How high earners can protect their income and net worth pt. 2

December 7, 2023

Today, we are rounding out our discussion on insurance.

So far we have covered:

  • Life, disability, and umbrella insurance here.
  • Analyzing health insurance options here.

To be honest, I delayed writing about insurance for a long time.

It's one of those topics where everyone knows they should spend time understanding it, but they never actually get around to it.

It's hard to make this topic interesting, so I thought everyone would ignore insurance content.

But after 190,000 impressions on Twitter from an insurance thread (see below) and a ton of positive feedback on my health insurance newsletter, I am here to say I have never been so thrilled to be wrong.

I’m thankful to be a voice to help guide you through this difficult but important topic.

Everyone should have coverage to protect themselves, their earnings, their net worth, and their family.

So let's get into it.

Home Insurance

For many people, their home is their largest asset.

If you want to protect your largest asset, you need to understand your home insurance.

Your Coverage Outlined:

A: Main Dwelling

This covers your house and everything attached to your house like a deck or garage.

Make sure this accurately reflects the current value of your house.

With the recent surge in home prices, you could be underinsured here.

And remember: you need to insure your house, but not the land (there could be some cost savings here if you were including the value of the land).

B: Other Structures

These are structures not attached to your house like a detached garage or shed.

C: Personal Property

This covers the things inside of your home like furniture, clothing, electronics, etc.

Note: it may not cover the full value of the things inside your home. If you have expensive items, you most likely will need additional coverage through a rider or separate policy.

D: Loss of Use

This will cover the cost of going to a hotel or renting a place if you can not live in your home (during repairs).

E: Liability

This will cover you against claims if someone gets hurt on your property.

F: Medical Expense

This will cover medical expenses if someone is injured on your property.

As you can see, homeowners insurance covers a lot more than just damage to your home.

But not all coverage is created equal.

It’s important to understand what type of coverage you have.

There are three levels:

1) Actual Cash Value

This will replace things based on their current market value.

Meaning - this calculation includes depreciation.

If you bought a TV worth $1,000 5 years ago, you will not get a new $1,000 TV. You will get coverage for what your TV is worth today.

So maybe a $300-500 TV.

2) Replacement Cost

This coverage does not include depreciation.

So, if your TV is damaged, the insurance company will not consider that the TV is 5 years old and not worth as much as a new TV.

They will simply replace the damaged TV with a new one.

If your home's replacement cost is $750,000 and you need to completely rebuild, the insurance company will pay to rebuild the house up to $750,000.

But what if it ends up being more expensive to rebuild? Say $800,000 or $900,000?

3) Guaranteed Replacement Cost

This coverage will pay whatever it costs to rebuild your home, even if it’s more than your policy limit.

So if the replacement cost is calculated wrong, you can rest assured that this form of coverage will cover the additional costs to repair your house to its previous state.

Level 3 is the most comprehensive (& costly) coverage but can be worth it if you need to use it.

A few things to know:

Natural disasters are usually excluded. If you live somewhere that has a higher chance of floods or earthquakes, you may consider taking out a separate policy to cover it.

Document everything you have in your home in case you need to use your coverage. The simplest way to do this is to walk through your home and film what you have, noting brands/costs for your more expensive items.

For expensive items, like jewelry/art/cameras/bikes you might need a rider for additional coverage.

Auto Insurance

The major components of auto insurance are:

  • Liability:
  • Bodily injury if you hurt a person.
  • Property damage if you cause damage to a car.
  • Uninsured/underinsured: if you get in an accident with someone who doesn’t have enough coverage.
  • Collision covers damage to your car. This may be required if you have a loan on the car.
  • Comprehensive covers damage to your car outside of an accident (hail, theft, fire).
  • Medical payments coverage covers medical expenses for you and your passengers (usually optional).

While liability coverage is usually mandatory, collision & comprehensive may be optional.

In the case of a lawsuit, you will want liability coverage to protect your finances.

It's not always the best idea to opt for the state minimum requirement - if you're a high earner or have a large net worth, you want great coverage here.

But most people do opt for the state minimums (with low coverage) or have no coverage at all. This is where uninsured/underinsured coverage can step in to help you.

We understand the importance of Liability Coverage, but what about collision or comprehensive?

Again, collision & comprehensive protects your car.

If your car is paid off and inexpensive and you could cover the cost of a new car if needed, you may choose to forego covering your own car and self-insure instead.

The six types of insurance to protect your earnings, your net worth, and you & your family:

  1. Life Insurance
  2. Disability Insurance
  3. Umbrella Insurance
  4. Health Insurance
  5. Home Insurance
  6. Auto Insurance