I used to love storms through the spring and summer. I found the towering clouds and lightning’s fireworks displays truly awesome to watch. The uncontrollable power of the weather can be so grand. Then, as if in an encore performance, the passing of the storm would usually greatly reduce the temperature, humidity, and wind making for a beautiful evening.
While the storms are still grand and powerful, my opinion has changed now that I am a homeowner and responsible for the cleanup bills after the storms roll through. I have had hail damage to our vehicle and shingles, water in my basement, and ice-storm damage that involved the removal of two huge trees, parts of two more trees, and 10 stitches in my head. In the grand scope of it all, however, I have been quite lucky. My home has never been completely or even partially destroyed as many in our area have experienced this spring.
Unfortunately, some homeowners have found out too late that their insurance simply didn’t cover what they would financially need to reclaim what they could of their homes. As part of National Home Ownership Month, I wanted to share a little information about homeowners’ insurance that, should the day ever come when you need it (and I truly hope it doesn’t), you will be better prepared to deal with the physical damage.
• Replacement Cost vs. Actual Cash Value – While ‘Actual Cash Value’ insurance is cheaper to pay for, this is a case of getting what you pay for. Cash Value coverage will calculate the cost of your home if it were new, and then depreciate or deduct value from that based on the home’s age. You will get what your home was worth at the moment before the tragedy hit. ‘Replacement Cost’ actually pays you the amount it will cost to rebuild regardless of your home’s age, but will cost you more in premiums (cost of the insurance).
• Deductible – When you file an insurance claim, you will pay a portion of the total repair/replacement cost. This is your deductible. You can usually pick your deductible and the higher the deductible you choose, the lower your premiums. Be aware, however, that with a higher deductible, you need to have that much more in your savings should you need to file an insurance claim.
• Flood Insurance – If you have a loan and live in a flood plain as determined by the government, you will probably be required to have flood insurance. As expensive as it is, you need to be aware of the limits of its coverage. For example, the water must come in above ground level and the policy generally only covers the structure – none of your personal belongings. Even if you aren’t officially in a flood plain, you can still purchase flood insurance. You can find out more at FloodSmart.gov.
• Policy Riders – As a stopgap for water damage and other items, you can add additional coverage to your policy. These are known as riders and are often fairly inexpensive, especially compared to the costs after a disaster. You may get a rider to cover sump pump or sewer backup, or to cover higher values of electronics or firearms in your home. Often, the maximum amount of a claim is limited on a basic policy, leaving you to cover the difference with your checkbook. You can even get riders to cover that monstrous diamond on your finger should it be lost or broken.
• Claims History – Be aware that insurance companies track your claims. The more overall claims made in a given area, the higher your annual premiums. There is also the database known as the Comprehensive Loss Underwriting Exchange (C.L.U.E.). Think of it as a database that all insurance companies report to that tracks all insurance claims. Even if you are trying to improve your rate after filing claims by switching insurance companies, the new companies will be aware of your previous claim history. This isn’t to say you shouldn’t use your insurance, but be wise about it.
• Credit Score – It’s not just for getting a loan. Many insurance companies will also look at your credit score prior to issuing you a policy. The more negative items on your report, the higher the risk of you not paying your insurance bill. Subsequently, they mitigate some of the risk by charging you a higher premium for the same coverage.
• Multi-Policy Discount – You may be able to save some money by having multiple insurance policies through the same insurance company. You can bundle your homeowners’ policy, vehicle, life, umbrella, and other policies. If you are going to have the different policies anyway, having them with one company can save you money by giving you a discount.
• Insurance Agent – This is an item you may well have the most say over and the one that quite well may have the biggest impact on your insurance experience. Ask your friends, talk to multiple agents, and take your time picking. Ask a lot of questions about your needs as well as their experience. Pick the one that is best for you. They aren’t just sales people; they can be a great adviser, advocate, and even friend when trouble comes. Invest your time in finding the right agent.
None of us really wants to be in a situation that requires us to file any homeowners’ insurance claim. Unfortunately, reality is that most of us will have to file a claim at one point or another. We generally have little to no warning when those events do occur, so need to be prepared beforehand. As they say, “It’s too late to dig a tornado shelter if the sirens are already sounding”.
It’s never too early to be prepared. Have the insurance you need. Have the savings you need to cover the difference. Most importantly, be informed about both so that you are ready. I still worry about impending storms; but knowing I have the coverage I need I am a little freer to enjoy their beauty again.
If you have questions about home ownership or want help in budgeting towards your emergency savings, the Center for Financial Resources can help you get started.
written by Breck Miller
images courtesy freedigitalphotos.net