To many people, insurance is just a necessary evil, and they buy only the bare minimum to comply with state or local laws, or with lender requirements. This is true of both auto insurance and homeowners insurance.
Auto insurance is usually required by state law, and so the driver must purchase the coverage for as long as he or she is a driver. There is no such compulsory law for homeowners insurance, but a lack of coverage can end up being more expensive than keeping coverage in force.
Here are just a few ways home owners may find themselves uncovered in the event of a claim.
PMI Is Not Your Insurance
Private Mortgage Insurance (PMI) is NOT homeowners insurance. If you pay less than 20% down on your home, you mortgage company will require you to purchase PMI on the loan. This insurance pays the mortgage off to the bank in the event you default on the loan.
There are many good reasons to avoid PMI. As any insurance broker will tell you, the best reason not to purchase is that you do not get paid under this insurance coverage. It will not replace your belongings, and it does nothing to make your family whole again or rebuild your home.
This coverage also does not provide comprehensive personal liability. Should someone be injured on your property, you would have to pay those claims and legal expenses out of pocket.
No More Mortgage = No More Insurance
Some homeowners work with their mortgage company to include homeowners insurance in their escrow and pay the premium with their mortgage payment every month. It is in the interest of the mortgage holder to make this happen, because insurance will make the purchaser whole again in the event of a claim. If a damaged or destroyed home is rebuilt, the homeowner is more likely to continue paying their mortgage.
This process can also streamline your budget, but it may leave you without insurance coverage after your loan is paid off. Once a mortgage is paid it is the homeowner’s responsibility to secure insurance coverage for the home so that it may be repaired or replaced in the event of a claim.
Do Not Underinsure
Some banks require that you insure your property for at least the remaining amount on the mortgage. As you pay on the loan, this amount gets smaller, so you may think that you need less insurance. Less insurance means less premium, which sounds like a pretty good deal. Except it isn’t.
The purpose of insurance is to make a policyholder whole again in the event of a claim. This occurs by reimbursing the policyholder for the face value of the insurance policy in order to rebuild what is lost. Lower limits of insurance not only decrease your premium, they also decrease your claim payout.
Over time inflation increases many things, including the cost of building materials and labor. To rebuild the home you purchased in 1979 for the same size and scope in 2016 could cost quite a bit more. Add to that the increased cost of construction to bring that same home up to current code and you could end up paying more out of pocket than you might like. Is that worth saving a few dollars on your current insurance premium?
If you own a home it simply doesn’t pay to skimp on homeowners insurance. Check your filing cabinet to see what coverage you currently have, if any, then call your broker to schedule a personal insurance checkup. You’ll be glad you did.