Am I over-insured? Wasting my money or protecting my assets?

Question

I want to be more focused on cash flow. I am in the process of purchasing my 8th investment property. Is insurance something you should look at when you are trying to maximize cash flow? I heard a guest say he only covers them for cash value and it saves him tons of money which increases his cash flow. Of course, I am being told/sold to protect myself. I will give a few examples of my coverages. They are all similar because they were all set up/sold to me by the same person. I use a company that rhymes with Great Harm and my wife's uncle is our agent.

House 1

Value $175,000      Owed $124,000

Rent Received $1,425      Payment $1000 <---- Don't kill me on this, I know it's not a great one.

Coverage - Dwelling $178700, Dwelling Extension $17870 Personal Property $8935 Business Liability $1,000,000 Annual Aggregate $2,000,000 Medical Payments $5,000 Deductible 1%

House 2

Value $145,000     Owed $69,500

Rent Received $1200    Payment $620  <-----Getting a little smarter

Coverage $110,800, Dwelling Limit $11,080, Personal Property $16,620, Business Liability $300,000, Annual Aggregate $600,000, Medical Payments $5,000, Deductible $1,000.

Thanks for any comments or insights. Always looking to connect with people in the Norman, Oklahoma area.

Adam Hurst · Answer

@Colleen F. I will ask that question. $1,000,000 seems like a lot on one property or maybe not.

Jason Bott · Answer

@Adam Hurst in regards to your Property coverage, try this 4 step process I use with my clients.

1) Determine how much risk you are willing to take on if you have a Property claim. This would be the amount of money in addition to your deductible.  Are you OK paying an additional $5k, $10k, $25k?

2) How will you fund that amount?  Reserves, line of credit, etc.  Will this put you in a bad spot?

3)  If you get through the first 2 and want to keep moving forward, you then take these amounts to your agent and ask them to put together policies that give you these desired outcomes.

4)  Finally, compare the new quotes to your existing policies and determine if the premium savings is worth the additional risk.

In regards to your Liability coverage, an Umbrella policy gives you a higher Liability limit if you feel your General Liability (GL) policy is not high enough.  I suggest a SFR to have a minimum of $1M of GL.  If you feel that is not enough, then entertain the Umbrella.

Colleen F. · Answer

Why is your liability 300,000 on one property and  1 million on the other property?

David Nutakor · Answer

@Adam Hurst, umbrella insurance is your answer, especially since you have more than 5 rental properties. I suggest you add your primary residence and personal vehicles to the umbrella insurance to make it cost effective.

Greg Scott · Answer

Penny wise, pound foolish.  Saving $50/mo on a cash value policy looks great until you have a major loss.  Then you are screwed.

Greg Scott · Answer

@Marco G. Fully agree. In the past 7 years, I've averaged one claim per year.  I'd be dead with ACV.  With replacement cost, I've actually ended up in a better position after each claim.

@Adam Hurst  On my SF rentals I used to get $500K liability and had a $2M liability umbrella. Typically you need at least $500K on each property to support the umbrella requirements.  The liability risk portion is mostly up to your persona preference, but I can say it is best to be consistent from property to property so you know what you have.

Mike McCarthy · Answer

Definitely look at umbrella insurance.  For a few hundred $$/yr, you can get $1M (or more) liability coverage on your rental properties, primary home, and autos.  It allows you to reduce your main policies to $300 or $500K (I don't recall), which will save you some money there too.

Also consider your deductibles.  Many people won't touch their insurance for a $500 or $2000 expense.  So why would you have a deductible that low?  $1K is fine, $2500 might be better.... depending on what kind of reserves you have and how to treat insurance.  (No bad answer of course, just how your risk tolerance works)

Adam Hurst · Answer

@David Nutakor Thank you David. Sounds like sound advice.

Marco G. · Answer

@Adam Hurst

Replacement cost all the way. I just replaced three roofs after a freak hailstorm and let me tell you, it would have looked very different if it was ACV instead....the savings just don’t pencil out.

If you had just done top to bottom renovation and ACV was high, then maybe for a year or two but the savings are not significant enough to merit the exposure otherwise in my experience.

Adam Hurst · Answer

@Greg Scott That’s where my head is. It seems risky.

Am I over-insured? Wasting my money or protecting my assets?

Most Popular Reply