Ep 222: Aleatory, Umbrellas & Other Weird Insurance Terms That Actually Matter

When you're making financial decisions, whether it be with a financial advisor or on your own.

Yes, it's really fun to try to determine which stocks and crypto and bonds and ETFs to invest in and how you can multiply your money and get dividends and do all of these exciting things.

But it's also very important to look at risk management and look at ways that you can protect your assets.

So today we are going to dive into a subject that may not be the most sexy financial topic.

It may not be that exciting, and some people even say that it is a racket.

I don't think that it is, but some people do.

But that is property and casualty insurance.

We're going to talk about it as a financial planning tool, so I hope that you enjoy this episode.

And here we go.

Welcome to the Weekly Wealth Podcast.

I am certified financial planner David Chudick.

This podcast and my wealth management practice are both designed to help the mass affluent to live better lives by how they handle their money.

We talk about financial strategies, prosperous mindsets, and simply how to build true wealth.

So come on and let's enjoy this journey together.

Hey everybody and welcome to this week's episode of the Weekly Wealth Podcast.

My name is David Chudick, and before we get started talking about risk management and property and casualty insurance today, let's make sure that we do all the things.

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All right, so most people don't know that in addition to my work as a certified financial planner, I also own a property and casualty insurance office.

So I have a great team of people and they help clients to manage their risks, maybe through home insurance, auto insurance, business insurance, things like that.

So I do have a little bit of expertise.

I've actually been doing this since the early 2000s in insurance and risk management.

So I wanted to talk today about some insurance basics.

I think there are a lot of misconceptions about insurance and I also want to talk about some ways that you can protect yourself and also tell you some mistakes that I've seen people make with their property and casualty insurance.

So let's start first.

Like property and casualty.

What does that mean?

Why do we even Call it that.

And it's also referred to as pnc.

P, A, N, D, C.

So if you ever hear PNC insurance, they're talking about property and casualty insurance.

So the property part that covers physical assets like your home, your car, your business property, and these would be from losses due to maybe fire, theft, natural disasters, things like that.

On your car insurance, you might carry coverages called comprehensive and collision.

And these would be property coverages because these coverage would repair or replace your vehicle if a triggering event occurs.

So property insurance is going to cover your property, your home insurance, your dwelling portion of your home insurance.

That's property insurance.

So if my home burns down, my insurance company will pay for me to build a new home, and that's property insurance.

Now, casualty insurance, that covers liability, that covers your legal responsibility if someone else is injured and their property is damaged.

So the liability portion of your auto insurance, you run into me, it's your fault.

You were texting and driving.

I have an injury.

Your policy should pay for my injuries and for my damages up to the limits of the policy.

Maybe you have homeowner's insurance, and maybe I come to your house for dinner and you didn't tell me that you were mopping the floor.

I slip on the floor, I hurt myself.

Your liability would cover my injuries.

Then, of course, there's all sorts of different examples within commercial insurance of when a business might be legally responsible to pay for somebody else's injuries or damaged properties.

So that's a brief introduction on what property and casualty insurance is and what each portion covers.

Now, I want to talk about the elephant in the room, which is insurance costs and how are insurance policies priced?

Now, let's remember that insurance companies are typically for profit entities.

So just like almost any other business that you see on Main street, insurance companies have to bring in more money than they spend or else they will cease to exist after they've gone through their reserves.

So that's key point number one is that insurance companies are for profit companies.

Now, with a typical business, they will have expenses.

Let's say you have a T shirt shop.

The T shirt shop can very easily estimate what their electric bill will cost per month and what their real estate costs, whether it be rent or ownership costs.

They can calculate their payroll, they can calculate their cost of goods sold, how much a T shirt costs them to buy, and then when they maybe do some screen printing, and then how much they can sell it for.

So they can relatively easily calculate their potential expenses.

Now, with an insurance company, insurance company have all of those Similar type expenses, they have payroll, they have thousands of people working for them in different roles.

They have utility bills, they have real estate expenses, they pay for company cars for some employees, they have all of those expenses.

And those may be relatively easy to determine.

But then insurance companies have, they have the unknown cost of claims, right?

So when you pay your home insurance, as an example, Maybe you're paying $1,000 or $2,000 or $3,000 a year, which I admit I don't like paying for my home insurance.

But if I had a total loss, my insurance company would be out literally millions of dollars between replacing my home, maybe potentially repairing the damage of somebody else's home, the putting me up in a rental home while my house is being built, and all of those different things.

So the claims expense of insurance companies can be huge.

And that has to be part of the rate determinating factors.

So let's throw in an insurance word.

This one would be on the insurance exam if you took the insurance licensing exam.

But that's aleatory.

