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My name is Tim, and welcome to the Financial LIFE Planning weekly!

How To Save Money (And Improve Coverage) With Home And Auto Insurance

published2 months ago
6 min read

Last week, we kicked off a mini-series on how to make the most of insurance products with a near-death lesson in risk management from a counter-intuitive perspective. If you missed it, please click here, because the lessons don't just apply to insurance decisions.

Over the next few weeks, we're going to hit some of the most prominent, useful, and often confounding insurance products--including life, long-term disability income, and long-term care insurance--but this week, we're going to address a pair of the least sexy insurance products, home and auto.

And don't worry, we'll also get you caught up on the market's misbehavior this week, too!


In this FLiP weekly you'll find:

  • Financial LIFE Planning:
    • Home & Auto: How To Save Money & Improve Coverage
  • Quote O' The Week:
    • "Don't be fooled by the calendar..."
  • Weekly Market Update:
    • How do you spell "capitulation"?


Financial LIFE Planning

Home & Auto: How To Save Money & Improve Coverage

I was recently asked a few questions by a Wall Street Journal reporter related to home and auto insurance, and I think the answers can help you improve your coverage and/or save you money:

Q: How have you personally saved on your homeowner's insurance lately?

A: Shopping it. Especially depending on where you live and the number of insurance companies who serve the region, quotes can change fairly dramatically. For example, I live in Charleston, SC, near the Southeastern coast, and the best rates and companies are entirely different here than when I lived in inland Maryland, near Baltimore. But because a lot of insurance companies also avoid coastal towns, I’ve found that I need to shop even more often here in order to make sure I’m getting the best deal.

Q: How can people save on their car insurance?

A: One of the surprising ways to save money on your car insurance is to increase your deductibles. Often times, insurance companies will default to very low rates—like $100 or even $50—but if you are willing *and able* to self-insure a higher amount because you have adequate emergency savings—to $500 or even $1,000—you may meaningfully decrease your premiums. This is a great rule of thumb in all insurance dealings to minimize premiums:

Self-insure what you can while insuring catastrophic risks that you can't.

Q: How can I improve the coverages on my home and auto insurance?

A: Unfortunately, while insurance companies tend to set low deductible rates as a default, they also tend to default to lower liability limits, and this is the catastrophic risk that we *do* want to insure. This is in their best interest—because it reduces their risk. Therefore, what I often find is that people have deductibles that are too low, but they also have liability limits that are too low.

Most people should have liability limits of at least $250,000, if not $500,000 or $1,000,000 (when possible). Then, in most cases, I also recommend an umbrella liability policy, because these BIG numbers are examples of the catastrophic risk that most of us could not bear, and therefore the types of risk that are best transferred to an insurance company. Just remember:

Insurance companies would rather we pay higher premiums for lower risk, so our objective as the insured is effectively in conflict with their objective as the insurer.

For further reading:


Quote O' the Week

Charles Richards

Don't be fooled by the calendar. There are only as many days in the year as you make use of. One person gets only a week's value out of a year while another gets a full year's value out of a week.

Weekly Market Update

Ouch!

  • - 4.65% .SPX (500 U.S. large companies)
  • - 5.20% IWD (U.S. large value companies)
  • - 6.53% IWM (U.S. small companies)
  • - 5.95% IWN (U.S. small value companies)
  • - 5.97% EFV (International value companies)
  • - 6.16% SCZ (International small companies)
  • - 1.50% VGIT (U.S. intermediate-term Treasury bonds)

Can you spell "capitulation"?

Contributed by John Marske, CFP®, a Notre Dame grad and generally good guy.

The past two weeks serve as a good example of what “capitulation” feels like – indiscriminate selling of virtually every asset. It doesn’t feel good. Previously this year, the stock market rallied on each day the Fed announced their interest rate decision. This includes rallies on the last two 75-basis point hikes.

EVERYONE anticipated another 75-basis point hike this past week, and the Fed delivered. Wouldn’t you expect another one-day relief rally? Guess what, it did not happen. The Fed surprised the markets with a new forecast of how high rates would have to rise to bring down inflation. All the major indicies declined over 1.7% on the revised forecast, and by Friday the markets dropped to the lows set in June.

Bullish investors had been proclaiming we are past peak inflation, based on housing and commodity prices, which have already come down as a result of year-to-date rate hikes. But certain aspects of the economy are not only being more stubborn, they’re actually still moving in the wrong direction.

For instance, while homeownership has approached “recession” status, the average rent in New York City recently hit an all-time high average of $5,000 per month! Luckily, a rail strike was averted in the past week, but only after transportation workers’ wages were increased. Fed members are more focused on “sticky inflation” like rents and wages, rather than commodity prices.

Higher interest rates for longer” was the message delivered by the Fed on Wednesday, after moving rates higher with their 3rd straight 75-bps hike, raising the Fed Funds rate to 3.25%. The Fed’s new forecast showed a much more pessimistic view regarding future interest rates.

Twelve of nineteen FOMC members expect Fed Funds between 4.50% and 5.0% by the end of 2023. The previous Fed forecast had fed funds at 3.8% by year-end 2023. In other words, the Fed was once-again wrong with their original projections. The Fed also forecasted the expected effects of these rate increases on the economy as follows:

Although the market was disappointed with the previous week’s the CPI data, the Fed uses PCE as their primary measure of inflation because it encompasses a broader range of goods and services than the CPI, from a broader range of buyers. It tries to track what is actually purchased, and represents how consumers change their buying patterns when relative prices change. The previous PCE print was 6.3% and the August report will be released on September 30th – another report to look forward to.

We should all know the formula by now – higher-than-expected inflation means higher interest rates, resulting in lower bond and stock prices.

Ten-year treasuries stood at 3.47% last Monday. By Friday, ten-year rates surpassed 3.70%, before settling at 3.69%. After finishing the day higher on Monday, U.S. stocks fell hard each of the following days, with Wednesday & Friday losses being most severe.

The S&P 500’s forward price/earnings multiple, which was 21 at the beginning of the year, has dropped to 16 currently. The good news is that if this multiple were to drop to 14, which was the low set during the 2008-09 recession, that would take the S&P 500 to a level of 3,600, which is only 3.5% lower than the 3,693 level hit on Friday.

We are now in the “emotional” phase of the markets where investors act emotionally, rather than rationally. The emotional phase tends to be the end game of virtually every bear market we’ve ever witnessed, and it’s coming in September and October, which has historically been the roughest part of the year. A fourth-quarter rally is not inconceivable. We just need to see signs inflation is moderating.


None of us likes to endure downward market cycles, but experienced investors know that the stomach churning is simply the price to pay for higher long-term expected returns.

One of the best ways we can deal with these uncontrollable frustrating factors, however, is to improve something we can control--like your home and auto insurance...and how you spend your weekend.

I hope you're spending yours wisely!

Best,

Tim


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Oh, and BTW, The information in this article is for educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. That should really come from your financial advisor. I'm thrilled to work for Triad Financial Advisors, but what I write is my opinion, and not necessarily theirs.