Insurance: the one bet in your life that you don’t want to have pay off; part two

“Getting insurance is YOUR responsibility to your family and your loved ones. You may hate it but it is your responsibility”– Jeremiah Say *

Welcome to the latest post in my journey to build financial literacy for young adults and their families. Today’s post is the second part on insurance. In the first part, which you can access at https://vocal.media/trader/insurance-the-one-investment-in-your-life-that-you-don-t-want-to-have-pay-out, I discussed why insurance is necessary and focused on legally-required types. Today’s post will dive into insurance types which are not legally required but serve important purposes nonetheless. Depending on your life circumstances, these insurances will be required by other parties such as your mortgage lender, your local or state government or a professional association.

What types of insurance are there?

In my last post, I provided an overview the three categories of insurances. In that post, I covered “Legally required” insurances:

• Legally required: Usually health insurance and auto insurance, although this may differ by state or country
• Discretionary yet required: these are required in certain instances. For example, if you have bought a home with a mortgage the bank will require home insurance. If you have a limited amount of equity in the house, the bank will also require mortgage insurance
• Discretionary but not required: there are many insurances which are not required, but will make sense based on your life circumstances. For example, if you have a spouse or children, you will most likely want life insurance

Let’s now dive into the discretionary insurances. I had originally planned on covering both discretionary types of insurance in today’s post, but due to very wide range of these insurances, I will focus on the Discretionary yet required and then cover the Discretionary but not required in a third post.

As described above, Discretionary yet required are insurances which are required in certain circumstances.

Home insurance

This type of insurance is “a form of property insurance that covers losses and damages to an individual's residence, along with furnishings and other assets in the home. Homeowners insurance also provides liability coverage against accidents in the home or on the property.” ** These policies provide you a financial safety net in case of events as such your home catching on fire or being burgled.

In the US, most home insurances cover four different areas: interior, exterior, personal property and personal injury **, with each category having its own separate coverage limits. Home insurance typically does not cover earthquake or flood insurance which needs to be bought separately in areas at risk for either of them. Home insurance policies are sold with a deductible which is the amount of damage that you need to pay before the insurance kicks in. There will also be coverage limits such as $100,000 for contents within the house (personal property). When you buy this insurance, you trade off the cost of the insurance and the breadth and depth of the coverage – the more you pay in insurance premiums, the lower the deductible or the higher the coverage limits.

Home insurance is usually a discretionary insurance which I would strongly recommend all homeowners purchase. The last thing you need when disaster strikes your home is to not have the resources to get it back to a livable situation. However, it is not always your choice whether to buy this insurance if you have a mortgage. Most lenders will require you to have homeowner’s insurance in order to protect themselves. Your property is your lender’s collateral for your loan and they want to make sure that its value is protected in case of any adverse event.

Mortgage insurance

This type of insurance “protects the mortgage lender and is paid for by the borrower of the loan.” *** Lenders will require this insurance when you have a low amount of equity in the home, usually if you’ve put down less than 20% as a down payment. When a borrower has a low amount of equity in the home, the lender has taken on a greater risk as the borrower’s incentive to just walk away in case something goes wrong is higher when they have less equity to lose. By making the borrower pay for mortgage insurance, the lender gets additional protection against this scenario.

This is one of the insurances you should do your best to avoid as it does not accrue to your benefit. You should ideally put down a 20% or higher deposit for a home mortgage if you’re able to and just avoid this requirement. Alternatively, if you are a homeowner currently being required to pay mortgage insurance and have reached at least 20% in equity and can refinance your home at a similar or lower interest rate, you should definitely do that and stop paying for this insurance.

Earthquake and / or flood insurance

As mentioned in the section above on home insurance, neither of these two natural disasters are covered by most insurances. IF you live in an area where there is higher risk of either of these two to occur, you have the option to buy additional coverage for either earthquakes and/or floods. They are similar to home insurance as each type of insurance covers damage to your home, belongings, and also pays for temporary living expenses after the specified natural disaster.