So insurance aleatory refers to a type of contract where the outcome depends on an uncertain event and the value exchanged by the parties may be unequal.

So let's again, let's go back to your home insurance.

Maybe you had home insurance for 10 years and you never filed a claim.

So let's say your home insurance was $2,000 a year, and for 10 years you spent $20,000 on home insurance.

Now you also could file a claim and maybe $300,000, $400,000, $500,000 can be paid out.

So the insurance company in that case would have had an expense much greater than the client would.

So that is what aleatory means.

If we go back to that example that I had with the T shirt shop.

So I go into T shirt shop and let's say a t shirt's worth 30 bucks.

So I give them 30 bucks and they give me a T shirt that's worth $30.

And it's a pretty even exchange.

But insurance is really, it's a contract where your premiums are buying a promise to pay for damages upon a triggering event.

And obviously those damages can be very large.

So if anybody ever asks, why does insurance cost so much?

You can say the word aleatory and see if you can explain it.

And that is at least part of why insur rates sometimes seem like they're higher than we would all like.

So when you get that bill in the mail that says how much your insurance premium is, how did they come up with that number?

Isn't that the interesting question, like how do they decide how much my car insurance is going to cost?

And the answer always is, what's insurance math?

And it doesn't make sense.

But let's talk about a few of the factors for different types of insurance.

So first of all, very generally speaking, insurance companies, they lump like items in together based on how likely they are to have a claim.

So what do I mean by that?

If you own a home and it's close to the coast, yes.

You have a larger chance of having hurricane damage than somebody who lives in a couple hours inland.

So your base rate is going to be higher.

Maybe in California, where there are a lot of wildfires, if you're in that area, maybe your base rate is going to be higher.

Maybe all homes that are brick will have a lower base rate because brick doesn't burn like wood does.

So there are parts of your home insurance that you just get lumped in based on age of homes, locations, things like that.

Then there are other parts that would be specific to you.

Maybe there is a credit component where insurance companies, they run what's called a financial score and that gives some indication of how likely you are to have excessive claims.

Maybe there's the age of the home.

Maybe there is, has your home been updated?

Have you redone the electricity, the electrical work?

And if you have, that makes your specific home less likely to have a claim.

So there are always parts of your insurance that you have some control over.

Then there are other parts that are just, they're just part of the general market.

And remember these insurance companies, they are for profit companies and they do need to make sure that they are charging an adequate rate so that they don't lose money continuously.

Now in your auto insurance, the things that you can control are continuous coverage.

Make sure that you never have a gap in coverage.

If you do, that could make it much, much harder to get a preferred rate policy somewhere else.

Of course, we can all control our driving record.

So don't speed, don't tailgate, don't text and drive.

Just make sure that you're doing all the things that can lessen the chances of having an accident and almost eliminate the chances of having speeding tickets.

Now your age also affects your auto insurance.

So obviously teenagers have out of a thousand teenagers there will be X amount that will have accidents.

And out of 1,040 year olds there will be a lot less that have accidents.

So age is a factor.

Okay.

Now the parts of your insurance that you maybe don't control is how frequently losses are happening in your area.

So remember you're lumped into a group of like objects.

So if your state has excessive losses, remember insurance is the pooling of risk, then you might have a base rate increase.

There are when lawsuits have excessively high payouts, then that increases insurance prices for everybody.

Little hint there.

Some of the personal injury attorneys, even if these large claims don't end up getting paid out, they do ultimately raise rates because insurance companies spend a lot of money and resources fighting some of the maybe unnecessarily high claim and lawsuits out there.

Quick question.

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So now that we've talked about some really general insurance basics like how is insurance priced?

What does aleatory mean?

Now let's talk about some of the major mistakes that you can make with your insurance coverage.

And remember, at its core, insurance protects your money.

Nothing more, nothing less.

So if you cause me to have a loss, if you have the right insurance, your insurance company will pay to make me whole or indemnify.

There's another insurance word, me from the loss or if you don't have the right insurance, then you will personally have to indemnify me and make me whole.

So let's start with home insurance.

Here's a couple things.

Now this is not an all inclusive list.

So make sure that you're working with a real good local independent insurance agent that can answer questions for you.

But here's some things that are maybe pretty pertinent in today's market.

So if you're using your home for anything other than just you living there, if it's a homeowner's insurance policy, make sure that your insurance agency and the carrier knows.

So if you have business exposure, if you are renting out part of your home or all of your home on a short term basis, things like that, make sure that your company knows because there are times where that may make your home ineligible and it could void the policy.

So make sure that if you're renting your house, if you have a home office where you have customers coming to you, there are people that cut hair out of their homes, things like that, make sure that your company knows so that they can get you either a different policy or put the proper endorsements on.

