 Personal Finance PowerPoint Presentation, property insurance planning, get ready to get financially fit by practicing personal finance. When making financial decisions, we've been breaking them out into the short-term decisions and the long-term decisions, the short-term decisions being those that we train our gut to trust our gut using trial and error honing down our habits. The long-term decisions, the ones where we're going to use the adage of measure twice, cut once. When we think about the insurance planning, we generally have to put them on the long-term side of things because they're not the kind of thing that we can basically train our gut to do the day-to-day types of transactions because they involve thinking out into the future. Therefore, we want a formal plan. Most formal plans will look something like this. We're going to set our goals, laying out the goals. Number two, we're going to develop a plan to reach the goals. Number three, we put the plan to action. And number four, we analyze the results of it and then possibly set the goals again and the cycle then continues. The types of things that we might have, events for insurance related to them, disability, illness, death, retirement, property loss, liability. So here's our chart that we saw in prior presentations. We're focusing this time on the importance of property insurance. Most of this information can be found at Investopedia. You can go there and take a look at them for more research. Looking at the references, resources, continuing your research from there. This is by Daniel Myers, updated September 6, 2021. What is property insurance? The basic goal behind buying any insurance is to make you financially whole following a loss. So as we discussed in prior presentations, insurance is a type of risk mitigation tool of a future event that could possibly happen. So for example, if we're insuring against fire that could happen in the future, when we buy the insurance, it doesn't mean that we want the fire to happen or that the insurance would not be worthwhile unless the fire were to happen because we're buying the mitigation of the risk. We're still hoping, of course, that the fire at the event does not happen when we buy the insurance, but we've got that risk protection, that's what we're purchasing. So you agree to pay a small, certain fee to an insurance company today in exchange for a guarantee from the company that it will bear the burden of a large but uncertain loss in the future. So contingent on some event typically that would possibly happen in the future, the insurance company might then have a big payout that they would need to endure, and that's where the shifting of the risk is happening. So if we have fire insurance or something like that on the home, we're trying to shift the risk of the fire happening to the insurance company. It still might be a fairly low risk that a fire will happen, but if it were to happen, it would be a substantial financial impact to us. And therefore the risk mitigation strategy might be one that we would want to do. Following that reasoning, property insurance protects you against damage to or loss of expensive personal property such as a dwelling or a car. So clearly when we're talking about property insurance, we're talking about insurance on property that is fairly significant in value like a home or a car, that if we were to suffer that type of loss on that property, it would be difficult for us to recoup it. Now note that we can only recoup in the insurance the financial loss that we have. So we might say there's nothing that can replace the memories that I've had in that home and so on, and that's true because we don't want the fire to burn down the home or whatever the event might that might damage the home. But if it did, we would have that financial hardship and that's something that we could we can insure against possibly forms of property insurance include auto insurance, homeowners insurance, renters insurance and flood insurance. Let's say that you own a house free and clear and have a tidy, neat nest egg. As long as you continue to pay your property taxes, you have every right to enjoy the use of that house for as long as you like as guaranteed by law. You may live there, rent it out, leave it vacant or sell it. You're sitting pretty and so you may ask yourself, why do I need property insurance at this point in time in the home? Then all of a sudden that giant tree in the backyard falls on your house and causes severe damage. So clearly now you have this one event that happened that could put you in a financial hard spot when you were looking pretty good just a second ago, just due to the size of the event that's happening to an asset, which is substantial to your balance sheet assets minus liabilities the home, right? So now you have to cover the entire cost of the repair in the house and that nest egg gets seriously reduced. So if you'd had property insurance, it would have paid in part or in whole for home to be fixed or replaced sparing you an unexpected and large chunk of change. So clearly that's the kind of thing we're trying to save ourselves from with the property insurance, that big event that could happen to a substantial asset, which would be costly to replace possibly passed with the average person would be able to replace and therefore a little bit of money each period might be worthwhile just to safeguard the event that that possibility could happen. You might say, well, how does that work on the insurance company? How can the insurance company make money because they are a business to do that because they're