Insurance Q&A: “What is a time deductible?”

Most of us are familiar with the concept of an insurance deductible.

Whether it’s the co-pay on a health insurance policy, the wind and hail deductible on a homeowner’s insurance policy, or the comprehensive and collision deductible on an auto policy, we are expected to share in the cost of our insured “losses.”

A deductible on an insurance policy has a few basic purposes. One is to keep us from filing “ticky-tack” insurance claims. If there was no deductible on our auto insurance policies, you might have individuals filing claims to fix rock chips in the paint on their cars.

Who cares? Anyone who pays an insurance premium. The costs to process the paperwork and pay an insurance adjuster would skyrocket if these types of claims were common…which would raise EVERYONE’S premiums.

Additionally, a deductible “forces” us to take more care of our property and ourselves. Without being forced to share in the costs of our “losses,” we might not maintain our property with such resolve.

For example, some people might not be in too big of a hurry to move their car into a garage during a hailstorm if they thought their insurance company would simply come out and fix the car for if it were damaged.

What Does Time Have to do With It?

A “time deductible” is a different animal. This type of deductible is not related to the sharing in the cost of physical property or our medical expenses (for tests and medication).

Rather, a time deductible typically comes into play when you are insuring the loss of income, which is not tangible property.

Specifically, your insurance policy may dictate that you wait a certain period of time, perhaps 72 hours, before they will begin to compensate you for your lost income.

So instead of reducing your claim payment by $1,000 (a typical auto deductible), you simply wait a few days before your payments kick in.

Time Deductible Examples

A few examples will be the best way to demonstrate the concept of a time deductible on an insurance policy.

1. Commercial General Liability Insurance – part of the CGL policy may be Business Income coverage. Imagine your company suffered a major fire. It may take you weeks or months to get back on track to earning revenue. Would your company survive three months without a single dollar of income?

Business Income coverage on a CGL policy would indemnify you for your lost income in the event you couldn’t continue your normal business operations due to a covered claim.

Your policy may have a time deductible that states you will not receive the “lost” income payments until after at least 72 of being out of business.

2. Landlord’s Insurance – perhaps you have a rental income property that cannot be occupied due to a covered loss…let’s say a fire. You certainly can’t expect your tenants to continue to pay rent while they’re not living in your dwelling.

Your insurance policy may cover “loss or rents,” also referred to as “fair rental value,” but you might have to wait out the time deductible prior to receiving claim payments for your financial loss.

Can I Avoid a Time Deductible?

Depending on the type of policy you have and what coverage you opt to add to your policy via endorsement, you may be able to choose no time deductible.

This means you may be reimbursed for loss of income immediately following your “loss.”

Similar to a “dollar amount” deductible, you can expect to see an increased premium for choosing a shorter time deductible or no deductible at all.

So be sure to weigh your options before making a decision.

Insurance Q&A: “How much do insurance agents make?”

Just like any other commission based sales job in the world, the sky is the limit as far as income goes for an insurance agent. However, it’s not that cut-and-dry.

There are a number of ways to get into the industry as a sales agent and a lot of products to potentially master and sell. How much you get paid depends on where you start.

It’s also worth noting that, just like any other sales job, you should not expect to earn very much money until you have built a solid client base. This can take anywhere from 2-5 years depending on how hard you beat the pavement.

Expect 10 “No’s” for every single “Yes.” This means you will likely “pitch” to 100 people to sell 10 insurance policies, which should be at least half of the sales you’ll need to make to earn some decent money every single month. If you’re not already scared, keep reading.

How Property and Casualty Insurance Agents Are Paid

Typically, an insurance agent is paid a commission, or percentage, of the total insurance premium the insurer charges for a given policy. Property and Casualty (auto, home and business) insurance agents typically earn anywhere between 7% and 20% commission on each policy sold. If you forced us to come up with a solid number, we’d say 12% is what you can expect on average.

Example: $1,000 auto insurance policy at 12% commission would net you $120.00

Each year, assuming your client is still happy and continues to insure with you, you will earn a “renewal” commission. Renewals are where the money’s at, as you do not have to advertise or spend time quoting the policy for it to renew.

