Tips on deductibles, claims, cash value vs. replacement cost
By Robert Bruss
Smart homeowners know how to save on their homeowners insurance policies. Here are the primary ways to reduce your homeowners insurance premiums:
1. DON’T INSURE FOR THE AMOUNT OF THE MORTGAGE. Many homeowners blindly insure for the amount of their mortgage balance. The result can be either too much insurance coverage or not enough. The mortgage balance has absolutely nothing to do with how much insurance you need.
Over-insurance usually occurs when high land value (which won’t be destroyed in a fire) is included in the homeowners insurance policy. A better approach is to determine replacement construction costs for your type of house.
Interview at least three local insurance agents. They will be glad to measure your home’s square footage and recommend homeowners insurance coverage.
For example, suppose you have a 2,500-square-foot home and the three insurance agents you consult agree it would cost about $200 per square foot to rebuild your house if it burns to the ground. The result is your homeowners insurance policy should be for $500,000 even if comparable home sales in your neighborhood are around $700,000 including the land value.
Ask each agent about their guaranteed replacement-cost coverage. This policy provision will pay above your policy limit if a major loss occurs.
2. RAISE YOUR DEDUCTIBLE TO LOWER YOUR INSURANCE PREMIUM. If you can afford to pay for small claims yourself without involving the insurance company, raising your policy deductible from $500 to $1,000 will usually reduce your annual premium about 20 percent. If you can afford to raise the deductible to $2,000, your premium savings will be even greater.
3. LOWER YOUR LIABILITY COVERAGE, RAISE YOUR UMBRELLA POLICY COVERAGE. If you have a net worth of more than $500,000, it can pay to lower your homeowners insurance liability coverage and raise your umbrella liability insurance policy to $1 million or $2 million, perhaps more.
For example, several years ago my insurance agent recommended cutting my homeowners policy liability coverage to $300,000. That means if someone is injured on my property because I am negligent, the policy will pay up to $300,000 damages. If the person were seriously injured, then my umbrella insurance policy with the same insurance company takes over and pays up to its policy limit.
Umbrella insurance policies usually cost just a few hundred dollars for $1 million or more of liability coverage. These policies also provide automobile liability coverage if I should be at fault in an auto accident. Be sure to have all your insurance policies with the same company so, in the event of a loss, there is no arguing between insurers.
4. DON’T MAKE SMALL INSURANCE CLAIMS. In case you haven’t heard, some insurers are either nonrenewing or raising premiums for homeowners who file too many insurance claims. If you have a large claim, by all means file an insurance claim. However, if you have a modest loss slightly above your deductible amount, it’s often best not to file a claim and to pay the entire loss yourself.
The number and amount of claims can also be important when you sell your home. If you have filed many claims, your buyer might have difficulty purchasing homeowners insurance because the house is “loss prone.”
To check your home’s insurance loss records or the insurance claims filed on a house you are considering for purchase, on the Internet go to www.myfico.com and then look for the CLUE insurance claim section.
5. CARRY ACTUAL CASH VALUE PERSONAL PROPERTY COVERAGE. A controversial way to save on homeowners insurance personal property coverage is to insure for the depreciated actual cash value rather than the full replacement cost.
That means in the event of a covered loss, such as a fire or theft, the homeowners insurance company will pay only the depreciated cash value of the personal property. However, full replacement-cost coverage, which is more expensive, will pay the full cost of replacing the personal property at today’s prices.
If you have valuable “scheduled items” such as jewelry, furs, artwork and collections, the extra insurance premium can be substantial. It may pay to shop among other insurance companies for separate special coverage on these items.
6. ASK ABOUT MULTIPOLICY DISCOUNTS. Many insurance companies offer savings of 5 percent or more if you have two or more insurance policies, such as automobile and homeowners, with the same insurer. Also ask about other available discounts such as for burglar alarms, smoke detectors and dead-bolt locks.
UNDERSTAND BUILDING-CODE-COMPLIANCE COVERAGE. For a slight extra insurance premium, most homeowners insurance companies offer building-code-compliance coverage. This benefit pays, in the event of an insured loss, to upgrade to today’s building codes.
For example, if your home burns to the ground and you elect to rebuild, the local building codes probably require electrical circuit breakers (rather than fuses) and perhaps fire sprinklers too.
KNOW WHAT IS NOT INSURED. As many homeowners discovered in the last few years, homeowners insurance policies do not provide flood damage coverage. However, your insurance agent can arrange flood insurance. If you live in a designated flood area, your mortgage lender will require a flood policy.
Earthquake coverage is also an extra-cost coverage that is not included in standard homeowner insurance policies. In addition to the high-cost premiums, earthquake policies usually have large deductibles, typically 10 percent or more of the earthquake damage. For this reason, many homeowners living in earthquake areas elect not to purchase this expensive coverage.
CONCLUSION: As smart homeowners know, it pays to re-shop insurance policies every few years with two or three insurers to compare prices, coverages and service. Homeowners should consider the six key methods listed above to save on insurance premiums and, at the same time, improve policy coverages. Further details are available by consulting local insurance agents to compare their homeowner policies.