Replacement cost of your homeWhat's perhaps the biggest mistake most homeowners make when insuring their homes? Industry experts say that it's under-insuring the value, which can lead to much financial pain if the worst happens. "If you under-insure your place, you'll likely be in for a bad shock," warns William F. Harris, an independent insurance agent in Los Angeles. "Nobody wants that kind of surprise." The estimated replacement cost is the amount of money to build the exact same home where it stands now. This is different than the market value of the home, which includes other things such as the value of the plot of land. Harris and United Policyholders, a consumer advocacy group, say most people only buy enough insurance to cover the mortgage, which usually is no more than 80 to 90 percent of the house's value, depending on the down payment. And that figure may be even lower if the property has appreciated in value. So, what can you do to guarantee you're covered? Amy Bach, United Policyholders executive director, suggests getting an accurate replacement number by hiring a professional appraiser. The cost usually runs from $200 to $400, but it can be worth it. Harris notes that some insurers will send their own appraiser as part of the coverage process, but he adds that it's always good to have your own estimate. "That could be very helpful in the settlement process" if your home is destroyed or damaged, he says.
Deductibles you choose for your policyA deductible is the amount you have to pay toward a loss before your insurance company pays a claim. Choosing the right deductible amount is a significant decision because the higher the deductible, the more money you can save on your premiums. Michael Barry, a spokesman for the Insurance Information Institute, a trade group, says that most insurers recommend a deductible of at least $500. But keep in mind that by raising that to $1,000, you're likely to save as much as 25 percent on your policy, according to the III. Our " Homeowners insurance deductibles: How to choose the right one" article provides rates by state and shows the savings earned with a higher deductible. But the institute notes that, depending where you live, you may have other deductibles to consider when balancing your financial situation with the need to protect your house. "If you live in a disaster-prone area, your insurance policy may have a separate deductible for certain kinds of damage," the III points out. "If you live near the coast in the East, you may have a separate windstorm deductible; if you live in a state vulnerable to hail storms, you may have a separate deductible for hail; and if you live in an earthquake-prone area, your earthquake policy has a deductible."
Type of dog you ownYou love your dog, but insurers may not be quite as enamored. The liability portion of your insurance helps to protect you if you're sued by someone who is attacked or bitten by your dog. But the III warns that some insurers will not insure homeowners who own certain breeds of dogs considered dangerous, such as pit bulls and Rottweilers. Others decide on a case-by-case basis, depending on whether an individual dog, regardless of its breed, is seen as vicious. To qualify for a policy, homeowners may be required to sign liability waivers for dog bites. Other insurers will cover a pet if the owner takes the dog to classes to modify bad habits or if the dog is routinely restrained with a muzzle, chain or cage, says Loretta Worters, another III spokesperson. She recommends having details about your dog -- including its breed and history -- ready when discussing your policy needs with an insurance agent.
Wood-burning stovesA wood-burning stove can be very atmospheric and reduce energy costs. But they can also raise your homeowners insurance premiums. Harris and other insurers say you may be able to avoid or reduce premium jumps by providing your carrier with proof that the stove was installed by a licensed contractor and meets code requirements. Also, Harris suggests installing a smoke detector not far from the stove, along with detectors in other parts of your house. Further, let your agent know if you have a fire extinguisher that's easily accessible. "See this as an opportunity to make your home safer," he says.
Home-based businessBarry says it's probably a good idea to take steps to protect equipment, supplies and anything else that is attached to you home-based business. Here are the most common options, according to Barry: Purchase an "endorsement" to your existing policy. Your insurer may offer an endorsement that adds additional property coverage and some limited liability coverage. The III says that you may be able to double your standard policy limits for business equipment from $2,500 to $5,000 for less than $20 a year. This option is usually limited to businesses that have less than a set amount of annual receipts, usually around $5,000. Buy a specific in-home business policy. Some insurers sell specific in-home business policies with some of the same features as larger commercial policies but with lower policy limits and at a lower premium. With this coverage, generally at a price of less than $300 a year, you can insure your business property for $10,000. The policy includes general liability coverage with the limit you choose, between $300,000 and $1 million. Also, if you have to close your business because of damage to the home, the in-home policy will cover the income the business loses and ongoing expenses, such as payroll, for up to one year. The policy also provides limited coverage for loss of valuable documents, accounts receivable, offsite business property and use of equipment.