If the client makes the renewal payment, you get paid again…it may even happen when you’re sleeping. Renewal policy commissions are often slightly less than the initial commission you get paid for the “new business.” New business may be 15% and renewals only 10%.

As you can see, a few years into the process of building your “book” of business, the renewals from previous years virtually make your income exponential. There are few products you can sell where you get paid each year, whether you worked with the customer or not.

Example: Last year’s auto policy from the example above renews ($120.00) and you sell a new auto policy on the same day the following year, earning another $120.00 – your income for that day is now $240.00. Not a bad day’s work.

The average insurance agency, if run well, should have a target of retaining 90% of the previous year’s business.

You might lose 10% of the previous year’s business from unhappy clients who didn’t feel their insurance claim was handled well, so they shopped around and found cheaper insurance…or maybe their third cousin became an agent and they simply switched their insurance policy to him or her.

How Life & Health Insurance Agents Are Paid

Life and Health insurance agents get paid a little differently. There is still a commission, but quite a bit more is paid upfront compared to property and casualty insurance. There are also renewal commissions, but these are paid at a much lower percentage (although maybe not less overall money than a property and casualty policy, as the premium is often substantially higher).

Example: You sell a $10,000 whole life insurance policy and receive 55% commission for the first year, which is $5,500. The renewal commission may be as low as 3%, which still nets you $300 per year.

Some life insurance companies may pay as much as the entire first year’s premium as a commission, and then not offer renewal money. The combinations of new and renewal commission for life and health insurance can vary greatly depending on the company.

Do You Want to Own an Insurance Agency or Work for One?

How much money you earn as an insurance sales agent can also vary greatly based on whether you start your own agency or work your way up at an existing agency. Of course, there are pros and cons to both options.

In the long run, if you’re getting into insurance sales so you can afford a yacht, being the agency owner is your goal.

It’s the same as any other industry. You make more money as an employer (if you’re good enough) than as an employee, but it requires more work.

Insurance Agency Owner

Expect to make much less in the short run if you open your own insurance agency, as every dime of your income from sales will be put back into keeping the bills paid and the doors open for the first couple of years. BUT, and this is a huge “but,” you’ll make significantly more money in the long run as an agency owner…if you can manage to stay in business.

Many insurance agencies are handed down to family members or simply purchased by someone who has enough money to buy one and doesn’t want to take the time to build the business from scratch.

Agent in Someone Else’s Insurance Agency

If you are new to the industry, you will likely start as a Customer Service Representative (CSR). If you are good enough at the job, and decide you like insurance enough, you may be able to “move up” to an agent, working on behalf of your employer.

The upside to this method is that you earn money immediately upon selling an insurance policy. You do not have to pay the phone bill, rent, utilities, insurance (yes, insurance agents need insurance), etc. That’s the owner’s problem.

You might expect to have your expenses paid, and in a large enough insurance agency, a processor to do your paperwork…which is a good portion of the job.

The downside is that you will be splitting your commission earnings with the owner of the agency you work for. After all, the insurance companies who offer these products will not let “anyone off the street” represent them and sell their insurance. If you’re new to the industry, you will have to ride someone else’s coat tails until you get your footing.

Captive or Independent?

You will also have the option of being a captive agent or trying to become an independent insurance agent. Captive agents typically sell insurance for only one company, whereas an independent agent sells insurance for multiple different companies.

Captive Agents

For captive agents, think Farmers and State Farm. This option is great for people who don’t know the first thing about insurance. Pass a “sales aptitude” test and you’re off to the races with these types of insurers.

Many captive agents switch over to becoming independent agents after enough time in the industry, as captive insurers typically have a limited “appetite” from an underwriting standpoint. You will turn many clients away if State Farm does not want to insure the individual because they are “too risky.”

After becoming a successful captive agent and building your confidence, you may decide that you want the ability to insure anyone who walks through the door. This means you want to be an independent agent.

Independent Agents

It’s much harder to become an independent agent, as you actually have to prove you know what you’re talking about to represent the various insurance companies.

