Think in three layers
Trouble comes in sizes. Small shocks, such as a car repair or a veterinary bill, are handled with cash. Medium shocks, such as a layoff or a broken leg, take cash and insurance together. Catastrophes, such as a fire, a disabling illness, a lawsuit or a death, can be handled only by insurance, because nobody saves enough to replace a house or thirty years of income. The working rule follows: insure what would ruin you and pay out of pocket for what would merely annoy you. Skip the warranty on the phone and the appliance, choose higher deductibles where you can afford them, and send the saved premium to the emergency fund.
Match your cash to your deductibles
Pull out your policies and write down three numbers: the out-of-pocket maximum on your health plan, the collision deductible on your auto policy, and the deductible on your renters or homeowners policy. Your emergency fund should at least cover the largest of them. If it cannot, lower a deductible or build the fund first. Keep a modest part of that cash in small bills at home, since cards and cash machines stop working in a long power outage.
Know the gaps
- A landlord's policy covers the building and not your belongings, and renters insurance usually costs fifteen to twenty-five dollars a month with liability coverage included.
- Standard homeowners and renters policies exclude floods and earthquakes. Flood coverage is sold separately, and policies from the federal program typically take effect thirty days after purchase, so it cannot be bought when the storm is already forecast.
- A policy written for actual cash value pays the depreciated worth of what you lost, while replacement cost coverage pays for new items and is worth the modest extra premium.
- Life and disability coverage provided by an employer ends when the job does, which is often the moment it is needed.
Make the inventory
Walk through every room recording video on your phone. Open the closets and drawers, say aloud what things are, and hold the camera on serial numbers and appliance model plates. Photograph receipts for anything worth more than a few hundred dollars. Store the files somewhere other than the home itself, and repeat the exercise once a year. It takes half an hour, and it replaces the task of listing everything you owned from memory while living in a motel.
Note Call your insurer at each renewal and ask what the policy does not cover. Coverage limits set years ago rarely match what rebuilding or replacing costs now.
