Housing & Mortgage
How to Avoid the Pitfalls in Homeowners Insurance
Guide to getting a good deal – and plenty of coverage
Whether you’re buying a first home or are a decades-long owner, adequately insuring your home is crucial. Yet, according to real estate data provider CoreLogic, in 2017 about one in four homes were underinsured by at least 20%.
A policy that covers less than 80% of your home’s replacement value is risky. Many policies have an “insurance to value” clause that stipulates coverage must be a minimum amount; 80% is common. If you file a claim and it is determined you’re underinsured by 20%, your claim could be prorated, meaning only paid in part. You don’t want to have to chip in $100,000 to rebuild your $500,000 house.
So, consider these steps.
Focus on the cost to rebuild. You probably know what your home’s current value is. But when it comes to insurance, the market value of your home isn’t what matters. It’s the cost to rebuild. That might be less than market value, if land values are high where you live. Or it could be more than the market value if, say, you recently plowed a lot into high-end renovations.
Replacement cost is based on current building costs in your area. (A charming older house may cost more to rebuild.) An insurance agent can provide the local cost to rebuild per square foot. If you know a good local contractor who deals with new construction, ask for estimates. If you have high-end finishes, consider increasing your square-footage cost estimate. Another option is to hire an appraiser. Or try costtobuild.net and dwellingcost.com.
Don’t settle for “actual cash value” coverage. A policy spells out how the insurer will figure out what you’re entitled to in a claim. Actual cash value (ACV) coverage will disappoint. It pays you based on the depreciated value of your home and possessions. So, let’s say a fallen tree puts a big hole in your roof that’s 20 years old. An ACV policy pays to replace a 20-year-old roof. That’s a lot less than what the roofer charges for a new roof.
Replacement value is the way to go. In fact, you should consider extended replacement cost coverage, where your payout can be up to 125% of the policy’s value.
Insure your possessions for replacement value, too. You don’t want a check that only pays to replace a 10-year-old couch.
Policies often limit coverage for possessions at somewhere between 50% and 70% of the policy value. And there are limits on valuables. A standard policy may limit jewelry coverage to $2,000. If, after careful inventory, you decide that’s not enough, consider policy tweaks to increase coverage.
Disaster prep: Do you really want to roll the dice? Damage from floods, high winds and earthquakes isn’t covered by a standard policy, or may come with different terms.
For instance, in some states an insurance policy has a separate deductible for hurricane and wind/hail damage. A standard deductible is typically $500 to $1,000, but hurricane deductibles are typically a percentage of your policy’s value, like 5%, so a $300,000 policy could include a $15,000 deductible for hurricane-related damage. Earthquake deductibles can be 10% to 15%. Separate policies for these events may be required.
Flood insurance is mandatory in clearly defined flood zones, but recent storms make clear that millions more homes are vulnerable. Yet most homeowners don’t have flood coverage.
Some private insurers offer flood insurance. The more common route is to buy through the federal flood insurance program managed by FEMA. Premiums vary, but at the high end the annual cost in 2019 is less than $500.
Consider an umbrella liability policy. A standard homeowner’s policy typically provides up to $100,000 in liability coverage if you are responsible for an accident inside or outside your home. It can also provide coverage if you are sued. You can supplement this with an umbrella policy that buys peace of mind cheaply: $1 million of protection typically costs less than $400 a year.
Shop around. If you own a car, check with your auto insurer. When you bundle policies you can qualify for a premium discount of up to 20%. Do a broader search, too. Not in a DIY mood? An independent insurance agent will shop different insurers. The Independent Insurance Agents & Brokers of America has a free search tool for finding local agents. Or comparison shop at sites such as insure.com. Consumer Reports’ home insurance buying guide has ratings for 15 national insurers.
Reduce your premium, not your coverage. Opting for a higher deductible — say, $1,000 vs. $500 — will reduce your premium. Besides, it’s smart to avoid the temptation to make small claims, as sometimes insurers raise the premiums at renewal for policyholders who make small claims. Ask about other discounts, such as for installing a home security system.
A sparkling credit score can also help. An insurance-based version of credit scores is used by many insurers in setting premiums. (The use of credit information to set homeowner insurance premiums isn’t allowed in California, Maryland and Massachusetts.)