going to try to run the numbers right on large numbers on large scales to see what the percentage of that event happening and it's probably pretty low. So for you individually, it might be fairly low, but it's fairly predictable over a large number of people. Therefore, that's how the insurance kind of calculations will work. So who needs property insurance? Well, pretty much anyone who owns expensive property indeed, you are forced in many cases either by law or mortgage contract to carry property insurance. So clearly when you get into a mortgage, for example, the mortgage, the person, the lender wants to have some security on the property as well, because if that property gets damaged, then you might be in a financial condition to can't pay back the mortgage. And now the property which was collateral on the home is no longer going to be able to pay back the loan most likely if they foreclose on it. So all 50 US states, for example, require drivers to carry auto insurance usually in the form of liability insurance. Now there's cases to be made from an economic standpoint with regards to like free rider kind of arguments to require people to have insurance and they basically put that in the car. It's a really interesting kind of argument as well because there's arguments to ask, well, can the government force you to buy something? And that was a constitutional question for a while and so on. On the car, they kind of made the argument that they're not really forcing you to buy it because you don't have to drive. Although if you live in LA, you kind of have to drive or it's like, but it's a but and they're obviously have the same kind of concept with the medical insurance and part of the rationale would be that, you know, if somebody if somebody doesn't ensure there's a free rider kind of scenario or problem that that distorts the the whole workings of the insurance plans and whatnot. So it's an interesting kind of argument. Note that anytime the government kind of steps in, it does have some interesting, again, other weird kind of effects on the market. One of them being that we lose track of the fact that it is, you know, a market transaction or we lose fact of the of the pros and cons of buying insurance. We just see it as a regulation. It's just something you need to do. And I think that kind of dumps down our thought process sometimes because it's kind of like saying that someone doesn't smoke because the government told them it's outlawed to smoke and they're going to kill you if you're smoke or something like that. Well, that's not as good really if you had a person that shows not to smoke. So we would really because then, you know, the rationale behind it and you're making your own decisions, which would typically I would think be a better situation. So so you want to still understand the insurance even if it's even if it's just a law. Why did you buy insurance? Because the law made me too. But we'd rather say, well, we'll buy the insurance because I weighed the pros and cons, the risk and rewards, and I found that the insurance was a wise decision to make. I would think would be the better way to be. So liability insurance covers repair, financial institution to someone else besides the individual at fault in an accident. For example, the person at fault's liability insurance pays car repairs and medical bills for the other driver and any passengers. Fortunately, when you purchase the required liability coverage, you are also given the opportunity to purchase property insurance and the form of comprehensive insurance and collision insurance with regard to auto insurance. So thus, saving you from financial hardship if your own car is damaged in the accident. So we might talk more about auto insurance and future presentations. It could be a little bit confusing because you have your own car, which you might say, well, I need to have insurance for my own car in the event that it gets that I need to replace it or something like that in the accident. And then you've got insurance for the other person because if you're the one that was caused the accident, for example, then you could have damage, medical and property that you could be at fault for in that case. So you could see the two sides of the need kind of for insurance and it gets fairly complex in terms of, well, what's going to be my best decisions for those types of insurance? What kind of insurance do I need for auto insurance? What kind of insurance do I need to be in alignment with the law? What kind of insurance would be best measuring out the cost of the premiums versus the coverage that I'm having and so on. So we'll talk possibly more about that in future presentations coverage. According to a survey published in a Journal of Financial Planning, many homeowners have vastly misguided views of what their homeowner's insurance actually covers. According to the reportage in the New York Times on a 2007 survey conducted by the National Association of Insurance Commissioners, 33% of homeowners believe that flood damage would be covered. 