Number two with homes, make sure that as you do updates and improve the house, that you are letting your insurance agency or your company know.

So if you build onto the house, that increases the home's reconstruction cost, which means that the policy might have to change.

If you update the home, maybe you put a new roof, maybe you put a new heating and air system, things like that.

Oftentimes that can get you a discount.

So make sure that your company knows about updates to the home.

But also make sure that if you do anything to improve the home, even if it does jack your rate up a little bit because you're increasing your coverages.

Make sure that your company knows so that you can have the right type of policy and the right amount of coverage.

Now let's also make sure that we understand our deductible and that we have the deductible that works for us.

So let's first talk about what a deductible is.

That's the portion of the, of the loss that you would be paying for yourself.

And this normally applies on the property side.

So If I have $1,000 deductible and let's say I leave my stove on in my kitchen and a kitchen fire starts and that causes $100,000 of damage, with my thousand dollar deductible, I would pay the first thousand dollars and then my insurance company would pay the remaining $99,000.

So that's how deductibles work.

Now there are times where increasing your deductible, which means you're taking on more risk, there are times where that will save you a significant amount of premium.

So let's say going from $1,000 deductible to a $2,500 deductible, let's say that saves me six or $700 per year.

And of course, only my agent or insurance company could tell me that, but let's say that it did.

To me, that might be worth it, right, to, to take a little bit more risk, but then have a lower annual premium.

So you can play with those numbers, but make sure that you have the deductible that works for you.

But now don't forget, if you have a $2,500 deductible and if you have a loss, you need to have some way of coming up with that $2,500 to, to pay your part of the loss.

Now let's talk about some policy exclusion.

Okay, so again, we're using some big insurance language today.

An exclusion is something that simply won't be covered under the policy.

So you need to either ask what some of the major exclusions of your policy are, or you need to know these by looking at your policy declarations page.

So some common policy exclusion are.

One of them might be canine exclusion.

So there are some insurance policies that will exclude coverage for anything related to dogs.

So if your dog bites someone and it causes a major injury, and if you have the K9 exclusion, then your insurance policy is not going to pay any of those damages.

And those damages can be a lot.

And I've seen this actually in effect at times.

So the K9 exclusion is one.

Remember that flood is an excluded peril on your homeowner's insurance policy.

So if the river rises and if you don't have flood insurance, and if your house gets damaged by those rising waters, then your homeowner's insurance is not going to pay for those damages.

So you might want to talk to your agent about flood insurance.

There are some policies with a home business exclusion.

So if you're running a small business and you have customers coming into your home that might be excluded or even result in a policy being non renewed.

Now, depending on where you live, things like fire or wind can be excluded from your policy, which means that you would have to purchase a separate policy.

So we can't go through all of the possible exclusions, but you do want to make sure that you're asking the question, what are some of the major items that would be excluded from this policy?

And if they apply to you, let's say you have a big dog, you may not want to purchase a policy that has a canine exclusion because if that doggie gets out and if it happens to bite somebody and cause an injury, then your policy is not going to cover.

So do you know what your exclusions are on your home insurance policy?

If not, that'd be a great question to ask.

And just like anything else, cheaper is not always better.

So don't necessarily buy the cheapest policy because sometimes the things that are eliminated in order to keep premiums low might be something that you really would want at a time of claim.

So again, make sure that you're working with a really good local independent insurance agent that is knowledgeable and that can give you options and answer your questions and honestly tell you where some of your risk exposures might be, because I guarantee you there are some that you've never even thought of.

All right, so now let's move on to your car insurance and let's talk about some common mistakes that people make and let's talk about some things that you might want to look at on your car insurance.

Now, one of the biggest threats to your nest egg into your financial house is getting into a major car accident.

It would be very easy to cause an accident that resulted in high amounts of injury and property damages that would need to be either paid by you and or your insurance company.

Now, they are called accidents for a reason.

Yes, there are some things that we can do to lessen the chance of getting into car accidents.

We can drive the speed limit.

We could not text and drive things like that.

But accidents do happen.

And car insurance, just like any other type of insurance, is simply protecting my money.

So if I cause you to have a loss, either my car insurance is going to pay for your loss or I am going to pay for your loss, or a combination of both.

So one of the first things to do on car insurance is to understand what those numbers mean.

Most states have something called split limits, and there'll be numbers like 25, 50, 25.

And what that means is that you would have to pay for somebody else's damage.

You would have $25,000 to cover any one person's injuries.

You would have total of $50,000 to cover everybody's injuries in that accident.

And then you would have $25,000 to pay for all of the property that you damaged.

So in my state in South Carolina, that's the minimum required by law.