You’ll very likely need to demonstrate that you have previously sold a lot of insurance to qualify for a contract to sell insurance products independently. The commissions are higher here, but you need to satisfy multiple insurer’s requirements from a policy standpoint.

You may represent 10 companies, and each of them could expect you to sell a minimum of five policies per month, or they will terminate your contract and not allow you to sell their product anymore.

So going independent will likely require a few years of experience in the industry, starting by working with an existing independent agency or buying one.

To sum it up, there are a number of different ways you can make money as an insurance agent, and what you put in is what you’ll get out, much like any other sales job. Don’t expect it to be easy.

Insurance Q&A: “How much is insurance for a new driver?”

If you’re new to this country or have a newly licensed teen, you may be wondering how much auto insurance is going to set you back.

The cost of insurance for a new driver can vary widely depending on several individual factors and the type of vehicle to be insured.

A quick review of how car insurance rates are determined may help you understand the basics of how your car insurance premium is calculated.

But whether you’re “new” or “old,” the same factors are taken into account when an insurer decides how much you should pay for coverage.

The Reality Is…

Generally speaking, if you are new to auto insurance, you can expect to pay more for coverage than someone who’s had consistent, uninterrupted auto insurance coverage. In fact, there are even discounts for drivers who have been consistently insured.

Car insurance premiums are based on the person (or persons) driving the car and the car itself. Newbies are usually more of a risk for an insurer because there is no previous driving history to “judge” you on.

Insurers look at your driving history, specifically your MVR and C.L.U.E. report, to determine your rate.

You are automatically considered a higher risk if you don’t have a driving history for the insurer to review…it’s kind of like getting a mortgage with no credit. Your rate will be higher, if you’re approved at all.

Additionally, there is often a surcharge for people with an “unverifiable driving history.” It can vary widely, but may be in the 10-20% range. So all other things being equal, you’ll likely pay more as a new driver.

What is the Insurer Looking At?

That said; let’s look at the factors that make up the premium you can expect to pay as a new driver. The possible combination of these factors is almost infinite, so we can’t simply give you a number, but we can tell you what the insurer will be looking at.

1. Why are you new? If you’re newly licensed as a teenager, especially a male, you can expect to pay through the nose for a new policy. Teen drivers are notoriously expensive to insure.
Expect a minimum of $100 per month ($1,200) per year. The cost to insure a first time driver who is at least 25 years old is much less expensive, but still more than what it would cost if you had previous coverage.

(How much is car insurance for a 16 year old?)

2. What coverage do you want/need? Are you shopping for liability only auto insurance, or full coverage including comprehensive and collision? As expected, the more coverage you ask for, the more expensive the policy.

(Collision vs. comprehensive coverage)

3. What type of car are you insuring? Never drove before, but just won the lottery? The cost to insure a 1990 Honda Civic will cost substantially less than coverage for a 2012 Ford Mustang GT convertible.

Tip: You do not need to purchase full coverage unless you have a loan or lease your new ride. Physical damage coverage is not mandatory by law, but you lender or leasing agency will certainly require this coverage. Remember, you don’t OWN the car until it’s paid off!

4. How’s your credit? Nowadays, most insurers rely on your insurance score to determine how much to charge you for insurance. If you’re a new driver with a perfect credit history your rate can be as much as 35% less than a new driver with a less-than-perfect credit history.

(Credit scores and car insurance rates)

For example, an 800 credit score “new driver” will likely pay less than a 500 credit score seasoned driver with a speeding ticket, but not if the 800 credit score driver is a 19 year old male.

So be sure to stay on top of your credit. It’s one of the few things you can control, even if you’ve never driven a car in your life.

New Drivers Need to Shop Around Even More!

As a new driver, it’d be in your best interest to shop around extensively. There are certainly companies out there that have more of a risk appetite for new drivers.

Be sure to gather insurance quotes online and contact a few local independent insurance agents to shop your premium.

You may also want to stay away from insurance companies that spend hundreds of millions of dollars advertising their products on TV.

Ultimately, your premium dollars are spent on attracting new clients rather than providing less expensive coverage to existing clients.