Flood insurance is a Discretionary yet required insurance “if you live in a high-risk flood area and your home is mortgaged with a federally regulated or insured lender.” **** Earthquake insurance is still completely discretionary, but there have been lots of discussion as to whether it should be required in high-risk areas.

Professional Liability insurance for service businesses

There are many different types of insurances to protect a business or professional. Depending on which state you live in, what your profession is, the size of your business and what kinds of licenses you need to run your business, local or state governments may require different insurances.

Professional liability insurance “will generally protect your business if sued for malpractice, errors, and negligence when providing services to your customers.” ***** Depending on where you live and what you do, this type of insurance will very likely be required by your local government and may actually be a deciding factor or even required by customers whose business you are trying to win. Here are some examples of professions and the relevant type of liability insurance which is likely to be required:

• Doctors—malpractice insurance
• Certified Public Accountants—liability for specific work they conduct on behalf of others and for errors
• Lawyers—malpractice insurance
• Construction companies—contractors liability insurance
• Engineers and Draftsman—errors and omissions insurance
• Lenders and Underwriters—errors and omission insurance
• Freight carriers—Automotive and liability insurance, depending on the materials being handled ******

As you can see, there are a number of different types of insurance which are important for various professions. If you are launching your own business, you should definitely reach out to an insurance agent and get advice on the insurance(s) you may be required to have within your local area and profession.

Surety bonds

This type of insurance “is a form of guarantee for contract completion. An obligee (or business) seeks a principal (or contractor) to fulfill a contract. But the business who is hiring the contractor wants to be assured that the project will be completed as required. To insure the business a successful delivery of the contract, the contractor buys a surety bond so the surety company becomes responsible for the contractor’s obligations. If the contractor defaults, the surety company can either find someone else to fulfill the contract or compensate the financial losses of the obligee. In other words, the surety assures a successful contract because it assumes all financial obligations if the contractor does not deliver.” *******

A number of business types are required to buy Surety bonds in order to get their licenses. These include “car dealers, mortgage brokers, loan officers, professionals in healthcare, professionals handling or administering an estate, and construction contractors.” *******

This completes today’s summary of Discretionary but required insurances. The practical steps you can start taking from today’s post are:

• Audit the insurances that you have either every year or when you have a change in life circumstance such as getting married or having a child
• Ensure that you have all legally-required insurances to at least the minimum required levels where you live (as covered in my first post)
• For discretionary insurances, determine any contractual or license-based requirements you have from your mortgage or business
• Map your insurance to each person or entity to whom you are responsible. If there is one which doesn’t have an insurance that ties to them, add that insurance

Thank you again for joining me on my journey to build financial literacy for young adults and their families. If you have found this post interesting and have friends and family who would benefit from it, please share it with them. If you are interested in reading more of my posts, please consider becoming a subscriber by clicking the button on the right. You can always access all the posts I have published on my author page at https://vocal.media/authors/sudhir-sahay. Additionally, if you have any questions on today’s topic or if there are any topics you’re interested in my broaching in future posts, please let me know. I can be reached at [email protected].

* Jeremiah Say as quoted in https://graciousquotes.com/insurance-quotes/

** Investopedia, What is Homeowners Insurance, https://www.investopedia.com/terms/h/homeowners-insurance.asp

*** Bankrate.com, What is mortgage insurance?, https://www.bankrate.com/mortgages/what-is-mortgage-insurance

**** Policygenius.com, Do I need flood insurance for my mortgage?, https://www.policygenius.com/homeowners-insurance/do-i-need-flood-insurance/

***** Small Business Administration, Insurance for a Small Business participant guide, p.7, https://www.sba.gov/sites/default/files/files/PARTICIPANT_GUIDE_INSURANCE.pdf

****** Small Business Administration, Insurance for a Small Business participant guide, p.8, https://www.sba.gov/sites/default/files/files/PARTICIPANT_GUIDE_INSURANCE.pdf

******* Small Business Administration, Insurance for a Small Business participant guide, p.11, https://www.sba.gov/sites/default/files/files/PARTICIPANT_GUIDE_INSURANCE.pdf