What are your insurance gaps?

The recent earthquakes in Southern California are a good reminder that a financial service should match your needs and goals. This comes under the GET READY! Principle that You should receive customized service appropriate to your needs and goals. Your potential financial needs should be reviewed for each type of financial product under consideration and take into account any existing financial products.  

Any new recommended products must fill a need (gap in your financial plan).  Any replacement of an existing financial product must be carefully reviewed with all pros and cons considered and presented in writing to the consumer. Along with this a professional advisor should ensure that any “gaps” are closed.  

Let’s take a look at insurance. It’s important to understand what your insurance policies cover, as well as what they don’t cover.  Coverage is not always what it seems to be, so you need to take the time to review your needs and then review proposals/quotes and your policies.  Most of us have insurance coverages that we have no use for, while having exposure to risks that should be insured. 

While insurance premiums are an important factor, premiums should not be the main factor that you consider.  Depending on the type of coverage, you’ll want to focus on deductibles, exclusions, coverage amounts, riders and what is specifically covered. 

Here are some gaps to consider with different types of insurance:

Auto insurance. Almost every state mandates a certain level of coverage.  It is important to note that these are minimum required coverage amounts and may not be sufficient to meet your needs.  

If you are driving for a car sharing service such as Lyft or Uber, your personal auto insurance does not cover you. The most common gap is that coverage through the car-sharing service does not cover you until you have a passenger. Therefore there is no coverage between when you turn on the app as a driver and you pick up your first passenger.

Where you will most likely not have a gap is when you are renting a car. Generally, your auto and homeowners insurance provides rental coverage. You should consider rental car insurance if you don’t have insurance, your insurance coverage has low limits or you simply want peace of mind. Here’s a look at: Does my car insurance cover rental cars?

Homeowners insurance. Earthquakes and floods are not typically covered under homeowners insurance policies. Coverage may be obtained by adding an earthquake or flood endorsement to your homeowners insurance policy or purchasing a stand-alone earthquake or flood policy. You can check with your homeowners insurance company. 

In California, you can find out more about earthquake insurance from the California Earthquake Authority (CEA) - here . You can learn more about flood insurance from the National Flood Insurance Program (NFIP) - here.  The premiums for earthquake and flood insurance may be higher than your homeowners insurance, so keep in mind what the biggest risk is for your home.  

Homeowner’s insurance may also not provide enough coverage to replace what is insured.  Get replacement coverage, not an “actual cash value” policy.  Make certain you purchase enough coverage to replace what is insured. This will give you the money to rebuild your home and replace it’s contents. An “Actual Cash Value” policy is cheaper but pays only what your property is worth at the time loss (your cost minus depreciation for age and wear).

Disability Insurance. Social Security disability insurance provides a maximum monthly benefit of $2,788 (in 2018) which will not be sufficient for most people. It can also be hard to qualify for and requires a total disability..  

Group long term disability insurance through an employer will usually not provide the full coverage that is needed. The majority of group disability insurance plans pay a pre-tax benefit which means any benefits are subject to income tax. There is also a maximum monthly benefit. Bonuses and commissions are not always covered.  A supplemental individual disability insurance policy can provide a significant amount of additional coverage for those who have group LTD especially if you have a high income. 

Here’s how to calculate your disability insurance coverage gap:Current Annual Gross Income:______ times ______(% covered 50-60 is the norm, most plans have a maximum benefit cap, so use that if applicable) equals _____ then subtract your gross income tax rate (35-40%) for your current after-tax long term disability benefit.  An individual disability program will usually replace about 70% of your after-tax income.  Compare for shortfall.

Life Insurance. This is an area where you may be able to reduce your premiums. Oftentimes, rather than obtaining sufficient life insurance and maximizing premium dollars, people will obtain cash value life insurance policies. It’s important that you get the amount of coverage that is needed rather than limiting your coverage due to the high premiums of cash value life insurance. Find out How Much Life Insurance Do I Need?

While comparing term life and cash value life (whole life, universal life, variable life and indexed life) is a long discussion, the bottom line is that for the majority of people, term life insurance will meet their needs. Term life insurance can provide a guaranteed level annual premium for a specific period of time.  Proponents of cash value life insurance promote the build-up of cash value and that coverage is permanent. However, cash value life insurance premiums can be 7-10 times higher than term life insurance, have expensive fees and oftentimes have minimal guarantees. Most people do not have a permanent life insurance need. It’s important to note that accumulating cash in a life insurance policy is not the most efficient form of savings. 

Heath insurance. For health insurance, be sure that you can afford to pay the deductible and co-pays.  While you may save money on insurance premiums by choosing a high deductible plan, you may find that you are unable to pay the deductible and co-pays if coverage is needed.

Balance billing (surprise medical bills). This is becoming more common. For example, you go to an emergency room at an in-network hospital and are seen by a specialist who is out-of network.  While insurance companies are required to cover you if you need emergency care, there is no set definition of an emergency. It’s important to understand what your insurance covers and to speak with your doctor and/or hospital representative to request in-network specialists and services. Learn more about State Efforts to Protect Consumers from Balance Billing. Here’s a good resource if you need help Navigating Insurance Appeals.

Long Term Care Insurance. Long term care is not covered by Medicare.  Medicare only pays for skilled care in a nursing facility for a short period–no longer than 100 days– and only  if the patient meets al !of Medicare’s requirements for receiving daily skilled care. Medicare does not cover  long term custodial care or in home care.

Some LTC policies, especially older ones are limited in the types of care that are covered. Home care was often not included when LTC policies first came out, or was only included as a percentage of facility care. While older policies may have more limited coverage, replacing them with a newer LTC policy seldom makes sense given the higher premiums for a new LTC policy.  

Annuities. Many popular annuities are structured like the Eagle’s Hotel California “You can check in any time you like, but you can never leave”. Some annuities only allow, limited if any opportunity to completely surrender the contract. The accumulated/cash value is only available through partial withdrawals and annuitization. Other annuities can be complex and hard to understand.  Also, surrender charges for the first few years can be high. Check out what FINRA has to say about Indexed Annuities. 

The bottom line is that you should take the time to understand your insurance policies, learn what is covered and what is not covered along with asking questions. Take the time to organize your insurance documents so that you can review your full insurance portfolio. Remember that in the end, you can become empowered through The GET READY! Financial Principles. If you are a member of the financial services industry, following The GET READY! Financial Principles will help you best serve your clients.