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Are There Gaps in Your Insurance Coverage?

Buying insurance is about sharing risk. For example, health insurance will cover some of the cost of getting and staying healthy. Homeowners insurance will assume the risk of loss in case your home is damaged or destroyed. But oftentimes, we think we're covered for losses by insurance when, in fact, we're not. Here are some common coverage gaps to remember when reviewing your own insurance coverage.

Life insurance

In general, when coupled with savings and income, you want to have enough insurance that will allow your family to continue to live the lifestyle to which they're accustomed. But changing circumstances may leave a gap in your life insurance coverage.

For example, if you have life insurance through your employer, changing jobs could affect your insurance coverage. You may not have the same amount of insurance, or the policy provisions may differ. Your coverage may have decreased, or the type of insurance may have changed. Where your prior employer may have provided permanent life insurance, now you may have term insurance that will expire on a predetermined date. Review your income, savings, and expenses annually and compare them to your insurance coverage. Changing circumstances may require more insurance. Your financial professional can help you determine if you have enough coverage to meet your family's future income needs.

Homeowners insurance

Homeowners insurance can be tricky as to what perils are covered and how much damage will be paid for. Clearly, it's important to know what your homeowners policy covers and, more importantly, what it doesn't cover.

You might think your insurer would pay the full cost to replace your home if it were destroyed by a covered occurrence. But many policies place a cap on replacement cost up to the face amount stated on the policy. You may want to check with a building contractor to get an idea of the replacement cost for your home, then compare it to your policy to be sure you have enough coverage.

Even if your policy states that "all perils" are covered, most policies carve out many exceptions or exclusions to this general provision. For example, damage caused by floods, earthquakes, and hurricanes may be covered only by special addendums to your policy, or in some cases, separate insurance altogether. Also, your insurer may not cover the extra cost of rebuilding attributable to more stringent building codes, or your policy may limit how much and for how long it will pay for temporary housing while repairs are made.

To avoid these gaps in coverage, review your policy annually with your agent. A face-to-face meeting is always best with the policy right there in front of both of you. Also, take heed of notices you may receive. While it looks like boilerplate language, it could actually be changing your coverage significantly. Don't rely on your interpretations--seek an explanation from your insurer or agent.

If you own a condo, your association's property insurance may leave gaps in coverage. For example, most association insurance doesn't cover your furniture, wall coverings, electronics (e.g., televisions, radios), interior walls, and structural improvements made to the interior of your unit. Review your condo documents, particularly the master deed, which may describe those parts of your unit the association insurance covers, and which parts you may need to insure. 

Auto insurance

Which drivers and what vehicles are covered by your auto insurance? Most policies provide coverage for you and family members residing with you. So your child who is living in a college dorm is probably covered, but living in an off-campus apartment might exclude your child from coverage. If you and your spouse divorce, which policy insures your children who are living with each parent at different times during the year? Notify your insurer about any change in living arrangements to avoid a gap in coverage.

Other gaps include no coverage for damaged batteries, tires, and shocks. And you might not be covered for stolen or damaged cell phones or other electronic devices (e.g., MP3 players). Your policy may also limit the amount paid for a rental while your vehicle is being repaired.

In fact, insurance coverage for rental cars also poses many gaps in coverage. For instance, your own collision coverage may apply to the rental car you're driving, but it may not cover all of the damages alleged by the rental company, such as loss of use charges. If you're leasing a car long-term, your policy may only cover the replacement cost if the car is a total loss or is stolen. But that amount may not cover the outstanding balance of your lease. Gap insurance can cover any difference between what your insurer pays and the balance of your lease.

Policy terms and conditions aren't always well defined, and you may not understand what's covered until it's time to file a claim. So review your insurance coverages with your financial professional to be sure you've filled all the gaps in your coverage.