Avoid Costly Home Insurance Mistakes, Part 1

I just ran across an interesting article by Kitty Werner on avoiding costly home insurance mistakes, and I thought I’d share it with you. The article outlines six major traps to look out for, and I’ll cover the first three here…

In short, Werner argues that you could save hundreds of dollars per year on home insurance, and perhaps many thousands of dollars in the event of a serious mishap, if you just take a few simple precautions.

TRAP #1: THE WRONG VALUE

Most home insurance policies state the maximum amount that the company will pay to rebuild a house in the event it’s destroyed. All too often, however, that amount is less than it would actually cost.

The problem typically occurs because an old policy hasn’t been updated to reflect today’s reconstruction cost.

Safeguard: Ask local real estate agents and contractors how much it would cost to rebuild your house. (This cost is less than the sales price. Don’t include the land and foundation, which can withstand most disasters.)

Then check to see whether your insurance policy is written so that it will pay the actual reconstruction cost. If it isn’t, ask your insurance agent to amend the policy.

Some insurance companies may refuse to raise the ceiling on the full replacement value. You may want to shop around for another carrier.

Be careful, however, not to let an agent talk you into a policy that states a higher value for your house than it would cost to rebuild. That boosts your premium unnecessarily because the insurance company won’t pay more than the actual reconstruction cost.

TRAP #2: THE WRONG INSURER

Though overall insurance rates are rising, the ability to make easy comparisons of coverage has encouraged competition among insurers, resulting in a wide variation in premiums and a growing number of companies to choose from.

Unfortunately, not all of these companies are reliable.

Safeguard: Before buying a policy, check out the insurer with your state’s agency that oversees the insurance business.

Many states have consumer-friendly agencies that are eager to tell residents about the financial and claims-paying history of insurers. Some agencies have Web sites where this information is also available. To find your state’s agency, check your state’s Web site.

You can also check out the financial soundness of insurers through Weiss Ratings (800-289-9222). Price per company report: $14.99 on the web, $19 by phone.

Insurers are rated on criteria that include financial stability and the number of customer complaints against them. A company is then given a grade of A for “excellent,” B for “good,” C for “fair” or D for “weak.”

Choose a company that has at least a B rating.

TRAP #3: HASTY COMPARISONS

Instead of comparing only homeowner’s policies, ask for quotes on your total insurance needs, including auto insurance for all members of the household and business insurance if you have your own company.

Most insurance companies give reductions of 5% to 15% to customers who buy what they call “multiline” policies.

My thoughts: We have replacement value coverage on our house. And while it’s tempting to over-insure ‘just to be on the safe side,’ it really is a waste of money. Also, keep in mind that you only need to insure the value of the structure (plus contents, as necessary) — there is no need to include value of the lot when figuring how much to insure you home for. After all, the land will still be there when it comes time to rebuild. As far as the quality of your company goes, we’ve always gone with a major insurer (State Farm) where we have all of our policies. We’ve shopped around a bit but, with all of the multi-line, claim-free, etc. discounts that we’re getting, it just doesn’t make sense to switch, especially if we would be switching to a less reputable insurer. That being said, it’s always good advice to check around and make sure you’re getting the best deal available. We recently did this when we replaced our term life insurance policies, and it worked out quite well for us.

See also: Avoid Costly Home Insurance Mistakes, Part 2

[Source: Bottom Line/Tomorrow]