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Clients and insurance agents whom I work with are telling me that the insurance marketplace in Texas has gone almost out of control.
Wes Shannon
Rates are up drastically and coverages are down, particularly with home insurance. Homeowners are encountering rate increases of 25% with large deductibles for their roofs. As a comprehensive financial planner, I can tell you insurance is an integral part of a financial plan. So, let’s look at some basics to insurance and ways to control the costs.
The biggest change most homeowners are facing is a separate deductible for windstorm and hail. I have seen wind-and-hail deductibles of 1% and 3% of the property insurance value. If you have a home insured for $750,000 and the windstorm-and-hail deductible is 3%, you have a $22,500 deductible for wind and hail damage to your roof or any other structure (3% of $750,000 is $22,500).
This may be more than half or all of the cost of a new roof. This deductible may be limited to the roof or it may apply to wind-and-hail damage to the entire property. If a tornado should hit your home the deductible would still be $22,500, according to this example.
Unfortunately, our state insurance department has shifted its focus. Prior to the 1990s, Texas had an insurance department that was known as one of the strongest consumer protection agencies in the country. Today, the state insurance department says its focus is making sure that the insurance companies are financially sound. Financially sound companies, the thinking goes, de facto protect the consumers of Texas.
Before the 1990s, all insurance companies had to issue homeowners policies in one of three “approved” forms from the Texas Department of Insurance. Agents and policy owners knew what the policies covered. It was either a “Form A,” “Form B,” or “Form C.”
Today, each company may issue its own policy with its own unique language.
So, one company may apply the large deductible just to the roof, or another may apply it to the entire property. One company may reduce the method of payment for a roof claim from “replacement costs” to “actual cash value” (that is, replacement minus depreciation) if the roof is over a certain age. You, the consumer, or your financial planner must read the individual policy to know. Most insurance agents cannot keep up with the hundreds of policies that have hundreds of different conditions.
It has become very important for homeowners to plan on roof repairs and replacements on a regular basis. If you buy a home with a 30-year roof and it is 2 years old, it’s best to begin budgeting a set-aside of money in a bank account or money market account to replace or repair the roof.
Don’t count on the insurance company replacing it. The need to maintain regular savings for home maintenance has become imperative. New homebuyers must anticipate setting aside 2% to 4% of the cost of the home each year for maintenance costs. A $750,000 home would require a monthly savings and expense of $1,250-$2,500 per month. Be prepared to have to self-insure the first 3% of your home value.
Auto insurance has increased primarily because of the significant increases in the costs of car parts and repairs. With new automobiles selling for an average of $44,052, according to Kelly Blue Book Reports, claims for auto accidents have gone through the roof.
And so have the rates for auto insurance. Used cars are holding values longer, so, that just adds to the costs of claims.
One way to control the costs is to increase deductibles to $1,000 per claim for “collision” and “other than collision” coverages. Also, consider not insuring cars you own for physical damage after the values become less than what you have in your emergency fund. Insurance is for those losses you cannot afford.
The most important coverage is your liability insurance. In addition to carrying high limits of liability insurance on your cars and home, look into buying a personal umbrella liability policy for additional million dollars of coverage on top of what the other policies provide. Property losses are limited to the value of the property, but a liability loss is not limited and can exceed your net worth. One close to retirement should make sure their liability insurance is at least equal to their net worth.
Another advantage of having a Certified Personal Financial Planner™ working for you is having your insurance reviewed periodically to make sure it does what it is supposed to do. There really is no substitute for a comprehensive financial plan.
Wes Shannon CFP® is a Certified Financial Planning Professional for Brazos Wealth Advisors.