The Truth About Insurance.com

What is a Waiver of Premium Provision?

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)

What is a Named Insured?

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)

Usage Based Auto Insurance Gaining Traction, Lowering Premiums

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.

What is Actual Cash Value Homeowners Insurance?

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.

Shop Your Car Insurance Annually. Loyalty Does Not Pay

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.