Risky business: Two-thirds of homeowners are underinsured

House of Cards Fifty percent of American homeowners  do not have a clear understanding of their home insurance coverage. Two-thirds are underinsured. Coincidence? Not in my case.  Our coverage was a house of cards.

Our home was underinsured for the first 14 years we owned it. My lack of knowledge put the largest investment of my life at risk—a fact that still gives me chills. 
– Sonja Penner

It’s funny that no one wants to be a statistic, yet when you find yourself represented in a study, you start to feel like part of something. Even when the stats are not flattering, like those I found myself associating with recently, on some level it’s comforting to know you’re not alone.

What caught my attention was a statistic from the 2010 J.D. Power and Associates customer satisfaction survey results for home insurance. The study found that 50% of American homeowners do not have a clear understanding of their home insurance coverage. Another study by Marshall & Swift/Boeckh—recognized consultants to the insurance industry—reports that two-thirds of Americans underinsure their homes. Coincidence? Not in my case.

These stats reminded me of a meeting I had six years ago with Skip Miller, Member Benefits underwriter. I was taking advantage of the opportunity as a new employee to have a personal insurance consultation. I was looking to save money on my insurance, but instead got a shock to my personal sense of security as well as my self-created image as a savvy consumer. Not only did I learn that my home was grossly underinsured, but it also became clear that I really didn’t know anything about my home policy.

My lack of knowledge was directly related to the fact that for more years than I care to count, I did not have enough insurance to protect the biggest investment of my life.

All of the misconceptions I had about home insurance were drawn out in the J.D. Power survey.  Furthermore, anecdotal evidence from our Personal Insurance Consultants supports the findings. Here are the top four reasons that people like me find themselves underinsured.

Shopping solely based on price
Price has always been a sticking point with insurance. Insurance is one of those gotta-have intangibles that unless you’ve been in a situation where you’ve needed it, the value isn’t always obvious.

When my husband and I purchased our home in 1991, I was in charge of getting insurance. I’m quite certain I bragged about getting the lowest price available. And my husband probably gave me a high five (or the 1980s equivalent) for my success.

Unfortunately, I missed the whole point of insurance and increased our financial risk for the sake of a few bucks. If we had lost our home due to fire, for instance, we would not have had enough coverage for a comparable rebuild. Our choices would’ve been to cover the added cost ourselves or settle for a lesser home. Fortunately, I didn’t learn my lesson the hard way.

Dave Gardner, Personal Insurance Consultant in our Green Bay office, tells of a recent insurance review he had with a member. “The house was insured at $169,000, and our replacement cost calculation came back at $221,000. That’s a $52,000 difference. That’s a lot if you’re in a situation where you need to rebuild your home.” According to Gardner, in this situation the premium difference was only about $50 per year. “It does not make financial sense to underinsure a home by $50,000–$60,000 to save $50 per year.”

A better, safer way to save money on home insurance premiums is to increase your deductible. Choosing a higher deductible may reduce your premium by 15%–30%.

Confusing market or assessed value with the cost to rebuild
The J.D. Power survey suggests that most consumers believe their policy limits are based on the real estate value of their home, rather than the replacement cost of the physical structure. One-third of those surveyed had contacted their insurer upset with one simple issue:  since the value of their home had plummeted, why did they need so much insurance? Shouldn’t they be able to reduce their coverage and thus their premiums?

“The assumption that these two numbers are tied together causes people to think they are paying for coverage they don’t need,” says Gardner.

He explains that market values are based on factors such as location, condition of neighboring properties, prevailing interest rates, local market conditions, and even property taxes. None of these influence what your insurance really covers:  your home’s replacement cost. This is the cost to rebuild your home exactly as it is now, in its current location, and using the same materials and workmanship. Despite a severe economic downturn, the cost of building has shown no signs of decline.

A related misconception is that new home prices reflect the cost to rebuild. It seems reasonable, but not true. Re-building a home is almost always more expensive than building a comparable new one:  Demolition and removal of a destroyed home must occur before re-building even begins, local ordinances often place regulations on demolition that can increase expenses, builders can’t buy materials at volume discounts when working on a single home, and it generally takes longer due to the complexities of rebuilding.

Failing to have insurance reviewed or adjusted
Some people buy their policy and never look at it again. Guilty. For the first 14 years we owned our home, we never reviewed our policy or talked with our insurance agent after the sale, despite the fact that we made major improvements to our home.

“It’s recommended that you review your insurance coverages at least every other year, but it’s especially important to adjust your policy when you make improvements like adding a deck, a bathroom, or updating your kitchen,” says Gardner.

Some companies offer inflation guard protection that automatically adjusts your coverage limits by a certain percentage each year to help keep up with increases in material and personal property costs.  However, members shouldn’t rely solely on this to keep their coverage current.

Member Benefits offers a Midterm Policy Exam to help you keep your policy up to date. “We provide an evaluation of how well your policies manage your risks, verify that your policy information is up-to-date, and that you are receiving all available discounts,” says Gardner. As an added convenience, you can complete the Midterm Policy Exam online at weabenefits.com if you like.

Thinking $100,000 liability coverage is more than enough
Accidents happen. Your dog bites your neighbor’s young child in the face and they need stitches and possibly reconstructive surgery. Your teenager beans someone with a baseball while at the park causing eye damage. Your runaway grocery cart causes someone to fall and break a hip. Accidents yes, but the reality is that you could be held financially responsible in any one of these situations, and each could easily exceed $100,000.

Thank goodness I never needed my liability coverage, because I’m sure I was at risk for coming up short here as well. Most experts recommend at least $300,000 worth of home liability coverage. Others, like Member Benefits, recommend even more. “Our homeowners policy includes $500,000 of liability coverage. We don’t even offer anything lower,” says Gardner.

“Again, the additional coverage is a relatively inexpensive way for members to protect their assets.” It offers protection for you and all family members who live with you, including kids away at college, and it typically covers incidents on or away from your property.

My new bottom line
I now understand that the value of my insurance is not as much about the price as it is about protecting my assets. I’ve worked hard for what I have, and protecting my family’s financial security is just the other half of the equation. I’m still a statistic, but now I’m part of the other half. Are you with me?

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