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ONE DAY, AS I WAS walking through the mathematics building at the community college I attended, I saw a poster that screamed, “Math Majors?”
That got my attention. The poster introduced me to a career possibility: becoming an actuary. My job path was set. Or so I thought.
The actuarial career path consists of passing either five or 10 standardized tests. Complete five, and you become an associate. Complete 10, and you’re a fellow. Unfortunately, I flunked the first test I took.
Still, I didn’t give up on insurance as a career. Five years after graduating, I began as an underwriter trainee. I continued in the insurance field for 42 years, until I neared my 70th birthday.
I want to share some things I learned that could help you to be adequately insured. This may sound pretty straightforward. But insurance coverage is often a guessing game—both for insurers and customers.
Actuaries decide what premium to charge and how much money should be kept in reserve to pay the claims that’ll occur over the life of an insurance policy. Life insurance actuaries are very good at this. You rarely hear of life insurance companies declaring bankruptcy. Life insurance losses are predictable—unless something unforeseen like AIDS or COVID-19 comes along, and suddenly younger people are dying in large numbers.
The same certainty isn’t always found with other sorts of coverage, and sometimes insurers get the pricing badly wrong. For instance, the insurance industry didn’t know how to properly price long-term-care coverage. Pricing was based on the historical length of stays in nursing homes. But people were beginning to live longer and nursing-home stays lengthened—sometimes dramatically. In desperation, insurers began canceling losing policies or raising premiums drastically.
Meanwhile, in property-and-casualty insurance, actuaries aren’t used consistently. Instead, pricing is often a guessing game undertaken by the underwriters, who try to size up how likely customers are to file claims.
It can also be difficult to figure out how much coverge a customer should buy. Take homeowners’ insurance. I wish I could assure you that your insurance agent, broker or salesperson knows exactly how much coverage you need, but I can’t. They also guess.
That’s because the insurance company can’t take the time to decide exactly what your house or its furnishings are worth. To do such a painstaking survey would be too costly given the slim profit margins on most homeowners’ policies.
Many policyholders discover they’re underinsured only after a loss. To prevent this from happening, make a full inventory of what you own, and then get a professional appraiser to evaluate what it would cost to rebuild your house and replace your belongings.
These appraisals can be costly and won’t be paid for by your insurance company. Nor is it guaranteed that the insurance company will accept the appraised value that you present to them. But at least you’ll have a better idea of how much coverage you should buy.
You might discover that your insurance company doesn’t value your belongings as highly as you do. That’s because of an insurance principle called “like kind and quality.” Let’s say you have imported Italian marble that’s damaged by a tornado. Unless you presented the insurance company with an appraisal of this marble at the time your policy was first written, you’ll likely get covered for the cost of replacement marble from Vermont. It will look and perform similarly to Italian marble, but cost a lot less.
Many people intentionally underinsure to save money. When they file a claim, they may learn that’s a costly mistake. To understand why, let’s say it would cost $100,000 to rebuild your house if a fire destroys it. Yes, I know that’s a low figure today, but I’ve chosen it for simplicity’s sake.
You might think, “What’s the chance the house will burn to the ground? I think the average loss will only be $20,000, so I’ll insure for $20,000.”
Now, let’s assume you did have a $20,000 loss down the road. You won’t get $20,000 from your insurance policy. Instead, you’ll get far, far less. Why?
First, there’s your deductible, which you’re required to pay out of pocket. Let’s say that knocks $1,000 from the $20,000.
Second, there’s the coinsurance clause, which looks at the ratio of what you insured the house for versus what you should have insured it for. In this case, you’d insured a $100,000 house for $20,000—a 20% coverage ratio.
That means you’d only get 20% of the $20,000 loss covered—and that’s after the deductible. In this example, insurance would cover only $3,800 of the $20,000 loss. You’d have to pay $16,200 toward the repairs yourself. Painful, I know, but it pays to understand how insurance works.
Insurance is not a racket. But it is a for-profit industry. Insurers are only required to pay based on the terms and conditions of your insurance policy. Knowing what is—and isn’t—covered can save you heartache and money, regardless of what kind of insurance you buy. Be sure to read your policy.
David Gartland was born and raised on Long Island, New York, and has lived in central New Jersey since 1987. He earned a bachelor’s degree in math from the State University of New York at Cortland and holds various professional insurance designations. Dave’s property and casualty insurance career with different companies lasted 42 years. He’s been married 36 years, and has a son with special needs. Dave has identified three areas of interest that he focuses on to enjoy retirement: exploring, learning and accomplishing. Pursuing any one of these leads to contentment. Check out Dave’s earlier articles.
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My insured value of my home is well more than the market value (which includes land). Per my agent the reasons are:
-building to current code is more expensive
-replacing my home is a custom, one off, build even if it is straightforward construction (no economies of scale)
-clearing the lot
-building in an existing neighborhood has many additional expenses
-everything about building is more expensive (one area of our economy that we seemingly can’t make more efficient)
I am skeptical of the preceding comment (by stelea99), although it could be true for that state (or maybe I just didn’t understand what was written). For sure, all states have insurance regulations and oversight, and there must be differences. From my experiences, the author’s (David) version is more likely to represent what we will find applicable for our coinsurance. I guess that most states provide a 20% margin of error for coverage – so we receive 100% of loss if we have insured at least 80%. Otherwise,the claim will be reduced per David’s example. An issue not mentioned but folks should know (and I believe this is true in all states) is that if there is a mortgagee named, there can be no diminution for underinsurance.