(photo: cjc4454)

Wouldn’t it be nice if we could tell if a particular vehicle was insured just be looking at it?

At least you would know which cars not to drive next to on the freeway, and which cars not to park next to at the mall. Unfortunately, it’s not quite that easy.

While almost every state requires at least minimum mandatory limit liability coverage be purchased in order to operate a motor vehicle on a public road, there are tens of thousands of uninsured drivers on America’s roadways at any given time.

Put simply, they’re driving without car insurance and there’s no way we can tell.

You Can’t Tell

That’s right, there is no way for the average person to determine if a car has auto insurance coverage in force, unless the license plate reads I-N-S-U-R-E-D (just kidding).

There are no publicly accessible databases or websites out there that keep a running list of who does and who doesn’t carry car insurance.

Often times, we find out the hard way that a person is driving uninsured. It may go down like this:

1. Someone causes an accident and damages your car.
2. You try to exchange insurance company information.
3. The shyster who hit you says they don’t have insurance, but wants to pay you in cash for any damages.
4. You agree, and then never hear from the person again after calling the fake number they gave you.

The Cops CAN Tell

Many states are now switching over to electronic insurance reporting systems. This means that every insurer in the state keeps a live record of who does and does not have car insurance based on vehicle identification numbers (VINs) for all vehicles registered within the state.

So a police officer can check your tags while driving behind you and instantly determine if you have car insurance.

You better believe that you’ll be on the side of the road receiving a ticket in no time flat if you don’t have coverage (or don’t have proof of insurance).

But only the police have access to this sort of information. We, the general public, should not expect to gain access to this sort of information anytime soon, aka, never. Technically, it’s none of our business.

How Do We Stay Protected?

There are a few options made available by insurers to protect against the uninsured or underinsured drivers on our streets and highways.

Namely, underinsured motorist coverage, uninsured motorist coverage and personal injury protection, all of which can be purchased as part of your existing auto coverage.

These coverage types are designed to ensure you are not left to pay for bodily injury and property damage you suffer at the hands of some uninsured yo-yo.

Get insurance quotes online or contact a local independent insurance agent to review your coverage and shop your insurance premium.

Often, if you shop around you’ll be able to afford to add these valuable coverage types or increase your current liability limits and STILL save money.

Read more: What to do if you get in a car accident.

You’ve got to hand it to Geico. They take a completely boring product, insurance, and make it interesting.

Of course, they do so by throwing non-sequiturs at you in the form of talking cavemen, flying pigs, musical money stacks, and geckos with accents.

When it comes down to it, they never really say a word about insurance or related coverage options.

Perhaps this is why their commercials are so brilliant. Every other insurance company bores us with policy details that simply put us to sleep, though many are beginning to take Geico’s lead as well.

And Geico certainly has the lead. The insurer spent the most on advertising in 2009 (most recent data available) by a mile, and likely has held onto that lead, if your television is any indication.

The Geico Gecko’s Humble Beginnings

That brings us to Geico’s most lovable TV mascot, the “Geico Gecko.”

The little green critter apparently came about because the name Geico was often mispronounced as “gecko,” and because animals have proven to create a strong relationship between customers and companies. See Spuds MacKenzie for more on that.

So Geico’s advertising company, Martin Agency, started brainstorming and came up with a “quick doodle.”

Interestingly, it came about during the Screen Actor Guild’s strike when human actors were essentially barred from being in commercials.

So a lot of things had to come together to make it a possible.

That doodle proved to be a goldmine for Geico, as it been a prominent part of their ad campaign for about 25 years now.

In fact, it’s still their main mascot, and likely will be for the foreseeable future.

Is the Geico Gecko English or Australian?

The next logical question is where the Geico Gecko is from. After all, Geico has posed the very question in one of its commercials, only to leave viewers wondering.

Well, anyone that knows a good English accent knows it’s definitely not Australian. See Paul Hogan (Crocodile Dundee) for more on that.

It’s definitely an English accent, though it has varied over the years. The voice behind the Geico Gecko was originally performed by English radio presenter David Kelly, and was later handled by English actor Jake Wood of EastEnders fame.

