We have all seen the car commercial where the guy is on the used car lot and says “Show me the CARFAX®” before he purchases a vehicle. A CARFAX® report provides potential buyers a vehicle’s history of ownership, titles and accidents. The report allows buyers to make an informed purchase decision and gives them confidence that they are buying what is advertised. Did you know the same type of report is available when you buy a house too?

The CARFAX® for a home is called a C.L.U.E.® or Comprehensive Loss Underwriting Exchange report. A C.L.U.E.® report shows insurance claims made on a property for the past 5 years and insurance companies use this information for underwriting homeowner insurance (See a C.L.U.E. example).

However, home buyers can also get a C.L.U.E.® report by requesting the seller to purchase a C.L.U.E. Home Seller’s Disclosure Report for $19.95. Remember that the buyer or real estate agent cannot order the C.L.U.E.® report and it only can be provided by the seller or owner. The report shows the same claim history on the property that insurance companies use but it removes all of the seller’s personal information that they would want to keep private.

If you wouldn’t buy a car without the CARFAX® report, should you buy a home without a C.L.U.E.® report? Let me know your thoughts.

To help determine if raising your car insurance deductible is a good financial decision, you need to analyze the payback period.  The payback period is how long it would take to buy back your deductible from insurance premium savings. It can be calculated in 4 simple steps and is best explained by using an example.

Assume that our friend Mr. Fancypants is paying $1000 per year for car insurance and he currently has a $250 collision deductible on his car. To save money, Mr. Fancypants wants to increases his collision deductible to $500 making his auto insurance drop to $900 per year. Is raising Mr. Fancypants collision deductible the most economical decision using the payback period method?

Step 1: Calculate Retained Risk – When you raise your deductible that means you will pay more out of your own pocket before the insurance policy starts to pay.  Originally Mr. Fancypants would pay the first $250 for a collision claim but raising his deductible means he would now pay the first $500. Thus, Mr. Fancypants is retaining $250 of additional risk by increasing his deductible. (Learn more about retained risk in our prior blog article)

New Deductible – Original Deductible = Additional Retained Risk
$500 – $250 = $250 (Additional Retained Risk)

Step 2: Calculate the Savings – Since Mr. Fancypants is retaining more risk, the car insurance policy goes down to $900 per year and he saves $100 per year.

Original Premium – New Premium = Savings per Year
$1000 – $900 = $100 (Savings per Year)

Step 3: Calculate Payback Period – The payback period in this example is how long Mr. Fancypants would have to drive without having a covered collision claim to make his money back. It is calculated by dividing his additional retained risk (Step 1) by the additional savings (Step 2) for raising his collision deductible.  For Mr. Fancypants, he would have to drive 2.5 years without a covered collision accident claim before he would make his money back from the savings on his policy.

Additional Retained Risk / Savings per Year = Payback Period (yrs)
$250/$100 = 2.5 years

Step 4: Compare Payback Period – Since Mr. Fancypants does not actually know how long he will drive without having a collision accident, he needs a guideline to help make a decision. A general rule of thumb is if the payback period is less than 4 or 5 years, it usually makes financial sense to increase your car insurance deductible. Since the payback period for Mr. Fancypants is 2.5 years, the payback period method suggests that he should raise his deductible.

Remember that the payback period is just one guideline for making the decision to raise your insurance deductibles. Other factors to consider would include your likelihood to submit a car insurance claim, if you have the cash to pay the higher deductible and your prior driving record just to name a few.

Have you used the payback period to determine if your car insurance deductible are the most economical? Leave a comment below.

AVOID: This one is pretty straight forward. If you don’t participate in a particular activity or own a particular property, you eliminate the risk all together. This method is the easiest to execute but it can be the hardest to resist. Here are just a few examples of avoiding a risk:

• Not licensing a teenage driver who is clearly irresponsible

• Not buying a backyard trampoline because it is impossible to prevent neighborhood children from using it and potentially hurting themselves

• Not going skydiving (I’ve always wanted to do this, though!)

REDUCE: Obviously we cannot avoid everything, otherwise, we would never leave the house or cross the street. That’s why the next way to manage risk is to reduce it. Most of the time reducing risk is just a matter of using common sense and actually doing the things you know you should be doing in the first place.

• Having your chimney cleaned every year to reduce the chance of a fire

• Checking the prongs on your diamond engagement ring to reduce the chance of losing the stone

• Not drinking and driving to reduce the risk of a car accident

RETAIN: The third and final non-insurance way to manage risk is to pay the loss out of your own pocket, or retaining it. Most people retain risk when they carry a car insurance deductible or when they don’t buy earthquake coverage for their home in Lancaster County PA. However, retaining risk is only good when it is intentional. Unintentional retention of risk is bad news because you’re not aware the risk exists in the first place and you likely don’t have the money to pay for it. Some examples of unintentional risk include:

• Not having any coverage to repair or replace your finished basement after your sump pump failed and the overflow water damaged it

• Only receiving $1,000 after your $5,000 engagement ring gets stolen

• Not having any coverage to protect against a lawsuit when a customer visits your home-based business and falls on your icy sidewalk

TRANSFER: The final way to manage risk is to transfer the risk from you to another party. Buying insurance is the most common type of risk transfer. With insurance you pay a predetermined premium and in return the insurance carrier absorbs the losses that you otherwise would have to pay. Insurance makes the most sense when the risk is large but the cost to transfer the risk is small. Here are just a few examples when it makes sense to buy insurance:

• Transferring the risk of rebuilding your $200,000 home after a fire for a few hundred dollars

• Getting coverage for your $30,000 SUV if you are at fault for damaging your own car

• Buying liability insurance to protect your assets from a lawsuit

Insurance really is a piece of A.R.R.T. because insurance is the Transfer of risk. However, it is important to understand that risk can also be managed by using non-insurance methods too. That’s why your insurance agent should always explore all options to manage your personal risk and help you identify the unintentional retained risks that you may not even be aware of.

Do you have an ARRT masterpiece to manage risk or do you need to get the paint brush out for some touchup? Please leave a comment below.

Not only do you have access to the same services that most other sites provide -learning more about the company, requesting quotes and policy changes, or getting in touch with us- you’ll also be able to access a wealth of useful information. Our goal is to keep you, our customer, informed and up-to-date about a wide variety of insurance topics.

Putting our customers first, keeping them informed. That’s what makes us different.

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