You own property and casualty insurance for the same reason you own any insurance, as a way to manage risk. Insurance is a contract that allows you to transfer risk to the insurance company for an annual fee. The fee makes sense when the risk is RARE but also CATASTROPHIC.
My favorite insurance example is, if you are in your 30s, have 3 little kids and a beautiful new house and your spouse is busy with the children so that you provide all the income for the family right now, then the possibility that you might die before those kids get raised would be catastrophic to your family. It’s also relatively rare that people in there 30s or 40s just suddenly die, but it is NOT impossible. So, purchasing life insurance for $500 a year, for the next 20 years to get the promise of $1 million dollars to your family if you should die during that time, is a great strategy to transfer this catastrophic risk to the insurance company.
When you hear about property and casualty insurance you are talking about all the companies that advertise on the TV. It’s Jake from State Farm and Flo from Progressive and the Geico gecko. All of those companies offer property and casualty insurance. For most families it’s home owner’s insurance, renters insurance, car insurance, boat, motorcycle or RV insurance and personal liability insurance.
Why Would You Buy Property and Casualty Insurance?
In addition to the fact that it’s a good idea, as shown above, it’s often required by law. Specifically:
- Homeowners Insurance. When you take out a mortgage the lender is giving you money in exchange for the value of your house and the land it sits on. In case you default on the loan, they take the house and the land and sell it to recover the money they loaned you. So, the lender requires you to have property insurance to replace the house in case of fire or other damage.
- Motor Vehicle Insurance. Most states require some minimum level of vehicle insurance for cars, trucks and motorcycles. In the event you hit something and damage it, there is property insurance to repair the damage. In the event you hurt yourself or somebody else, there is casualty insurance, to pay for medical treatment and to compensate for the pain and suffering.
What is Casualty Insurance?
Casualty insurance is a broad category of insurance coverage for individuals, employers, and businesses against loss of property, damage, or other liabilities. It includes things like vehicle insurance, liability insurance, and theft insurance. Liability coverage is for losses that occur as a result of the insured’s (your) interactions with others or their property. For homeowners you are insuring against your house burning down. For car owners, you are insuring against hitting something and totaling your brand-new vehicle. Casualty insurance is an umbrella term used to describe aviation insurance, workers' compensation insurance, and surety bonds.
What is Property Insurance?
Property insurance is protection for your property or protection against liability in case you damage other people’s property. Property insurance provides financial reimbursement to the owner or renter of a structure and its contents in case there is damage or theft. It also covers a person other than the owner or renter if that person is injured on the property.
Property insurance can include a number of policies, such as homeowners insurance, renters insurance, flood insurance, and earthquake insurance. Personal property is usually covered by a homeowner’s or renter’s policy. The exception is personal property that is very high value and expensive—this is usually covered by purchasing an addition to the policy called a "rider." If there's a claim, the property insurance policy will either reimburse the policyholder for the actual value of the damage or the replacement cost to fix the problem.
For every holistic financial plan, I always review all my client’s insurance policies. If you do not have appropriate insurance to protect against common risks, your financial plans are very much at risk. And, if you are spending too much on insurance, your ability to build wealth to achieve future goals is limited. So, it’s really important to have the correct balance of insurance.
I really like the idea of having a fiduciary financial planner review your insurance in the context of all your financial goals. Since the planner is your advocate – fiduciary – you can be confident that they aren’t motivated by insurance sales quotas. And since the analysis is done in the context of your goals, you can be sure that recommendations won’t cut corners on insurance that will hurt you in the long run.
If you would like to discuss the particulars of your insurance situation, follow this link to set a time for us to talk. As a CERTIFIED FINANCIAL PLANNER™ professional I am trained to evaluate and understand insurance and I work as a fiduciary on your behalf. And yes, I’m still taking on a few great families to be part of my financial planning practice.
If this article has you thinking about your own circumstances, contact my office at rdunn@dunncreekadvisors.com. I am always happy to meet with people who are working on their financial plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.