53, 51% thought that damage from a main waterline break would be covered and 34% thought that bowl damage is covered. In actuality, the perils caused by property destruction that are typically not covered are flood damage. This is a separate policy earthquake, which is often a separate policy mold and it maintenance damage, things like worn out plumbing, electrical wiring, air conditioners, heating units, roofing, et cetera, as well as mold and pest infestation. So these are things that you might need additional coverage for, in some case, and then the sewer backup. So if you're in an area that has flooding, for example, obviously, then you might need to look more into that type of insurance specifically as well as the earthquake, which can be a very difficult thing for them to measure. So it's going to be a kind of complex thing for them to insure on. So policies are often written so that something to be covered, it must be sudden and accidental, meaning that it wasn't slow leak that caused damage over many months. So if you're trying to say, hey, I need to fix insurance, you can't be like, well, yeah, there was a drip that was happening here for the last 30 years, because that's not a sudden and accidental or accidental type of event, right? That took a long time. So the normal wear and tear type of stuff isn't generally going to be covered in that kind of insurance. So often this is not covered by insurance. If your roof caves in from old age and not from storm damage, it will likely not be covered. So if the roof, obviously roof is going to be something that is going to cost a lot to replace and fix and so on. But if it caves in just out of old age and it's been happening over a long term of time, then that's probably not going to be a thing. If it caved in because there was a storm or something like that, then you have a sudden event that basically possibly would be covered. So that would be more likely to fit the definition of sudden and accidental. So the perils that typically are covered include something like fire or lightning. So if your roof got hit by lightning, are you sure it was hit by lightning says the insurance company. That looks that hole in the roof that burnt right through it looks like it was termites over 30 years. No, it was it was lightning. I'm pretty sure. So windstorm or hail, explosion, smoke, theft, vandalism or malicious mischief, riot or civil commotion, damage caused by aircraft or vehicles, volcanic eruption. So these are all things. Hopefully that's not on that's not on my personal on our list here, typically, but don't want to eruption taken out the roof. So liability coverage in addition to covering the value of your home or other property, many insurance policies also include an important provision for liability coverage. You may not think this is very important. However, there are scores of eager lawyers in every city searching high and low for lawsuits against people such as yourself. Liability coverage is well known to owners of automobiles, but it may be lesser known to homeowners. So liability coverage basically someone, you know, suing you for I've known a couple of people in my lifetime where it seems like they're always in kind of a loss. They're always suing someone that doesn't seem like a good way to go. But there's, you know, that happens. So if your neighbor's house catches fire because you left your charcoal grill unattended, you will pay for the damage caused by the fire. So you have paid the insurance company your premiums so that it will pay for larger claims when they do occur. So the same goes for someone who is hurt and requires medical attention well on your property. So if you are on vacation and your property is stolen, such as a diamond ring, you may be entitled to reimbursement. Be sure to document the theft with evidence that you owned it and you should be able to provide a police report to the insurance company. So that's gonna be important that you go through all the steps that the insurance company is gonna be needing and you wanna take a look at, you know, whether or not the police report would be necessary given the circumstances. If it was stolen, you might need it. And you're probably thinking when you call on the police or looking for the police report that the police aren't gonna be able to do anything, which is probably the case. They're gonna come over and say, oh yeah, this was stolen, someone robbed you. Okay, I'll log it in, we'll put it in, we'll put it in the stats, right? They're not jumping right on the car and getting the investigators on the case, most possibly, but at least you log it in and you can give that to your insurance company and they might be able to reimburse you for it. So you should know what your policy does and more important does not cover insurance companies don't stay in business by charging a minimal amount to cover any and all things which could possibly happen to your property. Additional non-coverage. Home-based businesses are not typically covered. This doesn't include a home study, but rather a place where people come into your home as customers such as a workshop where you repair furniture. You will need a separate business commercial policy to properly ensure this area and its related liability. Again, these roles vary from state to state and county to county. So obviously you wanna make sure that you have the proper rules laid out for your particular location because they could change from state to state and county to county. Also, if your property, especially your house, is left vacant for more than a certain time period, usually 30 days, then the homeowner's policy may be canceled immediately by the insurance company. It is assumed that a vacant house is a much higher danger of perils such as fire or theft. So obviously if no one is in the home for a long time, if the home has basically been vacated or abandoned, then it's more likely that bad stuff is gonna happen to it. You just don't have the upkeep. You could be more likely that fires is gonna happen and that people will vandalize it, unfortunately. And therefore it changes the risk profile enough to require a separate policy. So obviously when