Purchasing a home is the largest investment most Americans will ever make. Yet for all the time and effort homeowners put into finding the right house, insurance is frequently treated as an afterthought. A damaged home is a disaster, whether the result of a small fire or wide-spread hurricanes or tornadoes. Knowing that you have the correct coverage may not lessen the pain of losing your home, but it will improve peace of mind.
Know Your History
After purchasing your home, or perhaps as a condition of it, your first task is to find insurance that will cover the cost of your loan and the value of your possessions at a reasonable price. This may not be as simple as it seems. Your insurance company probably knows more about you and your new house than you think.
Fair or not, many insurance companies are using credit reports to determine insurability. At best, poor credit will increase the cost of insuring your home. At worst, it may prevent you from obtaining coverage. Many insurers associate poor credit with increased risk of claims. Ultimately, it is up to you to know what is in your report and correct any mistakes.You can get copies of credit reports by contacting the three major credit bureaus: Experian, Equifax and TransUnion. Their web sites are: www.experian.com, www.equifax.com, and www.transunion.com.
Also get a copy of a home disclosure report from your agent or the seller’s agent. This report, also known as a CLUE report, discloses any damage or claims filed at a specific address over a five-year period. Insurers are looking for information about water and structural damage and will use this to determine insurability. You can get a CLUE report at the website, www.choicetrust.com.
Know What’s Covered
In the aftermath of Hurricane Katrina, some homeowners received a rude surprise. Their insurance companies refused to pay their claims maintaining damage was caused by water not wind. Most homeowner policies cover losses from fire and wind damage and theft, but do not include provisions for flooding or earthquakes.
The National Flood Insurance Program estimates a house is 26 times more likely to receive major flood damage than fire damage over the life of a 30-year mortgage. Even for homeowners in areas considered low to moderate risk, flood insurance may be a worthwhile investment. In 2001, the average cost of a flood policy was $323. People in higher risk areas will pay more for coverage, but may also receive discounts on their regular homeowner’s policy. Policies can be purchased from your local insurance agent, provided your community participates in the National Flood Insurance Program. A list of those communities and other tools to assist you can be found at www.floodsmart.gov.
For many homeowners outside of earthquake-prone areas, purchasing additional insurance may seem unnecessary. Still, an earthquake policy may not be a bad investment because many cover other disasters such as landslides and sinkholes. Ask your insurance agent about the details of these policies. Flood maps and information on earthquake risk are available to view at www.FEMA.gov. Earthquake maps are available to view at The US Geological Survey website, http://earthquake.usgs.gov.
Know how much is covered
After your home is damaged, the last thing you want to learn is that your policy does not cover the cost of rebuilding. Many policies are capped or do not take increased building costs into consideration, so it is important to know how much it will cost to repair your house.
Consider purchasing a replacement cost policy. This policy covers the current replacement cost of homes without depreciation and increases in value as building costs rise. Owners of older homes should consider adding an ordinance endorsement to their policies. When an older home is badly damaged and requires extensive repairs, the homeowner may be required to rebuild to current building codes. Most homeowners’ insurance policies do not cover the extra cost of rebuilding to code. An ordinance endorsement covers this cost.
Some homeowners fail to consider how much home improvements have increased the value of their house. It is important to have an accurate assessment of your home’s value. Insurance companies can help determine this value, but often rely on a formula based on square footage and number of rooms. A more accurate, but more costly, option is to get an independent home assessment, which typically runs $200 to $300. Home values are fluid and insurance policies should be also.
Conduct a content inventory of your house. This not only gives you an idea of the value of your possessions, but may help speed the claims process. Most policies feature coverage for contents at about 50 percent of the coverage for the structure. Items of extraordinary value, such as jewelry or baseball cards, probably will not be fully covered. Additional policies, running as low as $17 per $10,000 of coverage, are a good option.
In addition to covering repair or replacement of your home and its contents, homeowners insurance covers liability for injury or damage to other people’s property that occurs on your property. Most policies provide $100,000 of liability coverage. Considering the cost of medical treatment and legal fees, additional coverage could be worth the investment. Increasing coverage from the standard $100,000 to $1 million typically raises premiums about $40.
If you are a dog owner, make sure your insurance covers dog bite claims. About a quarter of all settlements made by homeowners’ insurance companies are for dog bite claims. Many policies do not cover dog bites, especially for owners of breeds seen as more aggressive.
Save Yourself Money
Skimping on insurance is asking for trouble, but there are ways to save money. Higher deductibles equal lower premiums. Increasing your deductible from $250 to $1,000 can save you as much as 25 percent on your policy. Additional deductible increases will result in more savings, but are a good idea only if you can afford the risk.
Insurance companies often offer discounts to customers who purchase more than one kind of insurance from them. Other discounts may include breaks for fire prevention devices, fire resistant materials, renovations and home inspections. Your insurance agent can inform you about any discounts you have available.
Consider paying small claims out of pocket. Insurance companies do not like paying small claims, and some may end up costing more in increased premiums over the long term. A good rule is to pay claims that cost less than $250 more than the deductible. Frequent small claims increase the risk of cancellation of coverage.
Don’t be afraid to shop around. You are not obligated to continue working with your current insurance company. When it is time to renew your policy, compare coverage and cost with other companies. Often, the same or better coverage can be found elsewhere for a lower cost.