it can guarantee that the few unlucky souls who do experience catastrophe at any given time are covered.?The community of consumers, through the insurance industry, pools the risk, protecting the unfortunate few when disaster materializes.

Let’s look at some of the terms:

THE PREMIUM is the price you pay for your insurance coverage and will vary depending on how much protection you want to buy, the length of the period covered by the policy, the size of your deductible, your age, your health, how often you make payments and your claims history.

THE DEDUCTIBLE is the amount of money you will have to pay out of your own pocket before the insurance company will pay any benefits on any claims you make.?Your deductible can be either a fixed dollar amount or a percentage of the total cost of your claim, depending on your policy.?For example, if you get into a car accident and you are at fault, you may have to pay the first $1,000 or 10% of the total amount of the claim.?Alternatively, if you get seriously ill and have to be hospitalized or have a costly medical procedure, you may be responsible for paying for the first $20,000.

Increasing your deductible generally lowers your premium.?However, before opting for the higher deductible, be sure that you have enough savings to pay it should the need arise.?This is a good example of where an emergency fund can be beneficial.?It allows you to assume more risks, the higher deductible, and save money by paying lower premiums.?

This and the next few articles will look at the various types of insurance including life, health, car and homeowners.

HOMEOWNERS’ INSURANCE

As I noted above, bad things happen and can happen at the worst possible moment.?As some of us are enjoying the summer vacations with our kids, and as life continues to return to some level of normalcy, post pandemic, some of our fellow citizens, are unfortunately feeling the impact of climate change.?Unprecedented levels of rain and unexpected floods in many parts of the world have destroyed furniture, appliances and other personal belongings at the worst possible time.?Sadly, many of those affected have no insurance or the wrong kind of coverage and will now have to either dip into their savings or borrow to replace lost items.?This is the time when a well-designed insurance policy could help alleviate some of the pain for those affected by events outside of their control.

?Your homeowner’s insurance should cover the cost of repairing or rebuilding your house if it is damaged by fire, a storm, a flood, a robbery or other type of catastrophe.?Standard policies cover the house and its general contents.?The insurance industry defines "General Contents" as all your household possessions, e.g., electrical appliances, furniture and fittings, your clothes and food stuff.?"Special Contents" are defined as high-risk items, e.g., electronic or digital equipment, cameras, jewelry or heirlooms.?These “special contents” need to be listed and insured separately.

Insurance associations advise that the following perils are usually covered in contents and building policies: fire, lightning, explosion; bursting and overflowing of pipes and water tanks; burglary, housebreaking, theft or larceny; damage by aircraft; impact by road vehicles, horses or cattle; strikes, riots, malicious damage; hurricanes, windstorm; flood; and damage to property caused by falling trees. ?Note that earthquake, Earthquake insurance, which protects your home and your personal property if an earthquake ever damages or destroys them, isn’t a part of regular homeowners’ insurance, so it is offered by insurance companies either as an add-on to your homeowners insurance policy or as separate insurance from an alternate provider.

Cash Value vs. Replacement Cost

It is important that you know and understand the difference between replacement cost and actual cash value.?Make sure that your personal property insurance covers you for the replacement cost of your belongings, not their actual cash value.?An actual cash value policy will reimburse you for the cost of your possessions after deducting depreciation.?The insurance company must reimburse you for the actual cost of replacing the lost or damaged item if it is covered by a replacement cost policy.

Let’s look at an example:?If your contents are covered by an ‘actual cash value’ policy and your 7-year-old TV set, which cost $1,000, was damaged in the flood, it may have depreciated 50%. ?Therefore, you would be paid only $500 for that set when a new TV with similar features and dimensions would cost $2,000.?However, if you had a replacement cost policy you would be compensated $2,000—today's cost for a TV with features like the 7-year-old set.?Note that an evaluator or appraiser would determine the value of the affected property.

Unfortunately, most insured people affected by floods are probably having difficulty supporting their claims.?Like most of us faced with a similar disaster, they are finding it very difficult to know or prove all the items that were lost.?My advice to the rest of you is to set aside some time NOW to list all your furniture, electronic equipment, other major household items and possessions.?DON’T WAIT!!?Where possible list the serial number, date and cost of purchase, and even include the receipt if you can.?I would strongly advise that you take photos or videos of your home and its contents.?Using a video also lets you record information about the items and their date and cost of purchase.?Whether your record is on film, video or paper, make a copy and ask a friend or family member to keep it or store your copy in a safe deposit box so the inventory record will be safe at another location.?Of course, today it is easy to store these electronically in the cloud.

Next, we will continue looking at property insurance including renter’s, condo, and liability insurance.

Cheers, Nigel

Nigel Romano, Partner, Moore Trinidad & Tobago, Chartered Accountants