Ensure Your Home Isn't Underinsured

Most homeowners rely on their insurance companies to estimate what kind and how much coverage they need. This could be a serious error if you ever experience a disaster and find yourself underinsured.

A recent MSN.com article reveals that the insurance industry estimates that around 67 percent of homeowners are underinsured nationally. For those of us unfortunate enough to be affected by a fire, earthquake, flood or other disaster, this can be devastating. Why does this happen? Many insurance companies or agents do not adequately estimate their policyholders’ replacement costs and end up steering them wrong.

If you think you’re safe because of a “guaranteed replacement” or “extended replacement” policy, you’re not. True guaranteed-replacement policies are virtually extinct, and most insurers cap payouts to 100 percent to 150 percent of the amount for which the home is insured.

The most prudent thing to do when insuring your home is to buy the highest cap you can afford and take these steps:

1. Talk to a custom homebuilder about square-foot replacement costs.
Divide your home’s policy limits, listed on the “declarations” page, by your home’s square footage and compare this to the builder’s estimate of what it would cost to rebuild, including its current amenities. If your insurer is unwilling or unable to explain any discrepancies, start shopping for another insurer now.

2. Get the best coverage. Unfortunately, your home’s insurance is one area where you cannot afford to be frugal. Make it clear to your agent or insurer that you want the best coverage for your money, not the lowest premiums.

3. Check on “loss of use.” Most policies provide money to pay your rent and related living expenses while your home is being repaired or rebuilt. You can find this information on the “declarations” page. If the amount won’t cover you for two full years, ask for a higher limit. Many homeowners in disaster situations find that it’s not just their rebuilding coverage that falls short.

4. Know the difference between replacement cost vs. “actual cash value.” If your policy pays out “actual cash value” on your home’s contents, you’ll get a check for what they were worth when they were destroyed, not what they would cost to replace. It’s much better to pay for replacement cost coverage on your contents, even though the cost is typically 10 percent to 20 percent more than actual cash value coverage. Also, be aware of whether your policy makes exceptions on replacement cost coverage for certain items, such as carpet.

5. Know your limits on total coverage. Many policies limit your content coverage to a percentage of your overall policy limit. If your home is insured for $200,000, your contents coverage may be $80,000 or $100,000, depending on the insurer’s policies. These limits don’t reflect whether your possessions are all brand new and state-of-the-art or on their last legs. Do a detailed inventory of your possessions and what it would cost to replace them. It’s also a good idea to take digital photos and store them online or somewhere accessible if your home is destroyed. This takes a lot of time, but you’ll be grateful you did it if you ever have to make a claim.

6. Know limits on your valuables. If you own something valuable, such as jewelry or artwork, your policy may put a limit on it of $1,000 to $2,500. If you want your valuables fully covered, you will need to purchase an additional rider for an added cost.

7. Know all of the exclusions. The only way to know all of them is to read your policy from back to front. For instance, homeowners’ insurance typically does not replace equipment used for a home-based business or property belonging to a tenant. Damage from some disasters, such as a flood or sewer-back up, may also be excluded. In some cases, you can and should purchase supplemental coverage.

8. Purchase additional liability coverage. It’s almost impossible to predict who might sue you or for how much. Chances are, you probably don’t have enough protection against liability, which is why Steve Vidmar, an insurance defense attorney in New Mexico, recommends having $1 million in coverage. A $1 million umbrella policy usually costs around $200 to $300 a year.

Chances are, you won’t get the opportunity to pat yourself on the back for making the above preparations, and good for you. But if you do have an unfortunate disaster where you have to make a claim, you will be more than glad for the extra time and money spent.

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