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Insurance Primer: Do You Have Enough Coverage?

March 31, 2009

Michael Jordan, Wayne Gretzky and Warren Buffett have at least one characteristic in common besides their fame and fortune. All three of these men were among the best in their respective professions at anticipating what was about to happen, rather than reacting to conditions or circumstances. This is the same approach everyone should take when evaluating their insurance needs. After one sustains a loss or damage from storm damage, a collision or a liability claim, it is then too late to obtain sufficient coverage to ease the financial blow.

Many policyholders, especially younger individuals or those who have never suffered a loss, seek the cheapest premiums available without considering the consequences. There are plenty of ads out there touting competitive rates, but most folks do not have a good understanding of an insurance company’s reputation for fairly or promptly resolving claims. Likewise, the types and amounts of coverage vary widely. A good insurance agent, particularly an independent agent who can offer policies from several different companies, will often tailor a company or policy to the customer’s specific needs. Policies should be reviewed and updated periodically, as needs and family circumstances change.

Many policyholders erroneously believe that if coverage limits tripled or quadrupled, the premiums would increase by the same proportion. The truth of the matter, however, is that the increased premium might only rise a small increment. For example, an auto policy providing New York’s mandatory minimum liability limits of 25/50 ($25,000 per person for one injured party and $50,000 for all injured parties per accident) might cost $706 per year. You might be able to increase your coverage limits to 250/500 ($250,000 per person and $500,000 for all individuals per accident). Your premium might increase to $838 per year for a ten-fold increase in coverage.

Further savings could be realized by refusing to purchase OBEL (Optional Basic Economic Loss) or APIP (Additional Personal Injury Protection) coverage. These items provide additional layers of coverage for no-fault benefits above and beyond the mandatory minimum of $50,000 for lost wages, medical bills, etc. If you already have a separate disability policy and private health insurance, it might make sense to decline OBEL and APIP coverage.

Perhaps the most essential (and least understood) type of coverage is SUM (Supplemental Uninsured/Underinsured Motorist). This type of coverage protects you, family members residing with you and/or occupants of your vehicles in the event that another person deemed to be negligent in causing a motor vehicle accident has little or no insurance coverage. SUM coverage under your own policy allows you the flexibility to be compensated for the full value of your loss for pain and suffering, as well as lost wages and expenses (beyond what no-fault would pay), up to the limits of your coverage.

For example, suppose the negligent party only maintained a 25/50 policy and the full value of your claim was $250,000. Assuming your bodily injury liability limits and your SUM limits were at least $250,000, you could be fully compensated for your loss. Under this scenario, the company for the other driver would pay you the initial $25,000 while your own company would pay you the remaining $225,000 in supplemental benefits.