The most recent English accent heard in Geico commercials is a cockney accent, which is a working class accent common in the East End of London, England.

So there you have it. It’s definitely not Australian, and 100% English. For anyone familiar with accents, it’s pretty obvious.

Clearly Geico just decided to make it a cliffhanger in their commercials to get more people to their website with the hope that they would request an insurance quote. Once again, a brilliant idea.

By the way, the Geico Gecko is the most recognized insurance mascot, beating out Flo from Progressive and Mayhem from Allstate.

For the record, the acronym for GEICO is Government Employees Insurance Company. And the company has been around since 1936.

Insurance Q&A: “What is a waiver of premium provision?”

We purchase insurance with the idea that it’ll be there when we need it. But an obvious downside is that it doesn’t work if you don’t pay for it.

So what happens if you become ill or disabled and cannot work, and therefore cannot pay your premiums?

You guessed it; your insurance company will cancel your policy. Can you blame them? McDonalds probably won’t give you a burger if you don’t pay for it, so why should insurance be any different?

Part of being a savvy insurance consumer is being educated on what types of coverage are available to ensure you do not suffer financial setbacks as a result of an unplanned event.

This is where the “waiver of premium provision” will come into play on a life, health or long term care insurance policy.

No Cost Insurance?

Not so fast. This is not a free insurance policy. The waiver of premium provision is a rider that can be attached to an existing policy for an additional cost, which may vary based on your age, risk level, policy type, and more.

The rider suspends your insurance premium payments in the event you become ill or disabled and cannot work (and pays premiums).

So it’s sort of like insurance for your insurance. That’s right. You pay extra money while you’re healthy, but will be in good shape in the event something throws you off track.

Not a bad idea. After all, the last thing you need if sick or disabled is a cancelled life, health or disability policy.

How It Works

What does the provision look like in action? Well, it’s not automatic.  You have to provide evidence to the insurer that you aren’t physically able to work.

This is almost always accomplished by consulting a physician who can verify that you are in fact disabled or too ill to make ends meet.

Evidence that the “event” took place during the specified policy period is also a requirement. Proving this is the doctor’s duty as well.

After the facts are established, insurers may demand a 90-day waiting period before they actually waive premium payments.

Keep in mind that this rider is not designed to stop premium payments for minor events. If you’re not “out of the game” for at least 90 days, expect your insurance bills to keep coming.

The good news is the waiver is usually retroactive, meaning once the timeline requirements are met (90 days pass), you can expect to receive the money you paid during the waiting period.

Read more: Why you need health insurance.

(photo: Gruenemann)

Insurance Q&A: “What is a named insured?”

You may come across this term when you are shopping for insurance coverage.

While there shouldn’t be any trouble figuring out who a particular named insured will be for an insurance policy, it’s important to understand why an individual (or entity) is a named insured and what rights/obligations come with being designated as such.

So, Who is the Named Insured?

The “named insured” on any insurance policy is the individual(s) or entity that is listed by name on the declarations page.

It is important to note that on a personal lines insurance policy, homeowner’s insurance for example, a spouse is automatically considered a named insured even if he or she is not listed, as long as they live together.

There are a few rights and obligations of being a named insured on a particular policy:

1. A named insured is required by policy conditions to immediately report any losses to the insurance company. Ultimately, if you are not listed by name on a particular insurance policy (or the spouse of someone who is), you will not be filing insurance claims for financial compensation in the event of a loss.

2. A named insured may assign a policy to another party (subject to the insurer’s approval). An example may be when a particular property is sold; the named insured can request the policy be transferred to the new owner. This is a LONG SHOT, as the new party would be subject to the insurer’s underwriting guidelines. This was more common many years ago when insurance policies were much less complex from a pricing standpoint.

3. Only a named insured can request a mortgagee clause be added to a property policy. For the record, the individual or entity referenced in the mortgagee clause would be notified if the property policy cancelled. This is when lender forced property coverage would come into play.

What About the First Named Insured?

This one’s easy. The first named insured on any policy is the person whose name is listed first on the declarations page. There may be more than one “named insured” on a policy, but someone has to be the first! Why does this matter?

