Making the Most of Your Insurance Policies

Don't overlook the benefits of insurance policies in your financial plan.

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Tim Lee
Many investors are so focused on searching for their next investment idea, they overlook a great opportunity to protect their current assets and contain their annual expenses. While not generally thought of as an investment topic, asset protection insurance—property and casualty as the insurance industry calls it—should be a key component of every investor's portfolio.

Consider the seemingly infinite set of choices you face: Insurance companies will offer you coverage against "loss" of a particular asset, cash flow, or even against the liability of a misjudged action. With that in mind, here are some tips to help you make the most of your insurance policies:

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Pay now or pay later. I recently had a plumbing leak in my house that caused substantial damage to the ceiling of the room below. As my wife and I considered the cost of repairing the damage, we contacted our insurance company about making a claim against our home owners' policy. After speaking with our insurance carrier, it became clear that we'd end up paying for the repairs in one way or another. We could either pay for the repairs "out of pocket" or over time in the form of higher premiums tacked on to the initial deductible on our policy.

For us, it didn't make sense to tap our insurance policy to cover the damage. Insurance is designed to spread out the risk of a catastrophic event that has a low probability of occurrence. In choosing a policy, you should consider what level of loss you can absorb and what level of loss would be too great for to accept. Then set the deductible on your insurance policies just below this threshold.

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Set your deductible to match your ability to pay. Many investors buy a new car or house and put insurance coverage in place as a matter of requirement, without much thought or analysis. If you were in a car accident and could comfortably afford to write a $1,000 check to replace your fender, why would you set your deductible at $500?

Instead of increasing their insurance rates, many people simply pay the repair shop for the work and don't make a claim. You can save money by raising your deductible to the amount you could not afford to pay "out of pocket."

What changes should you make? You don't need an actuary to analyze risks to your cash flow. Here's an easy checklist of action items:

  • Match your policy deductible with your budget. If you have the means to set aside $500 or $1,000 to pay for a small problem, set your deductible payment above that amount. You'll save premium dollars.
    • Ask for pricing. Many times the discount for consolidating policies with one company can be significant.
      • Make sure your policies don't overlap. Ask your insurance agent or company how to make your policies work together.
        • Re-price periodically. The insurers do this, you should, too.
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          Homeowners', auto, and excess liability insurance seem to be the most overlooked financial instruments. Regardless of their net worth or sophistication, most people just "set it and forget it" when it comes to these policies. Unfortunately, no one can afford to ignore this issue. A sophisticated financial adviser will be able to help you navigate through these issues and coordinate your coverage with your risk and budget.

          A few minutes reviewing your policies now can result in significant savings in insurance premiums over time.

          Timothy R. Lee, CFP®, is a managing director and cofounder of Monument Wealth Management in Alexandria, Va., a full-service investment and wealth management firm. Monument Wealth Management is backed by LPL Financial, an independent broker-dealer and Registered Investment Advisor, member FINRA/SIPC. Monument Wealth Management has been featured in several national media sources over the past several years. Follow Tim and Monument Wealth Management on their blog Off The Wall , on Twitter at @MonumentWealth, and on their Facebook page. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for individual. To determine which investment is appropriate please consult your financial advisor prior to investing. All performance references are historical and are not a guarantee of future results. Strategies involving asset allocation and diversification do not ensure a profit or protect against a loss.