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Hurricane Katrina swept away all the old rules about homeowner's insurance. These days, filing a single small claim, switching insurers to save a few bucks, or assuming your coverage hasn't changed can expose you to huge financial hardships.
A study released this week by the Consumer Federation of America supports what many homeowners have been feeling over the past several years: We're paying a lot more to protect our homes and getting a lot less in return. It's more important than ever to check up on your coverage, so here are eight defensive moves to keep you adequately covered and cut costs.
Appraise your coverage
Surveys show that more than half of U.S. homes are underinsured by an average of 22%. Coverage based on generic formulas ($65 to $150 per square foot) won't cut it if you've renovated or failed to account for rising building costs. For $7.95, accucoverage.com will calculate your home's replacement costs.
Also missing from many policies are flood insurance (assess risk and find providers at floodsmart.gov), sewage backup coverage, and adequate liability coverage, which run as little as $250, $50, and $25 a year, respectively, according to Kimberly Lankford's The Insurance Maze.
Do a claims dry-run
If your home were wiped out, could you prove how much any lost, stolen, or destroyed belongings are worth? Just 42% of us have an inventory of our home's contents, according to the Insurance Research Council. Itemizing your assets gives you a running head start if disaster strikes. The Insurance Information Institute's free home inventory software at knowyourstuff.org can help you catalog your possessions room by room and attach photographs and scanned receipts (don't forget the stuff in the garage, basement, and attic).
Fill in the gaps
Note whether you have "cash value" (based on depreciation) or "replacement cost" coverage and consider that most policies cap payouts at 50% of the home's total coverage. "Extended replacement cost" coverage (which pays out about 20% more than a standard policy) and riders for valuables provide a bigger safety net for your belongings.
Keep up appearances
Today's insurers are skittish. Just asking about filing a claim can put your insurability at risk. Avoid the chopping block by paying for claims of $1,000 or less out of pocket, upping your deductible, and buying your home and auto coverage from the same carrier. If insurability is an issue, ask if a few fixes (e.g., replacing a leaky roof or old boiler) will help.
Check your risk reputation
Your premiums and eligibility are based on the five-year claims history in your home and auto insurance files. Your personal claims history and your property's history will be on file if you have one. In some states, your credit history plays a factor in setting rates. ChoicePoint (an Equifax spin-off) is the dominant insurance records bureau. If you have a personal or property claims file (not everyone does), choicetrust.com allows you one free look a year at your C.L.U.E. (Comprehensive Loss Underwriting Exchange) report. So does ISO Insurance's A-PLUS (Automobile-Property Loss Underwriting Service), which shows your car and property claims history through the eyes of an insurance underwriter. (Call 800-709-8842 to see yours for free.) If you really need your insurance score (similar to a FICO score), ChoiceTrust offers home and auto insurance scores for $12.95 each, including an Equifax credit report. Truecredit.com bundles automotive and property scores (based on what's in your TransUnion file and the insurance standards in your state) for just $9.95.
Check up on your insurer
See how it performs under pressure by reviewing the ratings (particularly the "complaint ratio") at naic.org/cis/index.do and ambest.com. Higher-than-average premium hikes and policy cancellation rates are signs that an insurer wants to exit a market. But before you bail...
Rate-shop with care
Switching carriers can cost you more than what you might save on annual premiums. You will give up any good-customer discounts you've earned over the years (typically 5% each year you are claim-free, maxing out at 25% to 35%). Instead...
Cut your existing costs
Three moves can cut your premiums by as much as two-thirds, according to The Insurance Maze: Raise your deductible to $1,000 from $250 (15% to 30% savings), purchase your auto insurance from the same company (15%), and keep a claim-free record (5% to 35%). That would save $245 to $560 on a $700-a-year policy.
If disaster does strike, make sure you have vital information within arm's reach before you head out the door. Preparation can prevent a personal crisis from turning into a financial disaster. Create a command central for your family's finances with this list of bare essentials.
Get It Done: Make a Grab-and-Go Box
Contacts: Note phone, address, and email for family, friends, schools, medical and financial advisors, utilities, and service providers (cleaning, gardening). Designate an out-of-town contact for everyone to call.
ID: Assemble passports, a current picture of each family member, and birth and marriage certificates.
Emergency resources: Include some cash and prepaid phone and charge cards.
Medical: Pull together health insurance policy information; claim forms; copies of insurance cards; a list of hospitals, doctors, pharmacies, and current prescriptions; and medical histories.
Financial: Jot down account numbers (credit, bank, brokerage, mortgage, savings), branch and main websites and phone numbers, and passwords (kept secure). Include the location, spare key, and content list for your safe-deposit box. Make sure a loved one or trusted advisor has been granted access.
Household: Document all payment obligations (mortgage, credit card, utilities, and auto, student, and any other loans), due dates, minimum required payments, and payment info. (Online banking and bill payment is a real help in these situations.)
Insurance: Include homeowner's, auto, life, and disability policies; blank claim forms and contact information; a list of local adjusters; and a detailed home inventory.
Legal: Make sure you have included your living will, health-care proxy or medical directive, will, durable power of attorney, and the deed to the house.
Keep original documents offsite (in a safe-deposit box) and put the copies in a Grab-and-Go Box. Store it in a safe place and tell everyone in the household plus a trusted neighbor or friend where it is.
Dayana Yochim is the consumer finance expert at The Motley Fool, a financial services company. For more tips on insurance and other personal finance issues, visit The Motley Fool.