The most neglected part of personal finance could be property and casualty insurance. It’s a close contest with disability insurance. Most people either overpay or are underinsured for homeowner’s and auto insurance. Some do both.
If you’re like most people, you probably don’t have enough coverage for liability, complete loss of your home, and damage to any collectibles. On the other hand, you’re probably over-insured for other stuff. Here are some tips for getting your homeowner’s and auto insurance right.
Search for credits and discounts. Premiums cuts are available for belonging to affinity groups (alumni and professional associations, clubs). Bundle home and auto insurance with the same insurer and get a break. Safety features in a home (security systems, fire alarms, sprinklers, back-up generators, flood detectors) net lower premiums. Lack of recent claims, a safe driving, and good grades by driving age kids all lower premiums. Keeping jewelry or other valuables in a safe deposit box or other secure facility can net a discount. Most insurers’ web sites list potential discounts. Make a list of items that might qualify you for discounts and ask your insurer or agent about them.
Open an umbrella policy. Regular liability limits on homeowners’ and auto policies are low. You need to insure your net worth and then some in case you or someone in your household causes a bad accident or someone is injured on your property. An umbrella policy also covers a range of liabilities not related to your property. Umbrella liability policies usually are relatively inexpensive. Most of my readers should insure for $2 million or more.
Set home replacement value right. Your homeowner’s policy has a stated replacement value estimated by the insurer. In standard policies the insurer will pay up to 125% of that amount to rebuild a house that is destroyed or substantially damaged. Costs above that are your responsibility. Remember, rebuilding costs usually are much higher than market value, so give careful thought to the replacement value. You probably also want the policy to cover replacement with like kind and quality materials, not similar materials.
Review contents coverage. Most policies use a formula to set a limit on the insured value of household contents. First, check the insurer’s reimbursement policy. Will it cover the replacement cost of everything you lose, only the replacement cost of the items you choose to replace, or the depreciated value of the items you lost? This policy gives a hint about whether the contents coverage is too high. Most people probably are paying too much for their household contents coverage.
Raise deductibles. This is the easiest way to cut premiums for homeowner’s and auto insurance. When you have a decent income or savings, pay for the smaller losses yourself and save the insurance for larger losses. Reasonable deductibles to consider are $5,000 to $10,000 for homeowner’s insurance and $1,500 to $2,500 for the auto.
Review collision coverage. Standard auto policies have collision and comprehensive coverage in case your car is totaled and it isn’t someone else’s fault. You probably are overpaying for this when your car is five years old or older. Compare the cost of the coverage to the value of the car. But if your car has a loan or lease, be sure the policy will pay off your full obligation if the car is totaled. This might require a higher premium but not as much as you’ll owe if the worst happens.
Have uninsured motorist coverage. There are a lot of uninsured drivers. When one hits you, you’ll have to pay all the repair and medical bills unless your policy has uninsured motorist coverage. The limits of that coverage should match your own liability limits.
Don’t forget riders. A rider provides either coverage or a level of coverage not available in the standard policy. Typical riders are for home-based business activities and equipment, jewelry and furs above the policy’s standard limit, collectibles, and detached structures on the property. Most types of flooding aren’t covered under standard policies, so consider if you want flood insurance. With auto insurance you might want replacement rental car coverage. This gets you a rental car while yours is being repaired after an accident. Likewise, a homeowner’s policy covers the cost of lodging elsewhere while a home is being repaired. But check the time and cost limits. Will they be enough if the home is destroyed by a fire and has to be rebuilt?
Shop around. Most people don’t change carriers once they obtain a policy. Yet, most people who switch insurers save money by doing so. You should know that independent insurance agents offer policies from more than one carrier but still limit the number of companies whose policies they offer. “Captive agents” offer policies from only one company, such as Allstate or State Farm. A few insurers, such as GEICO, sell policies directly to consumers using their employees or web sites. Progressive uses both direct sales and independent agents.
Prices vary considerably among insurers. You should first decide the level of coverage you want, but be prepared to change it after reviewing it and your circumstances with an agent. Then, shop around among all the types of insurers and agents.
RW February 2011