Stress test your insurance:
Would your policies fail in the face of financial disaster?

Insurance is meant to save you from financial disaster. But its effectiveness depends on the policy choices you've made. Would your insurance help you in a crisis? Put it to the test in the following scenarios.

Let’s say you ram your car into something and cause extensive damage to your vehicle. Fortunately you carry collision insurance.

Pass

About 72 percent of drivers carry collision coverage, according to the Property Casualty Insurers Association of America.

If you crash your car without collision insurance, you must either pay the repairs bills yourself or, if your car is beyond repair, foot the bill for a replacement vehicle.

Fail

But what if you’ve chosen a deductible for collision coverage that you can’t afford to pay?

State Farm, the nation’s largest insurer, says that customers have been gradually shifting to higher deductibles over the past few years. That means you pay more upfront costs — or for all repairs if your deductible exceeds repair costs.

Dan Young, senior vice president of insurance relations for Carstar, which has about 280 collision-repair centers in the U.S., has seen increasing numbers of customers who are unable to afford their insurance deductibles. “Even for accidents reported and paid for, with insurance checks in hand, the customer can’t afford their portion of the loss, so it’s not being fixed.”

Young reports that customers who can afford only partial repairs choose to put their money toward the mechanical fixes but not the bodywork.

Now let’s say you crash into someone else. If you cause a car accident that damages someone else’s property or causes injuries, your liability insurance pays out.

Fail

But if you carry only your state’s minimum for liability coverage, you could be on the hook for some whopping bills. The injured party can come after your assets for damage amounts above your insurance limits.

The Insurance Information Institute (III) recommends liability coverage of 100/300/50 (translating to $100,000 for injury liability for one person, $300,000 for all injuries per accident and $50,000 for property damage).

But state minimums are far below “recommended” amounts. Florida minimums are 10/20/10. California minimums are 15/30/5. According to III, in 2007 the average bodily injury liability claim payment was $12,296.

Pass

Now let’s imagine an uninsured motorist crashes into you, and fortunately you carry uninsured motorist (UM) coverage.

In these economic times, it’s more important than ever to protect yourself against other drivers who fail to maintain proper coverage, or any coverage at all.

The Insurance Research Council (IRC) estimates that one in six drivers will be uninsured by next year. That statistic would be a ray of sunshine in certain states where the uninsured-driver population already exceeds that. Florida’s uninsured rate was 23 percent in 2007, and you can bet it’s gone up with the economic downturn. Higher still are uninsured populations in New Mexico (29 percent), Mississippi (28 percent), Alabama (26 percent) and Oklahoma (24 percent).

Fail

Let’s say you carry home insurance but not flood insurance — because you don’t live near a body of water and you’ve never seen a flood in your neighborhood.

Water is a common cause of home damage, but home insurance doesn’t cover flooding. Consider this: The National Flood Insurance Program (NFIP), which offers flood policies nationwide, says one-third of all claims it pays are for policies in “low-risk” communities.

Additionally, NFIP estimates that 2 inches of water in your house would cause $7,800 in damage. Try out NFIP's Cost of Flooding tool for other estimates.

The same goes for earthquakes: Standard home insurance policies don’t cover earthquakes. For that you need a separate earthquake policy or an endorsement to your home insurance. And it’s not just Californians who should be on guard: According to III, earthquakes have occurred in 39 states in the last 100 years.

How would your health insurance weather a divorce? If you’re on your spouse’s plan, you need to protect your interests.

Say a couple is insured on the husband’s group plan and files for divorce. While the couple is battling it out in court, the husband could remove his spouse from his plan without telling her, creating a nasty surprise when she tries to use her insurance to pay at the doctor’s office.

Pass

Remember that the spouse being dropped from a group health plan is eligible for COBRA for up to 36 months.

If a divorcing couple is covered together under an individual health policy, the insurer will terminate the policy and the couple will then have to enroll separately in new plans.

Fail

Another concern is whose policy should cover the children. This can be further complicated if one’s plan is an HMO. Most HMOs operate in regional networks, so if you decide to pack up your child and move outside the HMO’s service area, coverage for your child will be limited to emergency care.

Even with health insurance, what kind of out-of-pocket expenses would you incur if you were diagnosed with a disease that required extensive treatment and hospitalization?

Fail

With ever-increasing deductibles and co-pays, even patients with health insurance can be pushed into “medical bankruptcy” when their share of medical bills starts pouring in.

A February 2009 report by the Kaiser Family Foundation and the American Cancer Society examined what can happen when medical bills surpass insurance coverage.

“High out-of-pocket costs coupled with the high cost of insurance premiums can force cancer patients to incur huge debt, and to delay or forgo life-saving treatments,” says John R. Seffrin, national chief executive officer of the American Cancer Society.

For example, cost-sharing and limits on benefits in some health plans can quickly lead to high out-of-pocket patient costs.

Those who become too sick to work and lose their jobs — and their workplace health plans — are often unable to afford COBRA premiums or private insurance on their own.

Unlike car insurance policies, many group health plans don’t have extensive choices for deductibles and co-pays. And many workplaces are shifting to high-deductible health plans in order to shift more costs to workers.

Fail

Perhaps you have a family but no life insurance.

And you’re not alone. According to LIMRA International, an association of life insurance and financial services companies, one-third of American adults have no life insurance at all. And those who do have life insurance are more likely to carry it only through group life insurance at work. And group life insurance doesn’t go with you if you lose or leave your job.

According to MetLife’s 2009 “Employee Benefits Trends Study,” 45 percent of those who have life insurance carry coverage of only two times or less their annual household income.

Use Insure.com’s Life Insurance Needs Estimator Tool to determine a good level of coverage for yourself.

Stress test your insurance company

Have you held up a magnifying glass to your insurance company lately? Here are three criteria for evaluating your own insurer. Strength: Use Insure.com’s Ratings Lookup Tool to find the current financial strength rating of your insurers. Are they rated “A” or above? Price: Have you comparison shopped recently, or do you just keep renewing with the same company year after year? If you haven’t compared rates lately, you could be getting less value for your insurance dollar. Complaints: Check the Web site of your state department of insurance (DOI) to see if it releases annual consumer complaint ratios. These give you insight into whether your company gets a disproportionate share of consumer complaints. Find your state DOI here. If you’ve pinpointed a rock-bottom insurance rate from a company, make sure it’s not also at the top of the complaint rankings.