There are a few situations in which being the first named insured will come into play during a particular policy term:

1. An insurance company is only obligated to send a policy cancellation notice to the first named insured. The only exception to this rule, discussed above, is when a mortgagee is added to a policy.

2. Loss reimbursement checks (claim payments) are made out to the first named insured. Note: Larger property claim payments, in which there is a mortgagee, above $10,000 for example, must also be signed by a representative from the lender or lien holder. Why? The lending institution, which technically owns your home, is certainly going to want to be involved in the claim payment process. They don’t want you cashing a $15,000 check for a roof damage claim and not actually making the repairs to the property!

3. The first named insured must be the one to formally request a policy be cancelled.

Who Else is Automatically “Insured?”

You do not necessarily have to be “named” by name on a policy in order to be covered as an insured.

You would have to read your policy “Definitions” to determine who will technically be “insured.”

The best example of an insured (by definition and not “name”) would be relatives or children who reside in your household on a homeowners or renters insurance policy.

Their individual names will not be listed anywhere in the policy, but they are certainly covered from a liability standpoint.

What About Additional Insured?

Most of the examples above deal with personal lines insurance policies such as homeowners, auto and renters policies. Things get pretty complicated in a hurry when we’re talking commercial insurance.

An additional insured is an individual or entity other than the named insured that benefits from the coverage offered by the policy.

For the record, adding additional insured is usually FREE depending on what type of business you operate.

(photo: quinn.anya)

Yes, we’re referring to popular new programs such as Progressive Snapshot.

Usage based insurance (UBI) is quickly being adopted by large auto insurance companies as a means to select drivers they prefer to insure, while providing these customers with lower premiums, according to a recent Weekly Credit Outlook from Moody’s .

How Usage Based Insurance Works

Insurers are using devices, known as telematics, which are installed in a vehicle to track various aspects of operation. The telematics report information such as mileage, time of day the car is in-use and how often the car’s brakes are applied vigorously.

This information helps insurers determine which of us presents the least likely statistical chance of having an accident and filing an insurance claim. And the lower your chance of filing a claim, the lower your overall insurance premium.

You’re not the only one saving money here. Your insurance company also saves big bucks by selecting drivers who don’t end up costing them money. It’s a win-win situation.

Keep in mind that this is not Mileage Based Insurance. MBI is a program where you guess how many miles you will drive in a given policy period. This type of insurance can be dangerous for an insured that guesses incorrectly and is forced to pay HUGE penalties for “going over.”

Which Insurers Offer UBI?

You may notice the insurers offering this product have one thing in common. Deep pockets. The cost to launch a product of this nature is keeping smaller insurers out of the market so far.

But they may be forced to get on board or potentially suffer financial consequences that outweigh the cost to implement UBI.

1. Progressive Insurance
2. Liberty Mutual
3. Nationwide
4. Travelers
5. The Hartford (announced they will offer UBI in the near future)
6. GMAC
7. Allstate
8. State Farm

Most of these insurers also make the list of companies with the biggest advertising budgets. Noticeably missing is GEICO.

TTAI wouldn’t be surprised if there were a Gecko-shaped telematics device in the works as this post is being written.

What’s the Future of UBI?

Over time, you should expect to see more and more car insurers adopting this technology. Those who don’t run the risk of being overlooked by consumers.

The companies that can’t (or don’t want) to go this route will be forced to insure “less attractive” drivers, as those that fall into this category will likely opt not to have their driving habits tracked – knowing their insurance premiums may actually increase as a result of being monitored.

After all, the “riskier” driver will certainly opt for an insurer who doesn’t track their vehicle usage and driving habits.

Is UBI Always the Cheapest Coverage?

While usage based insurance is a great idea for those who exactly fit the risk profile of the insurers who offer it, it is not always going to be the best deal around.

It is recommended you aggressively shop your insurance premium with an independent insurance agent who can compare several companies at one time.

They’ll help you find a company that doesn’t inflate their premiums in order to spend hundreds of millions of dollars in advertising each year.

