Those of us who live in places where we believe flooding, hurricanes, fires or tornadoes seem unlikely to occur, watch our TV screens, horrified over the devastation elsewhere in the country. We can’t imagine experiencing something like that first hand, seeing our homes destroyed or living in temporary shelters.
This inability to fathom the horrors of natural disasters can often make us more complacent regarding our homeowner’s insurance coverage, perhaps blissfully ignoring what is included in its many clauses and paragraphs. After something happens, however, is not the time to address what’s there. Taking inventory of the coverage you already have is something to put on your to-do list now. Forbes financial writer Mark Dennis offers some common errors many homeowners make regarding their policies.
Confusing Replacement Cost with Cash Value
The first is confusing replacement cost with cash value. If you still owe a considerable amount on your mortgage, chances are your lender already requires you to carry a homeowner’s policy that includes replacement cost coverage. This is defined as the amount needed to cover demolition, construction, and other related rebuilding costs needed to replace your home if it were destroyed. A less expensive form of coverage is cash value coverage. Your insurance agent should make it a point to explain, however, that cash value coverage may not include the added rebuilding costs that could find you unable to stay in your home after disaster strikes.
And what about those coverage limits? If you’ve lived in your home a long time, confident that the value of your home has significantly increased, isn’t it wise to invite your insurance agent over for coffee to discuss making your policy coverage limits sufficiently high to account for replacement costs that covers its value today rather than when you bought the place? If your policy does not include guaranteed or extended replacement cost coverage to protect against unexpected cost increases, it’s time to regroup. Read the policy and know what you own.
How sizable a check would you have to write to a construction contractor to cover your insurance deductible repairs? When you took out the insurance, you may have opted for a high deductible to offset a higher monthly insurance payment. According to Dennis, who experienced hurricane damage to his own home, he experienced what the world of behavioral finance refers to as loss aversion. “Under this behavioral bias, we tend to experience losses (e.g., paying a large deductible for an insurance claim) much more deeply and painfully than we appreciate the joy of gains (such as saving money by paying less in monthly insurance premiums because we agreed to pay a larger deductible if we file a claim). Becoming more aware of our built-in psychological biases is one way to help ourselves make better financial decisions.”
If you are cash-strapped, however, and can’t seem to set aside emergency funds for a larger deductible, it may be more comfortable to go for a smaller insurance deductible with a higher premium for a while. If this is the case, ask yourself what you could trim in order to steer more money toward emergency savings. “Better yet, take the money you save in reduced premiums and redirect it to your emergency fund savings account as well. You were paying that “extra” money to the insurance company anyway. Why not pay it back to yourself now and have a larger emergency fund in the future?” says Dennis.
What about your own safety?
Homeowners policies include a provision for personal liability coverage for instances where the owner is sued for injuries or damage caused on or by his property, but many homeowners carry only the minimum amount of personal liability coverage. This exposes their assets to potential forfeiture if they are ever served with a lawsuit. A separate umbrella policy or rider might be needed to provide the maximum amount of liability coverage.
It rains everywhere, but many of us are in denial, pretending we live on higher ground where flooding would never reach us. “A standard homeowner’s insurance policy protects against many catastrophes – fire, theft, wind damage – but not rising water,” says Dennis, who said many homeowners where he lives did not carry flood insurance. Whether it’s heavy rains, melting snow, or hurricanes, flood insurance is the only thing that can cover these damages. The National Flood Insurance Program (NFIP) provides consumer information regarding flood insurance, along with details of what flood insurance will and will not cover.
Remember the Purpose of Home Insurance
It’s important to remember that insurance is there to cover the “what ifs” in life. Even the most unlikely things continue to happen to someone, somewhere. It’s much more likely to be hit by a devastating tornado than to win the lottery, even many of us still feed dollar bills into those machines, grab, our tickets, and hope for a miracle.
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