Insurance planning is a pillar of the financial planning process, with policies used to mitigate the risk of loss from sudden, unexpected events known as casualties. Policy holders should have a firm understanding of the coverage specified and it should be reviewed periodically to ensure adequacy. Regarding home insurance, studies show roughly two out of three home owners in the U.S. are underinsured.
For most, a home is the largest purchase one will make in a lifetime. A homeowner’s policy offers protection against specified perils. Unfortunately, while the J.D. Power 2017 U.S. Home Insurance Study found that only 48% of policy holders fully understood the coverage of their policy,, while the ISO found that fully 5.3% of insured home owners filed a claim in 2016, almost uniformly due to property damage.
Insurance policies should be reviewed when significant changes occur in net assets, or on an annual basis at minimum. The purpose of reviewing a policy is to identify gaps in coverage or the potential of being over-insured. While the former is usually more of a concern than the latter, both need to be taken into consideration. Where a gap in coverage occurs, additional insurance can be purchased as a supplement for perils not covered or in-excess of the coverage specified in the home owner’s policy, such as for jewelry or flooding.
The minimum coverage recommended for a home owner’s policy is the amount it would cost to completely rebuild your house. This is known as replacement cost, which most often differs from the fair value or cash value of the underlying.
In August 2018, parts of northern New Jersey were flooded with torrential rainfall. Flash floods were so severe that autos at a car dealership in Little Falls were being carried away by the rising waters. Homes in the area also suffered damage. Standard home owner policies cover very limited water damage including that caused by floods. Protection against floods requires additional coverage. A mortgage provider may require additional coverage such as flood or earthquake insurance if you live in a high-risk area. Little Falls as are many other towns is not a designated flood zone. Therefore, home owners were not required by law to possess flood insurance.
Other items to consider are the assets kept inside your home (e.g. furniture, jewelry, electronics, etc.). You should maintain an inventory of valuable items in your home. Detailed records can include pictures, videos, or receipts. In the event of a disaster in which your possessions are destroyed, your insurance provider will likely want to see your documentation of possessions in your home.
The tax treatment of casualty losses underwent a significant change from the 2017 tax year. Prior to the Tax Cuts and Jobs Act (“TCJA”), damages to your home and other personal property could be deducted on schedule A of your personal tax return to the extent the net loss exceeded insurance reimbursements. The TCJA was signed into law on December 22, 2017 and practically eliminated this itemized deduction. Under the TCJA, personal casualty losses are limited to those incurred in federally declared disaster zones beginning tax year 2018. The homer owners of northern New Jersey affected by flood damage will not be able to deduct losses incurred unless the area is declared a federal disaster zone.
As human beings it is natural to be averse to risk. While insurance does not eliminate risk, the right policy can reduce risk to a tolerable level. In prior tax years, the Internal Revenue Code provided deductions to help alleviate the financial burden of casualty losses. Such changes in the tax law are an additional reminder to reevaluate the coverage provided by your insurance policies. There is no one size fits all insurance policy. The coverage should be tailored to your financial and psychological wellbeing.
For more information contact:
Ryan Berdnick, CPA, CFP, Senior Entrepreneurial Service Group
+1 732.205.2065 firstname.lastname@example.org
Visit us at www.mazarsusa.com