A few of the insurers on the UBI list continue to have some of the highest car insurance rates out there – regardless of your vehicle usage or driving history.

Insurance Q&A: “What is actual cash value homeowners insurance?”

Actual cash value (ACV) is a loss settlement method designed to pay no more than the depreciated value of your home (and likely your personal belongings) in the event of a loss/claim.

Ultimately, if you suffer a property loss, the insurer will pay the cost to repair or replace your damaged property, or its depreciated value…whichever is less.

Your home’s ACV is its depreciated value at the time of a loss, so obviously it can change over time.

You may opt to purchase this type of home insurance policy if you are not “in for the long haul” with regard to your current residence.

Since you will receive the depreciated value of your home if there’s a total loss, you would not likely have enough money to rebuild the structure the way it was…you’ll get a check from the bank, but not for an amount large enough to rebuild.

There are many things to consider when entertaining an ACV home insurance policy. First, you will need to verify if such a policy is acceptable with your lender.

Secondly, be sure you understand how you’ll get paid in the event of an insurance claim, and make certain to insure your home for the correct value (if the insurer doesn’t choose the value for you).

Overall, if you love your home and want to live in it (or one just like it) for a long time, you’ll opt for a replacement cost home insurance policy, as an ACV policy would likely leave you short of a rebuild.

How to Calculate Your Home’s Actual Cash Value

Every insurer may use a different technique, but you might find the following method useful. Here are the steps:

Step 1. Calculate your home’s replacement cost (RC). This number can vary depending on where you live in the United States (there are online calculators available for this exercise). You might try multiplying your home’s square footage by $100 for an estimate.

This means you expect your home would cost $100 per square foot to rebuild. This number may be $300 per sq. ft. if you live in a mansion.

Tip: Your home’s replacement cost and its actual cash value will be the same number if it’s a brand new build.

Step 2. Determine your home’s depreciation. There is often a limit for depreciation allowance. Perhaps 1% for up to 30 years of age (30% total) is the maximum allowable depreciation.

Step 3. Subtract the depreciation allowance from the replacement cost estimate and voila, you have the minimum ACV for your home.

Here’s an example:

Year of Construction: 1985
Square Footage: 1,000
Your home’s replacement cost: $100,000 (1,000 sq. ft. x $100)
Your home’s maximum allowable depreciation: $27,000 ($100,000 RC x .27 – 27 years of age)
Your home’s ACV: $73,000 ($100,000 RC – $27,000 depreciation)

Again, each insurer’s calculation can be different. Your home’s ACV may be much lower if your insurer allows for $75 per sq. ft. replacement cost instead of $100 per sq. ft. ($54,750 using the calculation method above).

You will certainly want to work with an independent insurance agent (who represents several insurers) to find the insurer who “does it” the way you need it done!

Why You Need to Get It Right

Simply put, you don’t want to over insure or underinsure your home. Remember, the amount of money you receive will be the ACV as determined by the insurance company, which may not exactly match what you thought it was when you purchased your policy.

Guess too high and you’ll be overpaying for coverage you won’t ever see if you file an insurance claim. Guess too low and you could be leaving money on the table in the event of a total loss.

Your insurer will NEVER pay more than the coverage limit on your declarations page. You might like the idea of saving a few insurance premium dollars by guessing low, but will be pretty sad if you suffer a total loss and find you could have received an additional $20,000 after your home burned down.

The coinsurance provision in your policy contract may also come into play here. Your policy may actually have a penalty for not insuring your home within a certain percentage of its true ACV.

This penalty basically reduces the amount of ANY property claim payment by a percentage based on how “far off” you were on your calculation.

Of course, there is no penalty for over insuring your home – other than the fact that you will be paying for coverage you won’t receive in the event of a claim.

Tip: Some insurers will perform an inspection of your property after your policy is issued and give you the opportunity to insure your home to the value they believe is accurate. Fail to do so and the coinsurance clause can bite you at claim time.

Can I Insure My Home for Actual Cash Value?

This will depend on whether or not you have a mortgage. Remember, if you have a mortgage, you don’t really own your home. The bank does. Therefore, you have to insure it according to their rules.

