Plus, real examples of really bad insurance policies uncovered by our consultants.
Underinsuring your home
1. If your home was destroyed by fire, would you have enough insurance coverage to replace it? Not having adequate coverage to rebuild is one of the most common mistakes homeowners make—and potentially the most costly. Whether it is due to a lack of awareness or an intentional strategy to save money on premium, the potential financial risk is significant.
During a recent insurance evaluation, I saw that the person’s primary home policy (with another provider) was written with a coverage limit of $108,000. Our reconstruction cost calculation for the home was $222,000, so they were currently insured at only 49% of the value. The homeowner would be on the hook for 51% of the cost, or $114,000, to rebuild the home.
In this case, this situation would invoke the co-insurance clause in the contract—even on a smaller claim. For example, let’s assume they have a $500 deductible and needed to replace their roof due to hail damage. If the cost for a new roof was $10,000, the insured would only receive $4,900 for this claim because of the co-insurance penalty resulting from underinsuring the structure.
Insurance is meant to protect against the catastrophic financial loss—losses that would be damaging to your family finances. Don’t sacrifice coverage on your biggest investment to save a few bucks on your premium. A better way to save is to consider increasing your deductible and making sure you have the right coverages.
Confusing market or assessed value with the cost to rebuild
2. There is a fair amount of confusion between a home’s replacement cost, market value, and assessed value, and which value to use when purchasing coverage for your home. These values are usually not the same and serve different purposes.
Replacement cost is how much it would cost to rebuild your house in the same spot with materials of like kind and quality.
Market value is how much you could expect to get for your home in the current real estate market if you were to sell.
Assessed value is the dollar amount placed on your home by your local government for taxation purposes. The higher the assessed value, the more you pay in taxes.
Your home’s location, condition, land value, and the selling prices of comparable properties, among other things, may be factored into market and assessed values.
When there is a big change in the housing market, especially if the values drop like they did during the 2008 recession, homeowners mistakenly think they can reduce their coverage. The problem is that the cost to rebuild their home in the event of a fire or other loss doesn’t go down (or up) with market value. The prices of labor and materials don’t necessarily follow the housing market. Costs to rebuild are more likely to increase when the economy takes a turn.
When insuring your home, you should have enough coverage to rebuild your home if needed. Using assessed or market value to decide on this amount could mean you are under- or over-insured.
Failing to have your insurance reviewed or adjusted
3. Some people buy their insurance policy and never look at it again. While it’s recommended you review your insurance coverages at least every other year, it’s especially important when you make improvements. Even if the policy has a built-in inflation guard, chances are it hasn’t kept up with the real costs of rebuilding or any remodeling projects that have increased the value of the home.
An insurance evaluation can uncover new risks and offer cost-effective ways get the protection you need. For example, during a recent evaluation with a member, I learned that he had finished his basement over the summer. It was a costly project and it definitely added value to their home, but their policy didn’t have coverage for sewer/drain backups. Backed up sewers can wreak havoc on a home, causing thousands of dollars in damage to floors, walls, furniture, and electrical systems.
I explained that home insurance policies have very limited coverage for water damage. However, water damage due to drain and sewer back up or sump pump failure may be covered with the addition of an endorsement.
The national average cost for a backup of sewer/drain claim is $9,000. For the additional $40–$50 per year, the member thought the coverage was a good value to protect their newly renovated basement.
Periodic insurance reviews will help ensure your coverage is still appropriate, which can mean eliminating coverages you no longer need and adding new ones you do.
Not having enough liability coverage
4. If someone slips and falls on your property and you are found negligent, liability coverage—which is part of the typical home policy—pays the cost of the claim (up to the limits of your policy). Liability covers medical expenses, lost wages, pain and suffering, as well as legal defense costs should you be sued. Coverage limits start at $100,000, and while that might sound like a lot of coverage, it doesn’t go far when medical expenses are involved or you are being sued. Member Benefits doesn’t offer less than $500,000 of liability coverage for your home, condo, or renters policies because we think it leaves our members at risk.
I’ve had a lot of conversations lately with people who carry the minimum liability coverage. In explaining the coverage, I find many people are not aware of the types of events covered by liability coverage. They’re also not aware that the coverage follows you wherever you go—not just at your residence.
For example, if you hit someone with your cart at the grocery store causing them to fall and break a hip, you could be found liable for their medical expenses. Plus, the individual might lose wages because they miss work. Those costs can easily exceed $100,000. Or maybe you injure a friend with a ball in a casual game of softball or basketball. You could get sued for their medical costs. Friendships can quickly become strained when there are thousands of dollars at stake. Liability insurance is there to protect your assets like your home and future earnings, and quite possibly a friendship.
Not scheduling high-value items
5. Did you know standard home policies provide only limited protection for high-value items? Adding an endorsement (also called a rider or schedule) to your home policy for valuable possessions can provide coverage for their full worth.
During an insurance evaluation with a potential member, I asked if there were any valuable items to schedule like jewelry or artwork. The member didn’t currently have scheduled items and was under the impression everything, including her $5,000 wedding ring, would be covered under personal property coverage. I explained that even a covered loss like theft would be limited by the terms of the policy and subject to the deductible. Losses such as mysterious disappearance or a gemstone falling out would not be covered at all. By scheduling an item, the coverage limitation is removed, deductibles do not apply, and coverage is expanded to include perils such as mysterious disappearance.
Here’s another example of how scheduling can be a good addition. Say your insured college student loses his or her laptop or it gets doused with a can of soda. You’ll be out of luck unless you scheduled the item with your insurance. While theft is a covered loss on your standard home policy, losing an item or accidental damage are not. And again, deductibles do not apply to scheduled items.
Scheduling high-value items is often an overlooked coverage, but the low cost for the added protection is a good value.
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