By Michael Kalscheur, CFP®
Senior Financial Consultant, Castle Wealth Advisors, LLC
Summer is the time of good weather, backyard barbecues and gardening. It’s the time when kids are out of school and looking forward to summer camps and summer vacations. It’s the time when we can all take a step back, breath in the fresh air and...review our homeowners insurance?
OK, maybe summer doesn’t conjure up images of reviewing your insurance policy, but this is a great time of year to do it. Most people find a company and then forget about their coverage until they purchase a new home, remodel or add a room addition. Unfortunately, some people also review their policy after a loss, only to find out that their coverage was not what they were expecting.
The following are some of the basics you should know about homeowners and umbrella insurance policies:
Homeowners insurance covers your primary dwelling, whether it is your house, your condo or your apartment. Homeowners insurance is called a multi-line insurance because it protects multiple things - property (the home and its contents) and liability.
There are several different kinds of homeowners insurance, but almost 90% of people have HO-3, which is an “all risk” policy. Essentially, everything is covered except specific items or circumstances (i.e. flood or earthquake), which can be covered separately. Coverage includes the primary dwelling, outside structures (i.e. a storage shed), personal property inside the home and loss of use (would pay for a hotel in case of a fire). Condo insurance is very similar, while renter’s insurance (for your apartment) only covers your personal property and liability issues (discussed later). Other coverages are available, depending on the policy and riders.
Homeowner’s insurance should not be confused with a home warranty, which some people request when they purchase a new home. Home warranties cover wear and tear items such as furnaces and appliances to make sure they don’t break shortly after moving in.
No, this is not a discussion about when to take your umbrella to work, but it may have to do with the weather. Umbrella liability insurance covers any loss from almost any reason. It is a back-up coverage that comes into play only when and if other insurance coverage is inadequate. For example, say your teenage son gets into a car accident and you are found liable for $1,000,000 (they won’t sue your son, because he doesn’t have $1,000,000). If your regular car insurance only covers liabilities up to $250,000, and you have an umbrella policy, that insurance company would pay the additional $750,000.
Umbrella coverage starts at $1,000,000 and usually increases in $1,000,000 increments.
- 1. Is insurance coverage necessary, and if so, how much is appropriate?
Homeowners coverage is an absolute must; in fact, it is required by every mortgage company out there (the last thing they need is fire destroying the only asset backing their loan). However, even if you don’t have a mortgage, you should still have homeowners insurance.
The reason why is obvious; a major loss would be financially devastating to 99.9% of people, while insurance premiums come with relatively low annual fees. Homeowners insurance is the epitome of what insurance is all about; protecting against an unlikely event (fire, flood, tornado, etc.) that would be much too expensive to pay for out of pocket. By spreading the risk of loss over thousands of policy holders, insurance companies can provide this protection on a cost effective basis.
Even if you don’t have a total loss, there are minor damages that your homeowners policy covers that would be financially painful. For example, what if you had just finished your basement and you lose power during a bad storm? Your sump-pump can’t turn on and now you have 4 inches of water in your basement. If your homeowner’s policy has a water/sewer backup rider, the insurance company will pay to replace drywall, carpet and the restoration company to come in and clean it all up. Losses of $10,000 - $15,000 are not uncommon under this scenario, but the rider might only cost you a couple hundred dollars per year.
Just as important as property protection is liability protection. If your neighbor’s daughter comes over to play or the paperboy is delivering the newspaper, and they fall and break their arm, who will pay for this? Your health insurance only covers you and your immediate family. It is your homeowner’s policy that covers other people who are injured while they are on your property. It also protects against your being sued for hundreds of thousands of dollars for “pain and suffering,” and other liability issues in case of an injury.
An umbrella policy is important if you have a substantial net worth - one that exceeds the liability coverage on your homeowner’s policy (usually $500,000). Once your net worth exceeds $1,000,000, an umbrella policy is an absolute must. An umbrella policy should also be purchased if you have increased risks that may open you up to potential liabilities. Examples include teenage drivers, a pool, any kind of motorized watercraft or ATV, or land where someone could get hurt.
