Articles for Homeowners

To Cover or Not to Cover? – That Is the Question

In our daily lives, most of us spend little time contemplating whether to purchase insurance coverage or, as they say in the insurance industry, “go bare.” Most of the decisions are made for us. Our mortgage company may require us to have homeowners insurance, our state and/or auto leasing company may require that our private passenger or commercial auto policy is in place prior to our taking to the open road, and our clients, especially those with risk managers, may require that we have a variety of coverage’s in place prior to doing business with us. However, there are numerous decisions left for us to contemplate. Buy long-term care insurance at age 40? “I feel healthy as a horse,” you say to yourself.“I’ll wait.”

The problem with the decision making process is that, when the decision is up to us, we sometimes don't think things through to their logical conclusion. Following are some considerations that should go into any insurance buying decision:

1. Risk Aversion – “How risk averse am I?” If I am very risk averse, I will be inclined to purchase just about any coverage available, with little regard to pricing, and I will probably buy the highest limits of coverage with the lowest deductible available. Alternatively, if I am not risk averse, i.e., I am comfortable “underwriting” my own risk, I may be inclined to eschew coverage and go bare. “How risk averse am I?” is a question that should be asked any time an insurance buying decision is made. The same question will be asked of you by a stockbroker or mutual fund adviser when deciding on investment decisions as required by law, but it is equally relevant in the insurance buying process.
2. Financial Wherewithal – “How much insurance can I afford to buy?” Often the decision is one of putting food on the table versus buying insurance, or at least that is what appears to be the case. Viewed in its true light, buying the right kind of insurance might be tantamount to insuring the continuing ability to put food on the table. This may become more obvious when the costs and benefits are broken down and analyzed carefully.
3. A cost/benefit analysis is an important step in any insurance buying decision. What is the nature of the exposure I am considering insurance for? Is it a catastrophic exposure like death, disablement or liability for injury to another? Is it coverage for an appliance repair, which may be costly, but will not likely break the bank? (Note: Warranties are not considered insurance products in all states.) The benefits may not outweigh the costs when considering the likelihood of an appliance breakdown, especially when factoring in the manufacturer’s warranty. Try to obtain statistical information regarding the likelihood of a breakdown after the warranty period is over. You may be surprised to find out how many appliance breakdowns occur during the manufacturer’s warranty period versus the extended warranty period.
4. Last but not least, an extremely important question that must be asked is “What am I insuring?” or “What am I protecting?” In the warranty decisions discussed above, it may be a $139 DVD player or a $20,000 automobile. In the long-term care scenario it may be your financial assets that you are protecting, though the benefit of choice of care and other quality of life issues may come into play in the decision as well. If you have little or no financial assets, i.e., you don’t own a home or have a nest egg of any significant size to protect, long-term care may not be the right choice for you at this particular time. The trade off in buying now versus waiting, however, certainly warrants careful consideration. For example, you may be building your nest egg and when it is of significant enough size, you may decide the time is right for long-term care insurance, but you may regret not having purchased the coverage when it was much more affordable.

So the stakes are obviously different depending on the type of coverage you are purchasing. You need to consider the right limits and deductibles for your risk aversion profile and give careful thought to what the product is, what your expectations are, and what alternatives are out there. You may decide that less or no coverage is appropriate for you, but the important thing is that you fully understand and give careful consideration to the benefits of coverage...and the risks of going bare.