Financial Samurai

Slicing Through Money's Mysteries

What’s In A Home Insurance Policy: Know The Details Before Your House Burns Down

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Sam asked me to write this post after we lost our home overnight to the Tubb’s Fire in Northern California. We were living a good doctor’s life. A $1.2 million dollar home with a killer sunset view. Life was good, but with my mortgage and student debt I was still quite stressed. The kind that affected me not only internally, but also externally. Affecting both work and relationship with my wife.

Crazy to think that stress and a mortgage can be that powerful, but it was. In fact, I would walk around my home and think about how we had about 1,000 square foot of home more than we needed. It was 3,300 square foot and I determined that 2,000 to 2,500 square foot were a much better fit for us.

But here we sat, 11 months after buying a big home without many financially reasonable options. Then overnight… POOF! It all went up in a flash. We were lucky. Someone knocked on our door at 2 am waking us up. We left with our lives and health, although not much more. Others were not as fortunate and I have seen and felt the impact of those losses in our community. So I write this post knowing how lucky we are. And I am thankful for that.

Interesting points from EJ’s guest post:

  1. Why being a homeowner may be better than being a renter when disaster strikes
  2. How home insurance can make you much wealthier
  3. Know exactly what is covered under your home insurance plan
  4. Itemize everything in a spreadsheet and a picture catalog
  5. It may be better to have a complete loss rather than partial damage

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Should I Get Natural Disaster Insurance For Earthquakes, Floods, And Hurricanes?

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Earthquake Fault Lines In SF Bay Area

Hurricanes and earthquakes are a stark reminder of the importance of getting disaster insurance. As a long time resident of San Francisco, I wonder about getting earthquake insurance every single year. San Francisco lies close to the San Andreas fault line which could start shifting at any moment. The last big earthquake was the Loma Prieta earthquake on October 17, 1989 which killed 63 people. After 23 years, perhaps we are due.

California mandates insurance companies send earthquake insurance prospectuses to all homeowners every single year. Each time I look over the earthquake insurance documents, I get this much closer to getting insurance, but I never go through with it because of the enormous deductible of around 10-15%. In other words, if my home is worth $2 million dollars, I’ve got to pay the first $300,000 out of pocket first before getting anything from the insurance company. Furthermore, the yearly premium is around $5,000.

A CHECK LIST TO DECIDE WHETHER OR NOT TO GET DISASTER INSURANCE

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How Does An Umbrella Policy Work And How Much Does It Cost?

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Umbrella PolicyWe’ve talked about all the different types of auto insurance. I’d like to now talk about whether you should get an umbrella policy given this was the most brought up next step in the comments section. An umbrella policy is also known as a personal liability insurance.

When you’ve spent a lifetime building assets for your retirement, the last thing you want is to get sued for all your’re worth. Accidents happen all the time and the more you are worth, the more the injured person will go after you. If someone in a $160,000 Porsche 911 Turbo GTS runs you over after running a red light, you’re probably more inclined to hire a lawyer and sue for big bucks than if you were run over by a 1985 Honda Civic!

Auto insurance policies only cover so much. My auto insurance policy has a maximum $500,000 liability per accident. I could get more liability, but the increase in premiums would make my insurance less worthwhile. My car is only worth about $5,000 max. Because I have assets over $500,000, I elected to get an umbrella policy to cover the rest of my net worth.

The chances of getting sued for over $500,000 is slim because: 1) I’ve got to be found negligent in the accident, 2) I’ve got to create massive damage in the accident, 3) The victim needs to go through the process of suing, 4) The victim needs to win, 5) Cases are usually settled out of court for less, 6) I drive half the national average, 7) I’m a pretty careful driver with a slow car, and 8) I’m a nice guy! Unfortunately, even nice guys get unlucky sometimes.

If I do get sued for say $1 million, I’m safe because my auto insurance coverage will kick in to pay the umbrella policy deductible, and then my umbrella policy covers me for the rest. The picture above illustrates the point clearly. The only out of pocket expense I incur will be my auto insurance deductible of $1,000.

SCENARIOS WHERE AN UMBRELLA POLICY MAKES SENSE

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Why Get Life Insurance If You’re Financially Independent

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Why get life insurance if you're financially independent and can self insure?The following post is sponsored by SelectQuote, based in San Francisco. They’ve been around for over 30 years, and I had the opportunity to sit down with their CEO for an hour to talk about his business and how they’ve managed to grow for so long. 

After giving folks a heads up about a common bait and switch tactic in the life insurance industry, I was asked by a number of people why I’d waste my money on life insurance premiums if I’m financially independent. It’s a good question that merits a deep dive because many of you will face the same dilemma once your passive income can cover all your living expenses or once your net worth reaches 20X your gross income. After all, you’re one of the few who care enough about your finances to read this site!

But I’m a little surprised why the folks asking couldn’t think of the many reasons why life insurance might be necessary after reaching FIRE. I guess if you haven’t reached FIRE, don’t have a family, or have never sat down with an estate planning lawyer, it’s hard to know.

Here are some reasons why life insurance is a good idea despite being able to self insure. You can click on the audio version if you scroll to the bottom.

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Subsidy Amounts By Income For The Affordable Care Act (Obamacare)

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Patriotic dog and US flagThe Affordable Care Act (Obamacare) is a potentially great way to help lower income individuals afford health care. I’m a supporter of ACA despite the trappings of ever bigger government running our lives because disease and accidents do not discriminate between rich or poor. In a nation as rich as ours, nobody should die or get stuck in a permanent loop of poverty just because they can’t afford medical treatment.

The two most common reasons why people don’t retire earlier are: 1) Lack of money and 2) Uncertainty regarding health care access and costs. As an early retiree in 2012 with a full 30 years to go before being eligible for Medicare benefits, I was worried about health care until I did some research on cheap health care alternatives. Now that I’ve spent a good amount of time studying what healthcare.gov has to offer, I’m not worried but thrilled for the potentially millions of other people who don’t have health care or who have no desire to work into their 60s.

I’ve also discovered that even millionaires will be eligible for health care subsidies. More equality is a welcome relief from the constant class warfare rhetoric and discriminatory policies we hear from Capital Hill.

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