Their rules usually dictate that you have a replacement cost loss settlement homeowners insurance policy. Why? They want to ensure their “asset” is replaced in the event of a large loss. Your home’s ACV may be less than what you owe on your mortgage. This would leave your lender “upside down” if the house was destroyed…and they won’t go for that.

(Replacement cost vs. actual cash value)

You may also be subject to lender forced insurance coverage if you have a mortgage loan and fail to maintain coverage on “their” home. You want to avoid this at all costs.

Insurance companies make more money when they retain customers over the long term because the acquisition cost (to advertise and issue policies) is one of the largest expenses they incur.

Once you become a customer, if you don’t file any insurance claims, you’re a cash cow to the insurer. Every time your policy renews, they make more money…without having to do much additional work.

But does loyalty pay? Maybe, maybe not. For the past several years, insurers have been consistently lowering insurance premiums to attract new clients. But just like cable television and mobile phone plans, typically only the new customers get the deal.

You may have noticed that your insurer actually runs several different companies. “Insurance Mutual, Insurance Company of TX, Insurance Fire Company,” just to name a few. Insurers often start “new companies” to offer new insurance products in a particular state.

They aren’t allowed to offer two different pricing models for the same product in the same state, so they get us on the hook, and then simply start a new company to sell a cheaper product.
After seeing commercials about how low their rates are, you may check back with your insurer to see why your rate hasn’t dropped.

If you’re lucky, you may be able to get a new policy from the “new,” cheaper company. But while you’re at it, you may also want to compare insurance quotes from several other insurers to ensure you snag the best rate possible.

What “Market” Cycle Did You Start In?

As alluded to above, insurers have been in a battle to lower rates to attract new customers for the past several years because the insurance market has been “soft.” Just like other financial market cycles of boom and bust, insurance has a “hard” and “soft” market cycle.

If you purchased your policy at the beginning of a “soft” market, your insurer has likely decreased their rates (for new customers) for several years now. Of course, they don’t necessarily offer you the cheaper insurance the new guy gets.

In contrast, a “hard” market refers to a period of time where insurers generally increase their premiums to build their balance sheets after years of “giving it away.”

How Long Since You Last Shopped?

Insurance companies make adjustments to their car insurance rates regularly – based on their financial results from previous years. Some insurers make several changes each year.

Keep in mind there are hundreds of companies fighting for your insurance premium dollars. Couple that with their rates changing regularly and you will realize the need to shop your insurance regularly, even if you’re happy as a clam with your current insurer.

If you work with an independent agent, you can simply ask him/her to shop your premium with other insurers they represent. You might find that there is a better deal available to you with the same agent.

On the other hand, if you use a captive agent, you will need to contact different companies on your own. A captive agent only represents one insurer. Call them and ask to lower your premium and their only option will likely be to reduce your coverage, increase your deductibles, or perform their discount double check.

Either way, you will want to contact other insurers to be certain you aren’t sacrificing anything to get a lower premium.

Older Car? Drop Physical Damage Coverage

Assuming your car is not a collector’s item, which may increase in value over time, you may want to lower your deductibles or even drop your physical damage coverage altogether.

Why? The actual cash value of your older vehicle may be so low that you are simply throwing away money by insuring it against physical damage coverage.

For example, you may pay $300 per year for physical damage coverage to insure a car that is only valued at $2,000. So, you are paying 15% of the vehicles total value to insure it (every year). That might not make sense financially.

On the flip side, you may only pay $500 per year for physical damage coverage when your newer vehicle is worth $20,000. This means you are paying 2.5% of your vehicle’s value to insure it against physical damage.

Unfortunately, there is no “magic” percentage where you are recommended to drop this coverage. Everyone’s budget is different, so you may be willing to take your chances to recoup some money in the event you suffer a total loss.

Be sure to address this matter every couple of years with your insurer to ensure you are not wasting money on insurance coverage that won’t really benefit you in the long run.

Remember, car insurance is not a “set it and forget it” program. Those who do the research and remain “active” with regard to their insurance needs often save more money in the long run.