Property and casualty insurance protects the physical assets and the liability exposure of the household. Auto and homeowner's (or renter's) are the two everyone holds. The important choices are the liability limits, which are almost universally set too low.
- 01Set the correct liability limits for auto and homeowner's policies.
- 02Distinguish actual cash value from replacement cost coverage.
- 03Explain why standard homeowner's policies exclude flood and earthquake.
Liability limits
Most auto policies default to $100,000 per person and $300,000 per occurrence. For any household with meaningful net worth, that is inadequate. Set limits at $250/$500/$100 or higher and consider an umbrella policy above them. A single serious accident can produce liability exceeding a lifetime of earnings.
ACV versus replacement cost
Actual cash value pays the depreciated value of a lost item. Replacement cost pays what it would cost to replace it new. Replacement cost is the correct choice for household goods; the premium difference is usually small and the recovery difference after a total loss is large.
Standard exclusions
Homeowner's policies exclude flood and earthquake. Households in flood zones need separate NFIP or private flood coverage. Households on fault lines need separate earthquake coverage. Read the exclusions; the surprises always come from the exclusions.
- Liability limits are almost universally too low.
- Replacement cost, not actual cash value, on household goods.
- Flood and earthquake are separate policies. Buy them if the geography demands.