If you haven't already received one, you probably will. In especially hot markets along the eastern and western seaboards, insurance agents have been busy suggesting homeowners increase their homeowner's policies to meet the newly valued replacement cost for their homes.
There are a couple of things to keep in mind about insurance. It is first and foremost a gamble. Insurance companies gamble on you when they insure you and your property. They use actuarial tools - tables that estimate such things as how long you will live or whether your property is in jeopardy.
Based on these reports, insurance companies will offer you protection.
On the other side of the table, you are gambling as well. You understand the need for protection but you also have an intimate knowledge of how much money you have and how much you might be willing to spend on that coverage.
Hurricane Katrina, which insurance companies estimate will cost $60 billion plus to compensate has given many of us pause to consider our insurance policies and whether we are adequately covered. In the NorthWest where I live, the main causes of natural disasters are earthquakes and floods. In many instances, both might be a considered a risk for a company who is hired to insure your assets.
Most folks, unfortunately pay little additional attention to their homeowners insurance once they purchase it. There are many good reasons for this. Insurance is an expense that often provides nothing but peace of mind.
Some folks, knock on wood, never file a claim and therefore find little reason to revisit their policies.
Most folks revisit their polices during a refinance. In hot housing markets, property values have jumped considerably since you first purchased your home. In not-so-hot housing markets, the cost of raw materials have jumped even if the price of homes has not. These two reasons should give you cause to take another look at your coverage.
Insurance on homes when you first purchase them is often referred to as fire insurance. Some policies cover numerous types of other disasters such a sewer back-ups in some locations flooding, in others earthquakes.
Determining the right dollar amount to insure your home requires you make several unemotional judgments.
Should you insure your house for the amount of the mortgage or more?
Banks will require you insure the home for at least the value of the money you borrowed. This is largely where their interest in your insurance needs ends. Adequate insurance coverage, however, requires so many more factors than simply covering the money borrowed. The question of whether replacement value or actual cash value are often the first consideration on how much coverage is enough.
Based on the assumption that you financed your home for 80% or less, you have to consider the total value of your home. So it is safe to assume that you are probably underinsured based on the lender's estimate of your home's worth. Banks are covering their money, not the cost of wood and nails and labor to rebuild your home exactly as it stands at purchase. You will need to insure your home, in almost every instance, for far more than just the value of your mortgage.
So how much insurance is the right amount?
Because replacement cost of your home has risen so fast in many areas of the country - especially in light of the recent natural disasters along the Gulf Coast, they have outpaced older valuations. The raw materials used in building homes have jumped in price and their costs look as if they will continue to soar even as the housing market begins to cool. My wife and I learned this cruel fact when we called our contractor in to rebuild our carport. His repair costs have nearly doubled since he bid the job two years ago.
In our neighborhood, housing prices have risen year-over-year about 7% while the cost of lumber has jumped 20%.
What should you do first?
Increasing your deductible is always a good first step at freeing up
more money for the possibility of increased coverage. Your deductible should be high enough to be both affordable and restrictive at the same time. In other words, you want to be able to work the cost of insurance into your budget but you also want the deductible high enough that if and when something should happen, you will be more likely to pay for the repair on something small rather than using your insurance policy to pay for it
Deductibles should be at least $1,000 and as much as 0.5% of the total
replacement cost of homes over $300,000. This gives the homeowner pause to consider opening a claim - a move that has been proven to increase insurance costs
Determine replacement costs. The easiest way to do this is to invite a
real estate agent in to assess the resale value of your home. In many instances, the figure they give you will be based on neighborhood sales of comparable value. It will not however reflect what your home might actually net on the open market, but if the number they give you is substantially higher than your mortgage, it might a good idea to adjust the insurance to that value.
Don't be shocked if the number is well below your estimates. In many cases, improvements inside the home are not taken into consideration. It does not take into consideration your emotional attachment to the home. Keep in mind that the realtor is also anxious to make the sale so their number falls somewhere between fantasy and reality arriving at a price that sells the property quickly. True market value of my home, for instance is about 35% higher than the comparable value a realtor - who did not tour the house - gave to us recently.
Another reason to consider a good replacement value estimate is how the insurance industry views your claim. Should you be underinsured and should you need to use your policy to cover a claim for partial replacement coverage, insurers may balk. They may pay less than you think if you have failed to adequately estimated the coverage you need. The current policy used by most insurers requires at least 80% of the replacement value be covered.
If you are still stumped about how much the house is worth, the insurance industry has created a site that will, for a fee, determine your home's worth. Beware, the InsuretoValue free tool available will come with an insurance quote.
Be careful about the terms replacement and actual cash value. Because
insurance covers not only the house you are in but the contents "Replacement Cost Content Endorsement" will do a better job at covering your personal belongings - as long as you can prove their existence - than "Actual Cash Value". Actual Cash Value will use depreciation when determining your reimbursement and that can find your replacement of those belongings nearly impossible with the check they offer you.
Far and away, the best way to harness your insurance costs is by controlling the amount of claims you have open. Some companies allow you to open a claim without increasing the costs of your policy. This free pass is not always available with all companies. Be sure to ask your agent what their claim's policies are.
Some companies open a claim as soon as you inquire about your eligibility and will exercise your free pass at that point. After that, all calls and inquiries, whether used or not could count against you as a claim. This will ultimately raise your rates making the same coverage much more expensive.
The Comprehensive Loss Underwriting Exchange or CLUE has become the new roadblock for many homeowners and the cause of the largest growth in complaints at state regulatory agencies over the last year. The insurance industry has kicked up its efforts to use the information about the home and the owner to deny or cancel policies.
Some things to remember (for any insurance purchase):
Understand your deductibility and your ability to afford it. Reaching a good balance between the two is extremely important. It becomes a Goldilocks problem. You need just the right amount to allow you to cover your home and belongings while allowing you to be able to afford the policy. In other words, not too much but not too little.
Understand your policy including what is and isn't covered. Understand what natural problems might affect your property. Do you live in an area prone to flooding, earthquakes, tsunamis, or some other act of God? If so, your policy might be in need of a rider, additional coverage provided separate from your basic coverage and paid upon the event.
What have you done to your home. If you have done significant upgrades to your home, increasing your home's value, call your insurance agent for an update on your policy. Changes in your home's underlying worth is important to your ability to replace it should anything unforeseen happen.
Take film of your home and its contents at least every two years. Carefully walk your property filming anything you think might help prove what you own.
If your home burns to the ground, this will provide the agent with visual proof of what you are claiming you own. This visual inventory gives them some basis for how they will pay you. Keep the tape in your safe deposit box.
Improve your home's chances of survival - as well as yours. Install a security system, get more fire detectors and extinguishers and update your wiring as soon as you can. These can actually lower your premiums so notify your agent if you upgrade or add these systems. Sometimes, these improvements will increase your home's value. It is an opportunity to roll any savings into additional insurance coverage.
Keep your credit healthy. Poor credit scores and/or history will directly affect your premiums.
And lastly, consider an umbrella policy. In this highly litigious society, additional coverage with these types of policies will go a long way in providing you coverage against injuries that happen on your property or when you are driving. Adding this coverage is often relatively economical providing you have filed no claims, your credit score is good and your history of responsible behavior is noteworthy.
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