But I think you're leaving a lot on the table if that's all that you purchase.

Because let's face it, how easy would it be for me to cause you to have $25,000 worth of damage?

That wouldn't be too tough.

That would be a couple hours in the emergency room.

Then after that, everything else would have to come out of my pocket.

So look at your declarations page or ask your insurance agent, what are my liability limits and how much might it cost me to increase my liability limits?

Now here's a hack.

You also might want to purchase a personal liability umbrella.

I can reference that podcast that I did about umbrellas in the show notes.

But personal liability umbrella policies are hugely important.

But maybe go for 300, 300, 100, or anything like that's a little bit higher.

That will give you more coverage if you happen to cause a loss.

Okay, so that's.

Number one is make sure that you understand your liability insurance coverage amounts and determine if you need to maybe up it a little bit.

Now, number two is don't ever use the terms full coverage.

It's not a real term.

It's made up by lazy insurance agents who really don't know what they're doing.

Full means like wholly and complete.

There's never going to be a scenario where everything that could possibly happen would be covered.

So full coverage is not a thing.

Typically what they're referring to is comprehensive in collision, which would cover your vehicle if you were at fault.

But if an insurance agent uses the words full coverage, just ask them, is there anything that would ever possibly not be paid for by this policy?

And when they say yes, then ask him, why the heck are you using the word full if full is not the reality?

Okay, now number three is that we need to be honest with our insurance agents and with our company.

So if you're delivering pizzas, they need to know that you're delivering pizzas.

If you're doing work with your vehicle, they need to know that you're doing work.

If your neighbor is borrowing your vehicle for the next few months and driving it every day, your insurance company needs to know that.

So be honest.

And that'll eliminate or lessen the chance that you'll ever have any type of a claim denied for fraud or for not disclosing some something that is important.

And then finally, we see this a lot here in our little office, and that is make sure you're opening your mail and make sure that you are reading the correspondences that you're getting from your insurance company.

Let me give you an example.

And sometimes these are a little bit of a pain in the neck, but they have to happen.

So there may be a time that you get a letter or an email from your insurance company, and it says in different words, but it would say, hey, John Smith is associated with your address.

You have until 30 or 45 days from now to either either prove that he doesn't live at your address or he'll be added on to your policy.

Now, there may be a time maybe you live in an apartment and John Smith was renting your apartment and his driver's license is still registered to that address.

There may be many reasons that this person could be flagged by the, by the database.

Sometimes you just let your insurance company know, look, I have no idea who this is.

And they'll make that adjustment.

But if you don't, then eventually that person gets added on.

Let's say it raises your premium, then you get all upset and then maybe your bank draft amount was higher than you thought.

And a lot of that could have just been prevented by reading your mail.

So I don't like opening letters from my insurance company, but you got to open the letters from your insurance company, read them and then respond appropriately.

Okay, so those are just a couple things with your car insurance, but let's make sure that we have adequate car insurance, make sure that we have high liability limits, and make sure that we're asking our agent once every year or two for a policy review.

And let's just ask, where are my major exposures?

How would you suggest that I cover my exposures and what would it cost for me to cover those exposures?

And then you are taking charge of your risk management as opposed to letting it just happen by default.

Here's your chance.

I would love to know some of your insurance questions.

Like I said, some people say insurance is a racket.

Other people say it's really necessary.

Other people say I would never drive without it.

Other people say, yeah, until I get caught, I'm not going to drive with insurance.

So what are your thoughts on insurance?

But even more than that, what are some of your insurance questions?

What are some of the things that maybe just don't make sense to you that you would potentially like to have explained to you?

You can go to our Facebook page.

So just put in Weekly Wealth Podcast in Facebook and ask those questions.

Or you can go to www.weeklywealthpodcast.com and click on the Contact Us and even leave me a voice message, which I would think would be really cool.

And we'll try to answer those questions in social media or to you directly.

Because insurance, I always say it's the least sexy financial planning tool, but it arguably is one of the most important because it protects your nest egg.

Alright everybody, I hope that you enjoyed this episode.

I hope that you learned a lot from it.

Again, make sure to share this podcast or other episodes with your friends, with your families, with your colleagues, and with your co workers.

I believe that how we handle our money should positively impact our lives and the lives of those around us.

And I hope that this podcast can be a small piece of that puzzle in your life.

All right everybody, until next episode, I wish everybody a blessed week.

Thanks.

Investment advice offered through Parallel Financial, an SEC registered investment advisor able to conduct advisory business in states where it had registered or exempt or excluded from Registratoin Contents contained herein are for informational purposes only and should not be construed as an offer or solicitation for investment advice or for the purchase or sale of any security, insurance or other investment product.