Squirreling away a little money regularly can help realize many future aspirations, but is only truly effective if you also avoid wasting money. Moving beyond the budgeting techniques that can help control outgoings, many use various forms of insurance as protection against the potential financial impact of the many misfortunes that can occur in life. Home insurance is designed to protect that most precious of possessions, the home, which if damaged can frequently cost enough money to repair that a nest egg built up over decades can be instantly wiped out. Having basic home insurance is a pretty much mandatory condition when arranging a mortgage in many countries, but as you will no doubt be aware there are literally thousands of different policies out there which range widely in terms of both efficacy and price.
The two main ways that home insurance can end up costing a lot of money are over insuring and underinsuring. Before we consider these pitfalls, it makes sense to note an overarching principal of all kinds of insurance, and that is that the policy has to pay out when you need to claim or it is worse than useless. The aforementioned bewildering choice of home insurance policies, which are now available from banks like Santander as well as dedicated insurers, can be a good as well as a bad thing. Competition for business is fierce, meaning that the market thankfully features some genuinely good deals, as well as some policies that are not worth the paper that they are printed on. The way to ensure that you end up with the former rather than the latter is to have an accurate idea of your needs given your circumstances – before you get anywhere near buying a home insurance package.
In a nutshell, the trade off is between the cost of regular premiums versus the cost of replacing (minor) damage yourself. More comprehensive policies can cover a greater range of insurable incidents, but will of course cost more in regular payments. Given the length of time that you will be paying for home insurance – usually decades – a seemingly small increase in regular premiums can amount to a huge sum over the course of a lifetime. If you find that you are covered for events that you never in fact claim for, this over insuring can seriously dent your nest egg.
But how to know what you will claim for? Predicting the risk of claim is a complicated business for anyone, the experts included, so perhaps there is a better way of looking at this issue. Short of a crystal ball, the uncertain future is impossible to predict. If you ensure that the most costly of misfortunes are covered by your home insurance, you can avoid the worst excesses of underinsuring.
It is essential to have an accurate idea of the rebuild cost of your home, which is often different from the current market value. This means therefore that a little research is required to avoid the possible long term costs of over insuring, or the devastating impact of finding out that you are underinsured, and that a successful claim will still not cover the cost of a rebuild should disaster strike. Seek expert advice, and be prepared to pay a little for this; trying to avoid this possible cost can prove to be the worst of false economies.
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We renew insurance annually without even thinking if our values is correct! Typically, years later we need to make a claim and we are under insured. It could be a big surprise. Good reminder!
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[...] Squirrelers – “Protecting the Nest and the Nest Egg Through Home Insurance” [...]
Many people renew annually without thinking of what the current value of the home is year after year. There are many things that need to be taken into account. One of the biggest things that can be done to increase the value of the home is to remodel the kitchen or bathrooms. If these have been remodeled recently, then the limits of the Dwelling portion of the policy should be increased as well. Being under insured is not a fun experience to go through in any way, shape or form.
Being ‘under insured’ is defined as having insurance for less than 80% of the value of the home. In insurance talk this is called “Insured To Value” and there can be what is called the “Co-Insurance Penalty”.
If a claim happens it is then up to the carrier to decide whether to enforce this or not. Sometimes this happens and other times it does not. Why? Because it depends on the claim, the situation and the carrier.
For example: Lets say the house is valued at 100,000. This means that the line of coverage for the DWELLING only should be AT LEAST 80,000 to be fully insured to value. If the coverage is only 75,000 and a claim happens, the carrier can opt to enforce as much as a 5,000 Co-Insurance Penalty in addition to the deductible.
Fortuntately, ITV and Co-insurance penalties mainly come into play if the dwelling is a total loss or the claim is a large loss (25,000 or more). But why risk the penalty, especially if you are located in a high risk area (fires, tornados or hurricane prone areas).
How can you figure out the Value of the house? You could get it appraised or hire an Insurance Adjuster to inspect, then prepare a valuation. I do this for clients on a regular basis. Expect to pay a base fee of around 350.00 to 400.00 for an average size house. If the house is more than the average size there is an hourly rate that may increase the fee. Your insurance agent should be able to assist in finding a professional to help you in either case.
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