How Does Property & Casualty Insurance Work?

Oct 10 / Jay Zigmont, PhD, MBA, CFP®

Two common types of insurance coverage are property and casualty. If you own (or rent) a home and a car, you've got these types of insurance. Here's more information about how they work and what to know when buying coverage.

Auto Insurance

Auto insurance is legally required in nearly all states, and since the cost of it is far less than the financial and legal penalties you could incur by not having it, you should definitely have a policy. When you're looking at coverage, you'll need to decipher what the different terms and numbers mean.

As an example, if your policy has a $100,000/$300,000 bodily injury coverage limit, this means that the maximum your insurer will pay out per accident is $100,000 per person involved, up to $300,000 for the whole claim. So if you're at fault, and there are four people who have suffered injuries, and the damage exceeds that $300,000 figure, the fourth person may be out of luck and seek damages from you directly.

Collision coverage is insurance for your own vehicle. If you have a cheap old car you can afford to replace, you may be able to save by skipping this coverage. Don't skimp on liability coverage though, as this is insurance for another person's vehicle, if you're in an accident and their car is damaged.

You may be able to tack on roadside assistance to your auto policy for a little more money, and this can absolutely be worth it. If you break down on the road, the cost of towing your car to a shop can be covered.

Homeowners Insurance

The cost of your homeowners insurance (also a requirement if you are paying off a mortgage loan, but you should have this coverage even if your home is paid off) is based on how much the property is worth. Since climate change-related disasters are becoming more common and home values are up, homeowners insurance is getting more expensive. It will cover the cost to replace your home if something were to happen to it.

Ideally, you should aim to have at least 80% coverage for your home. So if your home is worth $400,000, you should have at least $320,000 worth of coverage. Your home's value will change over time, so revisit your coverage annually to ensure you have enough in case the worst happens. Your homeowners insurance includes other components, like liability coverage (in case someone gets hurt on your property).

One important form of coverage to have is flood insurance, which is separate from your regular homeowners insurance and may be required depending on where you live. Confusingly, your regular insurance will likely cover some forms of water damage, but not those from a weather event, such as hurricane-related flooding. But if a pipe bursts in your basement, it may cover the cost of those repairs.

It's also important to have the right kinds of coverage for the risks you face in your area. For example, if you live in a part of the country prone to tornadoes, be sure you have enough coverage for this. And don't think you can get by without insurance if you have a condo or just rent your home. Condo insurance will cover the part of your building that you own, and renters insurance is strongly recommended for renters, because your landlord's homeowners policy won't pay to replace your belongings in the event of a fire, natural disaster, or a break-in.

Umbrella Insurance

If you have various assets (like a home and a car), you might want to look at umbrella insurance too. This will cover some of the problems that could slip through the cracks with other insurance, such as identity theft.

If you have questions about different types of insurance and whether you have enough, get in touch with your CERTIFIED FINANCIAL PLANNER™. They can evaluate your existing coverage and advise you about whether anything needs to be adjusted.
Jay Zigmont, PhD, MBA, CFP® is the Founder of Childfree Wealth, a life and financial planning firm dedicated to helping Childfree and Permanently Childless people. Dr. Jay is a CERTIFIED FINANCIAL PLANNER™, Childfree Wealth Specialist, and author of the book “Portraits of Childfree Wealth.” Dr. Jay is the co-host of Childfree Wealth Podcast. His Ph.D. is in Adult Learning from the University of Connecticut.

He has been featured in Fortune, Forbes, MarketWatch, Wall Street Journal, New York Times, Business Insider, CNBC, and many other publications.