One of the first rules of financial success is to protect what you have so that a disaster won’t set you back too far. That means investors who are trying to increase their wealth should protect their sources of wealth with appropriate insurance: health insurance to cover medical catastrophes, disability insurance to protect against loss of salary, and long term care insurance to protect a retirement nest egg.
One of the biggest assets for most households is the household. Homeowners almost universally own insurance to protect themselves from major damage to, or loss of, their homes. Despite the widespread use of homeowners insurance, many households still face a big insurance gap, because the value of their coverage has not kept up with growth in their home’s “replacement cost.” Think of it this way: if your home is damaged or destroyed, it has to be rebuilt. And that rebuilding will occur at today’s higher labor costs and using higher-cost materials.
Insurance industry statistics indicate as much as two-thirds of all American homes do not carry enough insurance. Soaring material costs have contributed to this gap: the price of lumber, for instance, has gone up 20% over the past two and a half years. Also, homes become underinsured when homeowners do major improvements, which add to the value of the home. Often they forget to call their insurance agents to let them know about the improvements. Although many insurance policies carry an inflation rider that automatically increases the value of the coverage (and the cost), those riders may not cover the true increase in values experienced by individual homeowners.
Insurers generally require homeowners to maintain coverage equal to 80% of the replacement cost of their homes. Those who fall below those limits may get only partial payment on claims, or even no payment. If you are unsure about your coverage, call your agent, tell him/her about improvements, and ask for a new estimate of value.
Now, let me share some exciting news! I am in the process of purchasing a commercial property that is located in Emmaus, Pennsylvania (just south of Allentown). While there is still a lot of uncertainty about whether it will work out, I am really hoping that I will be able to move Keystone Financial Planning to this new location by the end of December. I will let you know as soon as I have a firm date for the move.
I want to thank you for making this another great year for Keystone Financial Planning. As always, I appreciate your business and your friendship. Please call or send an email if you need anything.
About Christopher Jones
Christopher Jones is the Founder and President of Sparrow Wealth Management, a fee-only financial planning and investment management firm. Before entering the investment field, Chris was a management consultant for Deloitte Monitor. He graduated summa cum laude from Brigham Young University with a B.S. in Economics and a minor in Business Management.