they did their calculations on the insurance side of things, they're taking into consideration that the house is occupied. If it's unoccupied, their stats, their calculations would be substantially different to the point where that you'd have to have another policy it looks like and they'd have to recalculate the whole thing. So if you have a second home or vacation property, you may get another policy to cover this home as well. So what about my other five houses that I'm not currently living in then? Cause I can't be in them all the time. What am I supposed to do with all that? Well, you could have a separate policy to cover all your other properties. Pitfalls to avoid. Check to see if your policy covers repairs at actual cash value, ACV, or at replacement cost. So we talked about that a little bit in the past. We'll possibly touch on it a little bit more. How will they pay you off if there's a problem? The latter is usually much better. So case in point, if your roof was damaged and needs to be completely replaced, the replacement costs will pay for it to be fully repaired, less your deductible, while ACV will pay you what your roof was estimated to actually be worth at the time of the damage. The trade-off is that ACV costs less than replacement cost coverage. So in other words, are they gonna pay you kind of the value of the roof? Because if the roof goes down and the roof was up there for like five or 10 years before and it got hit by that lightning and you had to replace the roof and the insurance company is gonna give you money for it, well, you're gonna have to put a new roof up there. So you would think that even if you made the same kind of roof, well, if it was new, it would be worth more. Or is the insurance company gonna try to pay you the value of the roof, which you would expect to be less than the actual cost of a new roof, which means you'd still be paying money. So you would think that if they were gonna pay you back the actual value of the roof, which had been depreciated, then you'd still have to pay some money up, but it might be a less expensive insurance premium policy. And then if they were gonna replace the roof with new roof, then you would think that might be a more expensive policy, but be better at the point in time that the lightning goes through your roof. So art and jewelry. Additionally, if you have expensive jewelry or art that you want to be covered, you may need to add a floater. So that Van Gogh on my wall, I have a special, I've got special insurance, I don't have a Van Gogh or jewelry. I don't have any cool stuff. This is an add-on to your main policy. Many policies have standard amounts that they will pay out for losses to particular items and they will pay no more. Co-insurance clauses. Finally, some property owners only want to ensure a property for what they paid for it, which may bring into play a co-insurance clause. This is depending on local laws, where the property is insured for less than, say 80% of its current replacement cost, have a lesser amount of coverage and the insurance company will require you to share in a percentage of the repairs above and beyond the deductible amount. Premium factors. Do you live in an area prone to tornadoes, hurricanes or floods? Do you own a large dog or swimming pool? Are you a smoker? How's your credit score? So these are all questions that when the insurance company asks you them, then if you say yes, I live in a place that has tornadoes, you hear this, oh no, okay, well then they're gonna increase the amount that you're gonna pay. Do you own a lard? I do have a dog. Oh, well that's, I do have a swimming pool. That's okay, well that might be a prop. Do you smoke? Oh, that's a big problem. That's gonna cost you on the insurance premium. So you may be a higher than normal risk based on your answers to these questions and an insurance company will charge you accordingly. These are factors that take into account when sitting your insurance rates. The more that these and other risks are applicable to you, the higher your rates will be. A word of warning, some insurance companies provide seemingly unbelievable rates for their policies. If the company is unknown and its rates are exceptionally good, this should be a red flag. So you need to be confident in your insurance company because you're paying for something upfront where they're gonna pay you at a point in time where you're financially vulnerable and have suffered a loss which it could be financially devastating, right? So you're at a point of vulnerability if you actually need to cash in the insurance policy and so you want the insurance company to be around at that point in time and unfortunately like with anything there are scammers out there so you wanna make sure that you have a credible insurance company that you can depend on that will actually pay you if the bad thing that you're trying to insure against happens. So check around the company's reputation and don't just take this sales person's word for it. So clearly you wanna talk to someone that's not just the sales person for the insurance company, not that they are all liars or lying but they have a self-interest. So you'd like to get a third person recommendation possibly a friend, possibly a lawyer if you have one or a CPA firm or something like that. Have a look at the policy and see what it covers and what it doesn't. You may find only too late that what you thought was adequate coverage was barely the legal minimum in your area. When seeking the benefits of property insurance insist on quality coverage. Remember, cheap insurance can be very expensive.