Financial Planning for October 2007

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Finding the Right Homeowner’s Insurance
What is the most important place on earth to you? Is it your office or maybe the football stadium? Could it be where you worship or perhaps where you live? If this writer had to guess, I’d say your home would have to be at or near the top. Home is where your family is, it is where you eat and sleep and do a thousand other things that make a house a home. If you have been in your home for very long, chances are it contains a lot of precious memories.

If your home is such an important place, doesn’t it make sense to protect it? If a disaster happens, wouldn’t you want the resources to replace the possessions you lost? Memories can’t really be replaced, but replacing your possessions is critical to recovering from a disaster. Unless you are independently wealthy, the only hope you have of recovery will be a claim against your homeowner’s insurance. This article is a primer on how to go about getting the right coverage for you.

The first step in buying the right coverage is to find the right company. That search should start with preparing a list of possible insurers available in your state. Ask a reputable independent insurance agent for a listing of those you should talk to - independent agents represent a number of companies, not just one. You may even wish to have the agent shop the coverage for you, but you still need to know certain basic information regardless of how you acquire homeowner’s coverage. Ask the agent about the ratings of the companies. If the agent can’t help with ratings, you can go to the sites of the rating companies to find the strength of the insurers on your list. Ratings are an assessment of how well prepared to pay claims a company is. Generally, you don’t want to deal with a company that has less than an A rating.

Next, you need to determine your needs and whether a proposed policy will cover them. Some items to consider are:
  1. Replacement cost and actual cash value of your home.

  2. Replacement cost and actual cash value of the home’s contents.

  3. Whether your home is in an area that requires flood insurance.

  4. Whether you have certain listed items (like jewelry) that usually require additional insurance for full coverage.
Items 1 and 2 are critical. The insurance company or agent (reference to “insurance company” includes an insurance agent) will typically ask a lot of questions about the age of the house, structure type, square footage, electrical systems, etc. The purpose is to develop an estimated replacement cost for your home should a catastrophe occur. If your house is mortgaged, the bank will require replacement cost coverage. Even if there is no mortgage on your home, your best bet is still to obtain replacement cost coverage. Actual cash value is generally determined based on original cost less an allowance for depreciation. This will never cover the cost of rebuilding or, in the case of contents, replacing personal property. For example, a couple purchased a sixty-year-old home for $355,000. After taking into account the building design, materials and other factors, the insurance company computed a replacement cost of $483,000. While this may seem excessive, the way homes were built and materials used in the 1940’s differ from today’s standards and putting the home back into its previous condition before the disaster would cost every bit of the insurance company’s estimate.

Another consideration is the replacement of any unattached buildings like a tool shed, greenhouse, or garage. Be certain that you discuss this with the insurer if you have such structures.

One drawback to replacement cost insurance is that a higher replacement cost will increase the deductible when it is computed as a percentage of the replacement cost.

Be aware that homeowner’s polices do not cover loss in the case of flooding. Insurers can, however, sell you a flood insurance policy sponsored by the United States Government to cover up to $250,000 in replacement cost of your home. If your house is in a flood zone, your lender will require the coverage. Even if you don’t live in a flood zone, it may be advisable to purchase coverage, depending on your proximity to water and the drainage in your area. More than a few Katrina victims wish they had opted for flood coverage.

Homeowner’s insurance typically provides coverage for contents at a percentage of the home’s insured replacement cost. Consider very carefully whether the standard amount is enough. If you have a large number of high dollar value items (like jewelry and collectibles), you may need to increase the coverage for those items. Generally, the insurance company will require proof of value and charge an additional premium to cover them.

Have you ever tripped on a cord in your house? While it matters to you if you hurt yourself in your home, it’s not so big that it can get you sued. Discuss with your insurance company what level of general liability insurance you should carry. This type of insurance will cover you if you are sued for an accident occurring on your property.

Finally, ask for a specimen contract from the insurance company. This will tell you exactly what is insured and what is excluded. Exclusions are fairly consistent amongst insurers, but the devil is in the details. Read the entire policy and question anything you don’t understand.

The end result of the foregoing process is a premium rate quote. The number can be quite high, but you may be able to shave a few dollars off. Make sure the insurer knows you have a monitored alarm system, if that is the case - you will get a credit for having one. Ask if there are any other credits available and explore the premium difference at various deductible levels. Increasing your deductible will also reduce your premium. Just make sure you are able to pay the higher deductible in case of a catastrophe.

The final step, of course, is purchasing the insurance upon which you decide. Once the premium is paid, you will receive the actual policy a few weeks later. Read the policy and make sure it is what you understood you were buying. If it is not accurate, get the insurance company to correct the discrepancy.

If all of these suggestions seem like a lot of work just to spend money, you are right. Of course, you are not just spending money - you are buying peace of mind. Take the time to thoroughly investigate insurance companies and don’t just go for the lowest rate. ‘You get what you pay for’ and, when it comes time to pay a claim, it may be difficult to collect from the lowest cost insurer.

Have a great October!


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