Tax season: using a refund to improve your coverage

A tax refund is money a household has already budgeted without. That makes it one of the few times a year when an insurance improvement can be paid for without changing the monthly budget. It also arrives at a useful moment in the four states: spring comes before the Arizona monsoon, before snowmelt runoff in Utah and Idaho, and before the wildfire season everywhere, which is when several coverage decisions have deadlines built into them.

This article sets out the options in the order we would usually weigh them, explains how each works and what it costs, and is plain about the cases where the refund is better spent on something other than insurance. It is not tax advice; questions about deducting a premium belong with a tax professional.

What spring does to the household's risk

The coverage gaps that matter most in spring are the ones with waiting periods. A flood policy through the National Flood Insurance Program or a private carrier typically does not take effect for a set period after purchase, so a policy bought when a storm is forecast or when rivers start rising arrives too late. Carriers also restrict new home policies and coverage increases when a wildfire is burning nearby or a named storm is approaching, a practice often called a binding moratorium.

The other spring risks are familiar: hail in the Wasatch Front and the Treasure Valley, wind before the monsoon, graduations and summer jobs that put new drivers on the road, and travel. A refund spent before those arrive has more effect than the same money spent in August.

Option one: build a deductible fund and raise the deductible

A higher deductible lowers the premium, because the household agrees to absorb small losses itself. The obstacle is having the cash when a loss happens. A refund placed in a separate savings account removes that obstacle, and the premium saved each year stays with the household.

Suppose a household raises its home deductible from $1,000 to $2,500 and its auto collision deductible from $500 to $1,000, and the combined premium falls by $400 a year. Setting aside a refund of $2,000 covers the added exposure on both policies. If no claim happens for five years, the household has kept $2,000 in premium and still has the fund. The figures are hypothetical, and the saving from a higher deductible varies widely by carrier and property, so ask for quotes at each level before deciding.

Option two: pay premiums in full

Many carriers add instalment fees to monthly payment plans, and some offer a discount for paying the term in full. Paying a six-month auto policy or an annual home policy at once also removes the risk of a missed payment causing a cancellation, which matters most for a driver with an SR-22 filing or a household with a history of lapses.

Suppose a household pays a $1,800 annual home premium in twelve instalments with a $5 fee each month. Paying in full saves $60 in fees and, where the carrier offers a paid-in-full discount of, for example, $90, a total of $150. That is a modest return, but a certain one. These numbers are hypothetical.

Option three: add coverage that has a waiting period or a gap

These are the purchases where spring timing matters most.

• Flood insurance for a house near a wash in Arizona or Nevada, or on a river or in a snowmelt path in Utah and Idaho, bought before the season because of the waiting period.
• Earthquake coverage along the Wasatch Front, around Reno or in other seismically active areas, which the standard home policy excludes entirely.
• Water backup and service line endorsements, which cost little and respond to losses the base policy excludes.
• An extended replacement cost endorsement if the dwelling limit has fallen behind rebuilding costs.
• Scheduling jewellery, watches, cameras or instruments on a floater to remove the theft sublimit and the deductible.
• An umbrella policy for a household with a home, savings or a teen driver. The first year's premium is often a good use of a modest refund, and the renewal fits the normal budget.

Option four: close a life or income gap

A household with dependants and too little life insurance has a gap no property policy can fill. A term life policy is usually the least expensive way to close it, and the first year's premium is well suited to a refund. The medical underwriting takes weeks, so starting in spring means the policy is in force by summer. Disability income coverage deserves the same review for a household that depends on one earner.

Health savings accounts belong here too. A household enrolled in a qualifying high-deductible health plan can often still make contributions for the prior tax year until the filing deadline, which lets a refund reduce next year's taxable income and fund future medical costs. Eligibility and limits are set by federal rules; a tax professional can confirm them for your situation.

Option five: spend on mitigation, not premium

Some of the best uses of a refund are projects that reduce the chance of a claim. A water shutoff valve with leak sensors, a roof repair before the monsoon, ember-resistant vents and brush clearing in wildfire areas, a sump pump battery backup in a basement home, or a monitored alarm can each prevent a loss, and several carriers offer credits for them. More important, in fire-prone areas mitigation can decide whether a carrier renews the policy at all.

Suppose a Prescott homeowner spends a $1,500 refund on vent screens and clearing brush from the first zone around the house, and photographs the result. The carrier's inspector notes the work at renewal, and the policy renews where it might not have. The figure is hypothetical; the value of staying in the standard market is not.

When the right answer is not insurance

A household carrying high-interest debt, or one with no emergency savings at all, is often better served by paying down the debt or building the savings first. An emergency fund is itself a form of insurance: it pays deductibles, covers the gap between a claim and its payment, and absorbs the small losses that are not worth filing. If the policies already fit the household, the recommendation is to leave them as they are.

If you would like help ranking the options, send us your declarations pages and tell us the size of the refund. We compare the deductible, coverage and payment choices across the carriers we represent in Arizona, Nevada, Utah and Idaho, show what each would cost and change, and say so when the refund would do more good somewhere else. The analysis costs nothing.