In our introductory post on insurance, we explained that the purpose of insurance is to protect against risks and we briefly discussed the various risks to consider (protect your income, protect yourself, protect your possessions, and protect against health risks). In this follow up post, we narrow the discussion to two specific areas – protecting your possessions and protecting yourself. We’ll explain the types of insurance, the purpose they serve, and how to buy the right coverage at the right price.
Protect Your Possessions (Property and Casualty Insurance)
The two most common types of property and casualty (P&C) insurance are homeowners’ insurance and auto insurance. The purpose of this insurance is to protect yourself from events related to your home or car (car accident, fire, flood, etc.).
When it comes to auto insurance, one of the most important details is liability coverage. Be sure to have enough coverage for both bodily and property damage, in case you are involved in an accident and are responsible for covering medical or property expenses for others. Also be sure to have enough uninsured/underinsured motorist coverage, since this protects you if the other driver in an accident has minimal or no insurance coverage. To lower the price of your auto insurance, consider increasing the deductible, which is the amount you pay out of pocket for each insurance claim. A good driving record (both tickets and accidents) also helps reduce your cost of insurance.
As with auto insurance, liability coverage is one of the most important aspects of homeowners’ insurance. You want to be protected in case someone slips on your driveway or falls off a trampoline in your yard. In addition to protecting against liability risk, you want to protect your house and possessions from events such as fires, floods, and theft. Be sure that your insurance policy covers the replacement cost for your personal property, rather than the actual cash value. For example, if you bought a TV five years ago for $5 and your house was destroyed in a fire, an actual cash value policy would only pay the depreciated value of the TV, not what it would cost to replace it with a new TV. Similar to other types of P&C insurance, you can reduce the cost of your homeowners’ insurance by increasing the deductible.
How to Purchase Insurance
When purchasing insurance, it’s best to use an independent insurance agent. An independent agent sells products for many different insurance companies, rather than selling products for one company. An independent agent, therefore, gives you several options, which increases the odds that you’ll get the best price. Once your independent agent helps you find the best price, it can also make sense to purchase several insurance products from the same insurance company. By purchasing multiple types of insurance through a single company, or “bundling,” you can receive discounts that you wouldn’t otherwise be eligible for. Having your insurance with one company can also make managing your policies simpler on your end, in terms of keeping track of everything and making sure there are no gaps in your insurance coverage.
Protect Yourself (Personal Liability Umbrella Insurance and Malpractice Insurance)
Unfortunately, as high-income professionals, physicians are often the victims of liability lawsuits, both personal and professional. Personal liability umbrella insurance protects against personal risk while medical malpractice protects against professional risk.
As the name suggests, umbrella insurance is additional liability insurance that sits on top of the liability coverage included in your other insurance policies (notably auto and homeowners’). It provides another layer of protection in case a personal liability lawsuit exceeds the limits contained in your other policies. On this point, be sure that your umbrella policy is “coordinated” with your auto and homeowners’ policies so the umbrella coverage kicks in as soon as the other liability limits are reached. Fortunately, umbrella insurance is one of the cheaper forms of insurance and it typically only costs a few hundred dollars per year for $1 million of umbrella coverage. Umbrella coverage is important even if you don’t have significant assets. For younger physicians, their earning potential is their most valuable asset, and umbrella coverage helps protect against the risk of future wages being garnished.
In addition to personal liability protection, physicians are all too familiar with the professional liability risks they face. This is where malpractice insurance comes into play. If you work for a large employer, you are probably covered by that employer’s insurance policy, but if you work in private practice, it becomes especially important to understand the details of your coverage. There are two main types of malpractice insurance:
- Occurrence – Provides coverage for incidents that happened during the policy year, regardless of when the claim is reported to the carrier.
- Claims-Made – Provides coverage for incidents that happened during the policy period and were reported as a claim while the policy remained in force. Often, the insurance contract terminates when employment terminates, and claims filed after the policy is no longer effective must be managed through a “tail” policy.
If your malpractice insurance is “claims-made” coverage, it’s important to understand how your tail coverage works and who is responsible for paying for it.
Nobody likes paying insurance premiums and it’s easy to skip over important details when purchasing coverage. However, there is a big difference between just having coverage and having coverage that will fully protect you and your assets in the event of an accident or liability incident. By understanding the basic elements of each type of insurance, you can make intentional decisions about what level of protection is right given your situation. Having insurance is a lot like your health, you tend to take it for granted until something goes wrong. Remember, the goal is not to use your insurance coverage, but rather to have peace of mind in case you do need to use it.
About MD Wealth Management: We are an Ann Arbor financial planner that specializes in providing financial planning for physicians and retirees. We are CERTIFIED FINANCIAL PLANNER™ professionals and fiduciary financial advisors who operate on a fee-only basis, which means we do not sell financial products or collect commissions. As an Ann Arbor financial advisor, we enjoy working with clients both locally and remotely.