When purchasing homeowners or renters insurance many policyholders are usually thinking about two things: is this the least expensive policy I can find and will it satisfy my lender? While these are excellent questions, they shouldn’t be the only questions you are asking, and they shouldn’t be the only reasons that you purchase one policy over another.
Here are three other important questions you should be asking yourself AND your broker before signing on the bottom line:
Do You Have Enough Structure Coverage?
Many homeowners base their structure coverage on either the purchase price of their home or the lender required insurance. While these are good starting points, they may result in a coverage shortfall in the event of a claim.
The purchase price of a home often does not take into account the amount it would cost to replace the home in the event of a total loss. A $250,000 home purchased 10 years ago may cost $350,000 to replace in today’s market due to rising cost of labor and materials. Getting a check for $250,000 might seem great until you realize that extra $100,000 has to come out of your own pocket.
In addition, if your policy has a coinsurance penalty, you may be on the hook for even more. A 90% coinsurance penalty says you should have insured your home for 90% of its replacement cost value or your claims payment will be penalized. You should be insuring your $350,000 home for at least $315,000, but you only insure it for $250,000 or 80% of the “should” value. In the event of a total loss the insurance company will only pay 80% of the insured value: $200,000. That leaves you with a $150,000 shortfall in replacing your home.
Coinsurance penalties also apply to partial losses. This is more of an annoyance, but still hard on the wallet.
Other structures may also be a problem. Most homeowners policies add Coverage B – Other Structures at a standard 10% of the Coverage A – Dwelling value. If you’re insuring your home at $250,000, then your detached garage or shed is only insured for $25,000. Would it cost more to replace that structure?
Is Your Stuff Covered?
Most homeowners and renters insurance companies offer rounded limits for contents coverage. These amounts may default based on the building value in order to get a quick quote. Does the limit on your quote or policy seem like enough to replace ALL of your belongings?
While partial losses are common due to burglaries or small fires, total losses may occur with storms, fires and other catastrophic events. A thorough inventory of all items you own including clothing, furnishings, kitchen items, toiletries, appliances, and pantry items may result in an even higher cost of replacement.
Coverage for big ticket items may bring peace of mind in the event of a total loss. However, the cost to replace every day essentials such as clothing, eyeglasses, pots and pans, and small appliances can add up to large out of pocket expenses.
Other personal property to think about: items belonging to you that are not in your home. Do you have personal property in storage or a student away at college? There may not be coverage for these items unless you tell your broker about them.
Are Your Special Items Covered?
Even with a thorough inventory of all your personal belongings at home or in other locations, you may still not have the appropriate coverage. Most homeowners insurance policies include sublimits for certain items, and those sublimits may leave you in a lurch at claim time.
The Homeowners 3 – Special Form (HO3) lists these sublimits, among others:
- $200 for cash on hand or other forms of currency
- $1,500 for jewelry, watches, furs
- $2,500 for firearms and related accessories
If you have more than $1,500 in jewelry and more than $2,500 worth of firearms, these sublimits would not be sufficient. Personal electronics may have a sublimit on some manuscript policies, so be sure to check yours and compare it to your home electronic equipment. Talk to your broker about scheduling your high ticket items in order to avoid claims payout shortfalls in the event of a loss.
Many homeowners and renters policies are sold as “one size fits all” in order to satisfy pricing or lender requirements. However, your agent may be able to customize your policy to fit your needs. Adding schedules and endorsements (riders) that incorporate the property limits you require can help increase your peace of mind and your claim reimbursement in the event of a loss.