Umbrella liability coverage, as stated above, starts at $1,000,000 and usually increases in $1,000,000 increments. A good rule of thumb for most young families is to have an umbrella policy equal to your net worth.
- 2. How much does insurance cost, and how can I reduce this cost?
For all this benefit, the cost is rather minor; the average homeowners policy is about $670 per year. Obviously the larger and more expensive your home, the higher your premium will be, and vice versa. Rates can also vary widely by state.
The following are several ways you can reduce your homeowners insurance premium:
- Shop around every couple of years. It’s always a good idea to check the competition to see if you are getting the best deal for your situation. The only way to know is to do some comparison shopping.
- Increase your deductible. The more risk you are willing to take, the less the insurance company has to, thus you’ll have lower annual premiums.
- Install a Home Security System, Smoke Alarms or Dead-Bolt Locks. Many insurance companies will provide discounts for these important safety devices.
- Quit Smoking. It reduces the risk of fire, plain and simple.
- Put all your property insurance with the same carrier. Having Homeowners, Auto and Umbrella all with the same company may qualify you for significant discounts.
- Don’t over-insure. If your house burns down, you need to rebuild your home, but you don’t need to rebuild your land. Therefore, your homeowner policy should be based on the value of your home only, not including the value of the land. Also remember that some home values have declined significantly (especially in states such as CA, FL, NV), so it’s a good idea to revisit your coverage amount.
- Senior Discounts. If you are 62 or older, ask for one.
Umbrella policies don’t have deductibles and are based on risk factors, some of which you can control, others which you cannot. Things you control include your potential risks (discussed above), driving record and claims history. Things you cannot control include the number and size of claims that have been paid in your state. In other words, if you live in a highly litigious state, you’ll pay more.
- 3. Do I need a rider?
Homeowners policies cover all the contents of your home, condo or apartment. However, they limit the coverage on certain items to pre-determined levels. For instance, if you have more than $1,000 of jewelry and watches, silverware, oriental rugs, office equipment, collectibles or firearms in your home, you should check your policy limits and consider a rider to provide additional coverage as needed.
Umbrella policies do not have riders (one less thing to worry about).
- 4. How do I make a claim?
Each insurance company will handle this differently, but in general, when a loss occurs, you need to contact your insurance company immediately. A claims adjuster will review the loss and work with you to set things right. Here are some tips to make this process easier:
- Mitigate the damage as much as possible. As soon as you know there is a loss, you have an obligation to protect your home from further loss. Pump out a flooded basement and cover a hole in the roof with a tarp. Additional damage that results from your lack of care will not be covered by the insurance company.
- Know whether your policy covers replacement cost or actual cash value. This makes a huge difference, as your flat screen TV may cost $1,000 to replace, but since it is 3 years old is probably only worth $200.
- You may not want to file a claim for a small loss. If your loss is only slightly higher than your deductible, it may be better not to claim a loss, as once you claim a loss, your annual premium will most likely increase. Claiming a $300 loss only to see your premium increase $200 per year doesn’t make sense.
- Take an inventory of what is in your home to help prove the loss. Go through your house and document as much as possible so you can file an accurate claim. Insurance companies have checklists to help with this (go to this website for a sample: http://www.erieinsurance.com/homeowners/HouseholdInventory.pdf), or you can take your video camera and record everything in your house room by room. Just remember to store the documentation in a safe place not in your home (i.e. a bank safety deposit box).
Michael Kalscheur, CFP®, is a Senior Financial Consultant at Castle Wealth Advisors, LLC. Castle specializes in helping families and closely-held business owners with strategies to protect and transition family assets from one generation to the next. Castle’s senior partners also work with clients throughout the country in making logical decisions to help them fulfill their personal and business financial goals. For more information visit www.Castle3.com, call 1-888-849-9559 or contact Michael directly at .