Insurance: Why does it cost so much? Part 2

In part one we discussed, commercial or business insurance and where the premium comes from.

Today we are going to tackle personal coverage.  We’re going to concentrate on, homeowners insurance, auto insurance and a few words on umbrella insurance.

Homeowners Insurance

The limit of coverage, usually called ‘Coverage A’ or ‘Dwelling Limit’, is the biggest factor driving the premium.  The higher the cost to reconstruct your home the higher the premium.  Pretty simple.  The other limits, like ‘Other Structures’, ‘Personal Property’ and ‘Loss of Use’ is usually a percentage of the Dwelling Limit.

The age of the building, location, how close to tidal water (the beach) all also play a part in the premium.

The two surprising factors that can really effect your premium are:

Mitigation – Depending the age of the home, it may have several factors that make it less likely to have a loss during a windstorm or hurricane.  Shutters, roofing materials and construction all have a very strong affect on the premium.  The premium difference can be as much as 50%.

Credit – Though carriers don’t generally use the same information used to apply for a credit card they do look at your credit history for certain factors that have a correlation to the possibility of claims.  No two companies use the same factors or information.  Just keep in mind that a derogatory credit history may disqualify you for coverage or the cost may be higher.

Auto Insurance

Many of the factors that affect the cost of homeowners insurance also affect the cost of auto insurance.  Things like location (or geographical area), credit, limits of coverage.  The following are a few factors that are different:

Vehicle – The most obvious is the car.  The make, model, age, type of vehicle all have a drastic affect on the premium.  Some cars are more expensive to fix or are involved in more losses. Other cars have safety features that keep the loss amounts lower.

Drivers –  Age, experience, accident or violation history are all driver factors that affect the premium.  The data has historically shown that younger or less experienced drivers are more likely to be involved in a loss, which is why their car insurance premiums tend to be higher.  Other factors like, marital status, good student, homeowner are other factors that can affect the premium charged for a driver.

Umbrella

One of the most misunderstood coverage’s in personal insurance is the umbrella coverage.

Because of the name may people believe that it provides coverage for everything, which unfortunately is incorrect.  It’s called umbrella because it raises the limits liability coverage of the policies it is on top of.  So for instance you can have a homeowners insurance policy and an auto insurance policy, both with liability coverage and have an umbrella policy over them to raise the limits to $1,000,000 or as high as you may want or need.

Using the same example if you own a boat but don’t have any liability insurance covering it then it would also not have coverage on the umbrella policy.  Umbrella’s only provide coverage for the policies specifically listed on the policy, so if you want to make sure that your recreational vehicle, boat, rental properties, aircraft or other liability policies are included in the umbrella they must be specifically listed.

Another misconception about the umbrella’s is that it can provide coverage for business entities.  For the most part your umbrella does not provide any coverage for business operations, including property holding companies (i.e. corporations or partnerships that own property held for rental).

If you have businesses make sure you discuss with your agent to ensure how you can properly purchase business insurance for them.