Jan. 17, 2012 at 11:28 AM ET
Most homeowners have insurance. The question is: do you have enough insurance? Will your policy cover you if the worst happens – if your house is totally destroyed and you need to rebuild?
According to the Insurance Information Institute’s 2011 Insurance Pulse Survey, nearly half (48 percent) of all homeowners in the U.S. believe the insured value of their home is linked to its market value.
“They are two different things,” says Michael Barry, the institute’s vice president of media relations. “When it comes to buying homeowners insurance, you have to look at the insured value – what would it cost to rebuild my home in its current location with comparable construction materials if I were to have a total loss? And that number does not represent the market value.”
With home prices in the toilet, it’s easy to assume that you can save money by lowering the insurance coverage. Unfortunately, it doesn’t work that way. The cost of building materials – copper, lumber, steel, concrete – have all gone up dramatically the last few years.
“It’s truly unfortunate that people don’t understand market value versus replacement cost,” says Rudy Werle, vice president of claims for the Grange Insurance Association, a regional insurance company based in Seattle.
Werle recalls a recent claim for a house that burned to the ground and the homeowner was grossly under-insured. He had coverage for up to $350,000, but the estimated construction cost came in at $500,000. Werle says this customer was “one of the rare individuals who accepted responsibility” for the situation.
The insurance company did its best to help, but the new house did not have the quality of the original. The homeowner had to downgrade the kitchen appliances. Instead of granite countertops, he went with composite. He also had to settle for a lower-quality roof; one that was guaranteed for 30 years instead of 40.
Getting the right coverage is your job
Experts say it’s smart to review your insurance coverage each year before the policy renews. But most people don’t do this.
Angie’s List recently polled its members and found that nearly one-third of those who responded hadn’t checked their home insurance policies for two years or more.
“This is your responsibility,” says Angie Hicks, the website’s founder. “Your insurance agent doesn’t know what you’ve done to your house. They don’t know if you added a deck or bought an expensive piece of jewelry. Only you know that information.”
So put this on your calendar to make sure you’re reviewing your policy at renewal time.
At the very least, you want to know what you have. Then you can tweak the policy or comparison shop. Make sure you don’t buy too much insurance. You don’t need to insure for the value of the land your house sits on.
According to the Insurance Information Institute, there are four elements that help you decide how much coverage to get:
- The cost to rebuild the structure.
- The cost to replace the contents.
- Additional living expenses if you have to move out during repairs.
- Your liability to others who might get hurt on your property.
If you’re looking to save money raise the deductible, don’t cut back on coverage. The Insurance Information Institute says increasing the deductible from $500 to $1,000 could reduce premiums by up to 25 percent.
Remember: the amount of money the policy will pay for contents and additional living expenses is typically based on the coverage of the structure.
It’s important to have a home inventory to show the insurance company if there is a loss. The free app MyHOME Scr.APP.book (available for iPhones and Android phones) from the National Association of Insurance Commissioners lets you quickly photograph, grab bar codes and serial numbers and store them digitally. There is also free software for your computer at knowyourstuff.org, a site run by the insurance industry.
Note: Expect higher rates for homeowners insurance this year. Bloomberg reports that Allstate, Travelers and State Farm, as well as other companies are raising rates. The price hikes are a result of poor return on investments and higher-than-expected storm losses in the U.S. last year.