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Protect your financial plan: Transfer the risk

Published:Sunday | November 11, 2012 | 12:00 AM

Oran A. Hall, Contributor

Love is the only kind of fire which is never covered by insurance -
- Kin Hubbard

A fire can destroy a financial plan. But so can water, earthquake, hurricane Sandy and other perils for the individual who chooses not to transfer risk by insuring his assets.

Would you say that a plan that excludes insurance is a complete financial plan? Risk management is a critical part of any personal financial plan; insurance - life, health, critical illness, disability and property - is a great risk management tool.

Instead of taking all of the risk, the asset owner effectively uses insurance to transfer the risk to the insurer, who is in a stronger financial position to pay for the loss.

Even for the person who has the financial resources to replace an asset that has been destroyed or damaged, there is still a serious cost which inevitably damages the personal financial plan.

Consider what the money used to replace or repair the asset could have been used for. Consider also what would happen if there are insufficient funds to replace or repair the asset destroyed or damaged. Would other assets have to be sold or would a debt have to be incurred?

It is true that there are individuals who, quite fortunately, get by without suffering loss from any peril but there is no guarantee that such good fortune will continue indefinitely. It is the uncertainty associated with perils that makes it imperative for measures to be taken to protect the owner of property of any kind.

There is wisdom in insuring major assets such as a home, which is the most valuable asset of many persons.

A standard homeowner's policy provides financial protection against a wide range of perils.

Property damage

It generally includes coverage of the structure of the home itself including extensions and attachments such as garages, liability protection, that is, coverage for legal responsibility for bodily injury or property damage the insured or family members cause to other persons, including cost of defence and court awards to the limit of the policy, and reasonable expenses if the owners are unable to live in the house due to fire and other perils.

A homeowner's policy may cover building only, building and contents, or building, contents and all risk items such as electronic items.

It is advisable to insure property for its full replacement cost - not its original cost or current market value.

Considering the level of inflation we have experienced over the years and the consequent increases in the cost of assets, every effort should be made to have insurance at a level that will enable the owner to replace the assets or restore them to their condition before the damage.

Under a homeowner's policy, a building is considered to be underinsured if the sum insured at the time of loss or damage is less than 85 per cent of its current replacement cost.

Thus, if a building having a replacement cost of J$20 million is insured for J$17 million and is totally destroyed, the insured is paid J$20 million less any applicable excess.

If it is insured for J$15 million and is totally destroyed, the insured is paid J$15 million less any applicable excess.

If it is insured for J$15 million and is partially destroyed, the insured is paid 75 per cent of the value of the loss less any applicable excess, so if the loss is J$10 million, the insured is paid J$7.50 million less any applicable excess.

Coverage is for one year at a time and the policy should be upgraded to reflect any increase in the value of the property due to enhancements made or appreciation due to inflation or the market.

It is important to shop around for the best deal. A better alternative is to have a broker do that for you. Determine what you are being offered for each premium dollar before signing the contract.

Do not risk derailing your personal financial plan. Get appropriate and adequate insurance.

Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers free counsel and advice on personal financial planning.Send feedback to