Are the Limits of Insurance for your Home Accurate?

Is the amount of property insurance on your home correct? What is the appropriate amount of coverage for your home? To begin with, it should be insured for at least 80 percent of its replacement cost when covered under a standard homeowners policy. Replacement cost refers to the amount necessary to repair or replace damaged building parts with items of like kind and quality. Some insurance companies even require 90 percent or higher figures when the guaranteed replacement cost option is offered. With this option, the policy pays the full cost of replacing your home, without any depreciation and often without a maximum reconstruction payment. (This gives you added protection if there is a sudden jump in construction costs due to a major shortage of certain building materials. Construction costs often “surge” following large catastrophes, such as hurricanes.) Note that guaranteed replacement cost coverage approaches can vary by state and is not even available in every state.

Many homes are either underinsured or overinsured. For example, some homes insured for long periods of time with one insurance company may have inadequate limits of insurance due to increased building costs. In many cases, homes have been remodeled and improved, and this information has not been conveyed to the insurance agent or company, resulting in severe underinsured home values. If your home is underinsured, you not only have inadequate protection for total losses, but you may also lack full protection for smaller losses.

Sometimes homes are mistakenly insured for their market value. However, market value is normally not indicative of the home’s replacement cost. For example, market value also reflects the cost of the foundation and the nondestructible land value, both of which normally survive intact if the house burns to the ground and has to be rebuilt.

In addition, some homes may be insured improperly to meet mortgage company requirements. Some mortgage companies require the amount of insurance be at least equal to the mortgage balance on the house. The mortgage balance is also not reflective of the home’s replacement cost, which is often considerably more but can also be less. Insurance companies and agents often struggle in properly educating mortgage companies about these distinctions, but there is nothing to prevent you from insuring to actual replacement cost if that is indeed greater than the mortgage balance. The problem occurs when the mortgage balance is greater than the replacement cost, which will result in the purchase of a higher limit than needed.

The bottom line is that you should work with your insurance agent to determine the correct replacement cost and resulting insurance limit for your home. Most agents use sophisticated replacement cost estimating packages that can fairly accurately determine the replacement cost value of your home. Factors that these programs use to determine this figure include the following.

• Square footage of the home, including its configuration
• Construction costs for your community
• Exterior wall construction type, including frame, stucco, brick, or brick veneer
• Style of home
• Number of bathrooms and bedrooms
• Roof type
• Attached garages, fireplaces, built-in cabinets, and other special features, such as hard-wood floors

The more advanced replacement cost estimating programs require detailed information to improve the valuation estimate. For example, a rectangular-shaped home with 1,800 square feet will have a much lower replacement cost than a similar-sized home with an “L” shape. In other words, the better cost estimating programs require information about the number of corners in the home. The more detailed information your agent asks about your home, the more confidence you can place in his or her recommended limit of insurance.

As a final note, you should request an annual review of your homeowners policy to keep up with increasing building supply and labor costs. Also ask your agent about the advisability of adding an “inflation guard” endorsement to your policy or about the availability of guaranteed replacement cost coverage to help assure that your home is properly protected.

Insurance Purchasing Ideas for Homeowners

In some parts of the country, consumers have faced substantial increases in their homeowners insurance premiums, particularly in coastal areas subject to hurricanes and windstorms. Other consumers have experienced reduced coverage, moving from all risks coverage for their dwell-ing to named perils coverage. Still others have received nonrenewal notices due to minor losses, such as water damage claims. The following are some insurance purchasing tips that may help you save premium dollars and reduce losses on your homeowners policy.

1. Try to increase your deductible to the highest one you can afford, even if the premium savings do not appear to justify it. This will decrease your premium and increase the likelihood that your loss history will be excellent, since minor losses will be paid by you and not your insurance company. A loss-free record over time saves premium dollars. For ex-ample, if you currently have a $250 deductible on your homeowners policy, consider in-creasing it to $500 or $1,000.

2. Consider purchasing a monitored burglar alarm. Alarms have proven successful in reducing burglary rates. In addition, most insurers provide premium discounts to consumers with these alarms, some as high as 20 percent.

3. Maintain your home in optimum condition. If a repair is needed, perform it as soon as possible. For example, loose or missing roof shingles should be repaired or replaced immediately. A home in excellent condition is much less likely to experience a loss.

4. If you plan to buy a home, be aware that many insurance companies offer new home discounts. Some insurers offer the highest discounts, such as 20 percent, on brand-new homes and gradually lower discounts for several years as the home ages. Some insurance companies are now offering discounts for homeowners who are age 50 or older.

5. Request a copy of a Comprehensive Loss Underwriting Exchange (CLUE) report on the home you are considering buying. This report provides a list of prior losses for a particu-lar home. It is generated from a database of insurance losses compiled by a high percent-age of insurance companies. You can normally contact your current homeowners agent to get this information on a prospective home. Be wary of purchasing a home with prior foundation, water, or mold losses.

6. Install and maintain smoke alarms throughout the house. It is best if the alarms are inter-connected, so that if one goes off, they all go off. Test the smoke alarms once a month. These detectors should be approved by Underwriters’ Laboratories (UL) or other recog-nized testing laboratories. Most insurance companies provide discounts for homes with operating smoke alarms.