Having a disaster, such as a hail or a windstorm, hit your home, is the last thing a homeowner may expect. Homeowner’s insurance is designed to minimize the costs of those disasters and other unexpected issues. Every plan is not created equal, however. Homeowners need to make sure they have the right amount of insurance coverage and understand the dollar limits of their homeowners policies. By following a few simple tips, consumers can get their homeowners insurance just right.
Why Some Homeowners may Be Under-Insured
Although homeowners may carry insurance on their homes, not everyone has the right amount of insurance coverage. All too often, homeowners become upset after they discover that their policies may not cover the repairs and replacement costs after disaster strikes. There are several reasons homeowners may not have enough coverage, including:
- Outdated policies that are not adjusted for inflation
- Recent improvements without expanding coverage
- Failing to note exclusions in the policy
On occasion, people may reduce their insurance coverage to save money, but this might be a financially dangerous proposition. The best protection against under-insurance is to look at the policy details and change them as needed.
Understanding Insurance Limits
There are a variety of numbers homeowners will notice in their homeowner’s policy. When examining their policies, homeowners will probably notice a number called a “deductible.” A deductible is the amount the homeowner will need to pay first, before any insurance monies are paid to the homeowner from the insurance company. Other important amounts to note in the policy include the limit on the amount of liability coverage and a maximum the insurance company will pay to rebuild or replace lost or damaged items.
Homeowners should keep in mind that the maximum amount of coverage may not necessarily be the total they could receive – they may receive less, depending on the claim. Insurance companies use algorithms and other means for determining how much to reimburse a homeowner for particular types of damage.
Also note that many policies also exclude coverage for certain disasters, like earthquakes or floods, unless the policy owner has opted for it specifically. Policies may also not cover certain electronic devices like computers, expensive jewelry, or collections of memorabilia without certain insurance riders. Also be sure and discuss with your insurance agent if you have a home swimming pool or plan to install one in the future, as this may also effect your homeowner’s insurance coverage.
Replacement Value vs. Actual Cash Value
When looking at the types of coverage homeowners may consider, compare the cost of replacing an item to its actual value. Insurance policies often make a distinction between the two.
For example, a new couch might cost $1,000 or more, but an older couch that may have cost $1000 10 years ago that is destroyed in a fire may only be worth $100 in actual cash value. Homeowners who expect that their insurance will pay for replacement could be surprised to learn that they have a policy that only provides for the actual cash value. So instead of receiving $1000 to replace the couch, the homeowner only receives $100 as an actual cash value. As a result, homeowners should consider coverage that offers replacement value over actual cash value.
Finding the Right Balance
No one wants to pay more for insurance coverage that they may never need. However, there are ways to ensure that homeowners have the appropriate insurance without having to skip over the important details. The best thing homeowners can do, is to confirm they have enough coverage. An updated home inventory will assist the homeowner and their insurance agent about what may be in the home that is valuable. Having coverage on items that may no longer be valuable or useful is as bad as not having the right amount of coverage for an expensive item. Finding the right balance is the key.
Adjusting Coverage Periodically
Homeowners may make the mistake of owning a home for several years or even decades, without changing their insurance in any way. Insurance providers rely on the homeowner to tell them about improvements, additions, and purchases that change the coverage requirements. Once a year, homeowners should take a look at their policies. If they need to add coverage, it is better to do it well in advance of the policy renewal period. This review process also gives homeowners a chance to talk to their provider about discounts they may consider. Homeowners could also save money on their insurance premiums, while remaining confident that they have adequate protection.
Being over-insured could cost homeowners in monthly premiums. Having too little insurance may increase a person’s costs dramatically, at the worst possible time. Homeowners have little to risk by analyzing their coverage and asking if their policies provide for problems they may face. This early investment could save both money and stress, in the event of a disaster.
Anthony Gilbert is the owner of The RealFX Group. Tony believes homeowners should be proactive in protecting their investment while making sure to understand where their money is going at all times (and if it’s being put to good use).