Homeowners: Factors to consider when purchasing home insurance
Homeowner’s insurance is one of those bills we hate to pay, but regret it if we don’t. Typical coverage is for replacement cost—not market value. In some cases, that may be tens (or hundreds) of thousands of dollars more than the amount you actually paid for the house. With all of the weather-related losses, premiums are on the rise. There are things you can do to minimize the financial impact of paying your premiums, but also when you need to file a claim. Read on to know what factors you should consider when buying primary home insurance.
Do
- make sure you’re insured for 100% replacement cost
- have a high deductible
- talk to your agent
- get the most liability coverage
- consider extra protection for your high-value items
Don't
- skimp on certain coverages
- forget to bundle coverage policies for a discount
- think you are fully covered for everything
- look at your insurance policy as a repair policy
- assume your insurance company has the best deal
Do make sure you’re insured for 100% replacement cost
If there is a mortgage, the bank will insist you have coverage for 100 percent of your home’s replacement cost. If you want your home rebuilt after a major loss—even if there is no mortgage—we highly recommend it. Replacement cost is not the market value of the home—it is the cost to completely rebuild it in the event of a total loss.
To help offset cost overruns, ask for inflation guard. This increases the coverage of the structure by a percentage at each policy renewal. You can also add coverage to make sure your rebuilt home will be built according to current code by adding ordinance/law coverage. With some companies, you can also add replacement cost—plus a percentage—to account for possible cost overruns. Coverage varies greatly from company to company, so work with your agent to make sure that if you do suffer a total loss, your policy will make you as whole as possible.
Do have a high deductible
Your homeowners policy is not a repair policy. It is there to cover you in the event of a catastrophic event such as a fire, tree falling through the roof, a hurricane ripping off the roof…you get the idea. The new minimum deductible seems to be $1000 (used to be $500). For those with higher income, I recommend a $2500 deductible. In most cases, you will get a credit on your policy for a higher deductible.
Do talk to your agent
No matter what some direct-to-consumer companies say, this is just not something you can cover with a phone call. Your agent needs to go to your house and look at the potential for loss: Are there hazards? Does something need to be repaired to make the property safer? This isn’t to judge your lifestyle or housekeeping, but to make sure that there are no issues that might cause a company to drop you for underwriting reasons, or to not pay your claim.
Do get the most liability coverage
A homeowner’s policy is a package. It includes coverage for your home’s structure, your stuff in it, and liability that covers anybody that comes into your home or on your property. Most standard policies include a base liability limit of $100,000. The highest they will go is typically $500,000. The premium difference from 100K to 500K is usually only in the tens of dollars per year. Yes—in the tens of dollars per year. That is a very good deal!
Take the higher coverage, and pay the additional $25 or so for the higher coverage. If you have a high income—even a middle income—look into an umbrella policy. This adds another level of coverage for you in our sue-happy society.
Do consider extra protection for your high-value items
If you own special pieces of jewelry, high-end electronics, furs, fine arts, or other high-value items—you want make sure there is full coverage on those items. A typical homeowner’s policy does include coverage for all of these items, but the limits are low and are subject to your policy deductible. If you schedule these items separately, you create a policy within your policy for those specific items. Each company has different rules, but usually coverage is very extensive (worldwide) with no deductible. You may need to obtain an appraisal on the item(s) you want to schedule.
Do not skimp on certain coverages
It is relatively inexpensive to have a higher limit of liability and the limit of medical payments to others. These coverages are there to protect you and your assets, and to take care of accidents that happen on or to your property. Pay just a tiny amount more over the course of a year, and know that you have adequate coverage in case something bad happens.
Do not forget to bundle coverage policies for a discount
It’s usually quite easy to get a discount with a number of insurance companies if you bundle auto/home and umbrella. Ask your agent about possible savings if you do this.
Do not think you are fully covered for everything
There are two major exclusions in every homeowners policy: Flood and Earth Movement (i.e. Earthquake). Earthquake coverage can be added to your policy (possible exceptions would be on the West Coast) for an additional premium. Flood insurance is written through the government and National Flood Insurance Program (NFIP). Your agent either has access or will be able to help you obtain flood coverage. Hint: the policy documents will not say what the company will pay for, but they will state what they won’t pay for.
Do not look at your insurance policy as a repair policy
Homeowners insurance should be used as way to be made whole if you suffer a catastrophic loss. The more claims you put in, the greater your chance of being cancelled for excessive claims, or being denied a claim. Before putting in a claim, talk to your agent and get estimates.
Do not assume your insurance company has the best deal
Consider shopping around every two years. If nothing else, you will be assured that you do, indeed, have the best coverage for the best premium. If you don’t, you can switch at anytime!
Summary
Some key points to remember: Go higher, not lower with your liability coverage. Make sure your home is insured for replacement—not market—value. To lower your premium, try raising your deductible. Make sure your agent does his job and inspects the property. Be aware of policy exclusions. If you have valuables, schedule them separately on your policy and avoid (if possible) excessive claims. Most importantly, work with your agent. They want to keep your business and they will work to earn it.
