Higher Rates Have Already Been Coming
One reason insurance premiums are subject to government regulation is to protect policyholders from potential price-gouging from insurers. Yet regulators are also aware of the fact that if they force rates to remain too low, insurers won't be profitable and will go out of business, destroying the vital insurance market.
In recent years, a number of high-profile disasters -- including two major East Coast hurricanes and several tornado and storm events similar to what happened in Oklahoma City -- have caused big losses for major insurers.
With well-known insurance companies Allstate (ALL) and Travelers (TRV) suffering billion-dollar losses from claims from Hurricane Sandy alone, regulators have already faced more rate-hike requests from companies seeking to recover those losses.
In addition, low interest rates are keeping insurance companies from earning as much investment income as they did in past years. Insurers invest the premiums you pay, getting income from those investments until they have to make claims payments.
The lower the returns, the higher insurers have to set rates in order to earn the same net profit. Even policyholder-owned mutual insurance companies have had to raise rates, giving their shareholder-owned counterparts more latitude to follow suit.
Is There Any Potential Relief?
For consumers, higher rates seem almost inevitable in the short run. But the home insurance market runs in cycles, in which higher premiums give insurance companies a strong financial incentive to boost their presence in lucrative markets, increasing competition and eventually pulling rates back downward.
Making sure your policy limits are up to date and your deductibles are as high as you're comfortable with can help you cut your premiums. Moreover, talking to your insurer and shopping around can potentially reveal discounts or other promotions that can save you money.
Even with those steps, you'll probably pay more for insurance than you want. But the cost is still a small price to pay to ensure that a natural disaster doesn't destroy your financial future.
Motley Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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When buying homeowners insurance, be sure that you're buying enough coverage to rebuild your home, if necessary. Don't look at market prices for homes, but rather at the replacement cost for your home, which would include removing what's left of your home, buying new building materials, and labor. "Guaranteed replacement" policies should cover the whole cost, while "replacement cost" coverage often covers less than the full amount. Check your policy to see what kind you have, and be sure that your home's value isn't being understated.
Also, know that in standard homeowners policies, many kinds of damage are typically excluded, such as that from earthquakes, floods, nuclear attacks. These days, mold damage is often excluded, too. If you're worried about any excluded risks, talk to your insurer. You can probably expand your coverage, for a price. You may also get it elsewhere, such as from the FEMA-administered National Flood Insurance Program, or the California Earthquake Authority.
You may know that dental or vision-related expenses are not covered by your health care insurance, but that's probably not all. Pre-existing conditions have long been excluded by many insurers, though President Obama's health care reform act is addressing that. A nose job or other cosmetic surgery, for example, is most likely excluded, too, no matter how much of an emergency you think your double chin is.
Your policy may also not cover ambulance services, maternity care, prosthetics, kidney dialysis, organ transplants, diabetes management, emergency-room visits, mental-health care, and care you receive outside the United States -- or any of a number of other expenses. Don't be overly alarmed -- policies vary widely, and you may be covered for many of the above costs, at least to some degree. Just be sure to find out what is and isn't covered, and when shopping for a policy, seek out the one that fits your needs and pocketbook best.
The main reason to get renters insurance is because many possible losses renters face are excluded from their landlords' insurance policies. If a roof leak destroys much of your collection of first-edition books, your landlord's insurance will likely fix the roof and any damage to your apartment's floor, but your book loss will probably be excluded. Thus, it's smart to get renters insurance, which is often rather inexpensive, as well.
When shopping for such policies, be sure you know whether losses will be insured for their replacement cost or their current, depreciated value. (The former is, of course, preferable.) Renters policies can include or exclude coverage if a guest is injured on your premises. If you'd like that coverage, ask for it. Know that in many renters policies, damage due to natural disasters or structural damage to the building may not be covered, too. If you're worried about those issues, including burst pipes, ask about it. You may need to add a rider to your policy.
There are coverage holes with car insurance, too. At a basic level, while most drivers carry liability coverage, many don't carry collision coverage, which will address damage to your car. Omitting it can make sense if you're driving a clunker that you'd just replace after an accident, but crunch some numbers before passing it up.
There are some tricky little car-insurance details, too. For example, a stolen car may not be covered if you left it running with the doors unlocked. Damage due to hitting an animal such as a deer, or damage from a lightning strike, tornado, or flood, may also be excluded or limited. Medical bills may also be off-limits unless you have medical coverage, and valuables stolen out of your car are also often excluded. (They may be covered via your homeowners policy, though.)
A key thing to understand about life insurance is that not everyone needs it. If no one is depending on your income, then sad though your demise will be, you need not protect against anyone's financial loss from it. But many people do have dependents, in the form of children, spouses, and even parents or others. So know that with life insurance, you may not be covered if the death is a suicide, if it happens as part of war-time combat or during the commission of a felony, or if it's due to a private-aircraft accident. (Deaths tied to commercial flights are typically covered.)
Also, if you regularly engage in dangerous activities such as car-racing, hang-gliding, or extreme mountain-climbing, a related death may not be covered -- unless you pay a premium for a rider to your policy. Lying on your insurance paperwork can also lead to a denied claim.
If you're an investor and you've got much of your retirement security resting on an account at a brokerage, you can take comfort that you're probably protected by the Securities Investor Protection Corporation. It's a bit like the Federal Deposit Insurance Corporation, which covers bank accounts, but it may not provide all the protection you expect it to. The SIPC protects the cash and securities such as stocks and bonds that you may have in your brokerage account -- in the event that the brokerage runs into deep trouble or fails, or if a broker steals your assets. It does not cover losses that occur if your stock or bond loses money or a company in which you're invested goes out of business.
Even FDIC protection has limits. It typically covers assets in bank accounts up to $250,000 for each person's accounts at each bank in each account ownership category. So if you have $350,000 in savings accounts at one bank, you may not be fully covered and you might want to divide the sum between two banks.
You're smart to look into insurance for all kinds of needs -- and smarter still to read the big and small print to be sure you understand what is and isn't covered. In many cases, you can add the extra protections you seek. That might come at a cost, but it might be worth it, too.