Until you need it—and perhaps due to a perilous incident—few things in life are less appreciated than insurance.
The premium payments feel endless. There’s seemingly a policy for every possibility, be it your home, auto, life, health or even the family pet. It can all be overwhelming—so we might be tempted to avoid talking about it.
And therein lies the problem.
To work as intended, insurance should be reviewed periodically and then adjusted with help from an insurance professional. This is especially true as we age, build wealth or face uncontrollable financial factors like inflation. Sometimes, it’s wise to pivot away from a policy instead of continuing to fund it.
BOK Financial Insurance Inc. and wealth management experts stress protecting both property and financial assets for the future. They warn that by not reviewing policies as life changes, the ability to recover from a home-damaging incident or to fulfill a financial legacy is compromised.
“A good financial planner will make an insurance review part of their work. If the client needs a planner, then they need an insurance review,” Vicky Nelson, consultant for private risk and select business at BOK Financial Insurance.
Back to basics
The premise of insurance has remained constant for centuries: to mitigate risk. And in today’s fast-paced and litigious society, risk levels have risen to include:
- Service workers hurt in your home or on your property.
- Invited guests injured during or after a visit.
- Businesses growing in operational scope or geography.
- Fires resulting from always-on or excessively charged phones, TVs or tools.
As designed—and as many policyholders assume—insurance protection is to “make good” or repair or remediate damage caused by accidents, negligence or Mother Nature.
However, when policies are not reviewed or adjusted to keep up with risks or life’s circumstances, unintended out-of-pocket costs and disruption may be incurred.
“The worst time to discover an inadequacy in coverage is when you file a claim,” said Kimberly Bridges, director of financial planning at BOK Financial®. “By then, it’s too late.”
What to review — and what to do
Be proactive by initiating a review of your insurance coverages as part of an annual “financial check-up” that includes your CPA, wealth manager or financial planner. “A team approach is best because the best financial plan and investment strategy can’t overcome inadequate coverage for large losses, accidents, deaths or injuries,” said Nelson.
“Very few policyholders initiate reviews. They file away their renewals, barely glancing at their coverages to see if they’ve changed with the times.”- Vicky Nelson, insurance risk consultant
Homeowner’s insurance needs to reflect replacement cost
The number one concern is to have coverage that meets or exceeds rebuilding costs. Nelson explains that many policies began at move-in, but standard coverage escalators lag recent material and labor price hikes. She cites lumber prices, which fluctuated widely during the pandemic.
You’ll also want coverage that limits your financial responsibility to your deductible, as applicable. If those levels are insufficient, a homeowner can become a co-payer to the insurance company on a repair or rebuild if coverage-to-value thresholds are not maintained, Bridges said.
“People need to have conversations about potential pitfalls and understand the options available through insurance to make an educated decision about what to insure, for how much and their comfort to sleep at night,” Nelson said adding that additional policies may be needed to ensure appropriate coverage.
Umbrella policy
Though your homeowner’s policy has liability coverage, you likely want to have additional protection against injuries incurred by a guest or service worker on your property. But is it enough to cover the aggrieved individual or the associated legal expenses?
“If you’ve prospered, are visible in your community or are perceived to be financially capable, you may be susceptible to others’ greed or ill intentions following an accident or tragedy,” said Nelson.
Values change regularly for collectibles like art, memorabilia and jewelry. Family heirlooms can be irreplaceable. Specific items like a wedding ring—or grouped items like high-value baseball cards—can be covered through special-item or blanket-style supplemental policies.
“Regular reviews are really about making sure that liability and umbrella coverages are adequate enough to protect your acquired wealth and net worth,” said Nelson.
Auto insurance, like homeowner’s, should cover replacement. Shocking to many older-vehicle owners, average new car costs exceeded $47,000 in May. Additional liability insurance is often cost-efficient, while collision insurance for an older, damaged or salvage-type vehicle may be optional.
Life insurance coverage not always compatible to lifestyle
An insurance review can also reveal potential changes needed to your life insurance policy.
Term insurance policies offer constant premiums and death benefits for a defined period but may prove inadequate when needed. Often bought to replace income when buying a house or starting a family, term policies can be terminated mid-term and then re-purchased with greater benefits.
People generally don’t improve their coverages proportionate to their lifestyle changes, Bridges said. They start coverages in modest times, and don’t upgrade. “Do it when you’re younger and have a better chance to qualify health-wise,” she suggests.
You’ll pay higher premiums during the initial years of a new policy than the latter years of the original because premiums are set by age and health. You may even improve the benefit-to-premium ratio.
Asking these questions will help when reviewing term insurance:
- Has our household income risen significantly?
- Does the benefit amount still fulfill the income replacement purpose?
- For how long is this type of policy needed to pay for a mortgage or children’s education?
Permanent insurance can be acquired as a supplemental or successor policy. Though not as simple as term policies—and often known as whole-life or universal—they’re known for:
- Serving the lifetime of the insured.
- Accumulating “cash value” as a savings component.
- Conversion options that may include long-term care coverage.
- Paying the insured’s final expenses or helping heirs cushion estate, tax or property disposition expenses.
The savings and conversion options can be especially attractive to seniors. Many rely excessively on Social Security for retirement income or late-life expenses. Benefits often reduce by up to 50% after a spouse passes away.
“In addition, too many times, accumulated or life savings haven’t kept up with the costs of long-term care,” Bridges explained.
Permanent insurance as an alternate income source can be helpful with annual long-term care expenses topping $100,000 and stays averaging more than two years.
“The younger you are when you can commit to a permanent insurance policy, the lower your premiums will be,” said Bridges.
Consult the pros
Thinking of ending a policy to save the premium payments? Experts warn against it due to the accrued benefits that may benefit others.
“Don’t terminate a policy without talking to your wealth management professional. At least explore what can be done with the policy first,” Bridges said. “For example, some individuals choose to transition a policy to a charity willing to pay the premiums for the eventual benefits.”
Nelson reiterated the importance of speaking with your advisors in relation to insurance. “We help clients make an educated decision with respect to their risk tolerance. Their coverages should adequately protect not only their possessions, but their acquired wealth and net worth.”
. © 2023 BOKF, NA.