RemodelingAny remodeling, whether it's a bathroom, kitchen or whatever, will likely raise the value of your home. With that in mind, the III says you need to have the increased value reflected in your policy. Keep your insurance agent well aware of the status of any improvements. At its personal finance website, Wells Fargo notes that "it's expensive for you to build, and it's expensive for the insurance company to rebuild in case of a loss. Materials and construction costs will be taken into consideration and it may increase your premium, but at least your coverage will be up to date."
Home liability limitsPersonal liability limits should be carefully considered. Insurers say that most people buy policies with $100,000 in personal liability insurance, which tends to be inadequate. The amount could easily be used up due to medical expenses and possible lawsuits if someone was seriously injured in your home. With that in mind, insurance experts recommend limits of at least $300,000. The medical payments portion of liability has its own limits; the amount of medical payment coverage you can buy varies by insurance company, but at least $5,000 is usually recommended.
Insurance scoreYour insurance score, which is similar to your credit score, can significantly affect your premiums, even the ability to secure a policy. People with low insurance scores may be seen as a financial risk by insurers, much the same way lenders look at those with poor credit numbers. To better ensure a good insurance score, the III and most insurers suggest three steps, which are similar to maintaining good credit:
- Avoid having debt that is in default.
- Carry modest balances on your credit cards. Be sure to pay them in full each month.
- Never have a tax lien, court judgment, your salary garnished or a bankruptcy on your record.
Marital statusInsurers tend to smile on married homeowners. This is because married couples historically file fewer claims than singles and are seen as, possibly, more mature and definitely less of an actuarial risk by insurance companies. "Sure, married people tend to get (financial) breaks, with their taxes and elsewhere," says Harris. "It just happens to be the same when it comes to a homeowners policy. It's really all about the claims numbers."
Age and construction of your homeThe age of your home and how it was constructed are big factors in your home insurance rates. Even your home's previous claims history can play a part in setting rates. "Size, location and new-ness of the construction can all affect the cost to rebuild a home; and that affects the coverage needed," explains Allstate spokesman Justin Herndon. And Janet Ruiz, a California representative for the Insurance Information Institute, says it's important that insurance buyers estimate the true cost of rebuilding their home if it should be damaged. Would the house be difficult to replace or repair? These are all things to consider before buying and insuring a home. "Many insurance companies will have some kind of tool you can use and it will give you an approximate cost to rebuild," Ruiz says. "The second way is to check with a local contractor in your area to find out what the average building costs are. It's good to do both." It is likely that people with older homes will pay more to rebuild their homes if they are damaged or destroyed and that's why they face higher insurance rates. "It's possible that an older home may cost more to insure, as the materials [and] features in older homes can be more costly to repair and replace, things like plaster walls, ornate moldings, stained-glass windows, hardwood floors," Herndon explains. "That said, updates to roofs, plumbing, electrical and heating may positively impact the rate for an older home, since these things being upgraded reduce the likelihood of loss. Anytime you make a home improvement, you should talk to your insurance agent to be sure you're covered and realizing any savings that may come along with the improvement." Other home construction factors can include whether the home is brick or wood, the age of the electrical system and whether the home has smoke detectors, a security system and a sprinkler system.
Having a swimming pool, hot tub or outdoor spaThese nice-to-have features are each going to increase your home insurance rates because you will need additional liability coverage in case someone is injured, according to Ruiz. "A swimming pool or other special feature could affect your liability insurance," Ruiz says. Most homeowner policies include a minimum of $100,000 of liability protection, but the Insurance Information Institute recommends pool owners increase their liability amount to $300,000 or $500,000. This will add between $50 and $75 per year to your home insurance bill. And the Insurance Information Institute suggests homeowners with swimming pools and other special features, such as spas, consider an umbrella policy to provide additional protection in the event someone gets injured on your property and decides to sue. A $1 million umbrella policy costs between $200 and $300 per year.
Condition of the roofHow good a shape a home's roof is in will play a factor in your homeowner's insurance. "The condition of the roof affects your homeowners policy. New/newer roofs will typically see a reduced premium, while homes with older roofs will pay more," Herndon explains. "Anytime you make a home improvement, especially replacing or repairing a roof, you should talk to your insurance agent to be sure you're covered and realizing any savings that may come along with the improvement." Ruiz concurs adding the older roofs may have difficulty withstanding wind and hail. "If you have a new roof, you're not going to have roof losses," Ruiz explains. "A newer roof is preferable."
How close your home is to a fire departmentIf you live near a fire station, you'll pay less of your home insurance. Homes that are located near permanently staffed fire departments usually cost less to insure, according to the Insurance Information Institute. And that's also true for homes located near fire hydrants. Urban and suburban homes usually get better ratings for fire protection than rural areas. Having the fire department nearby will help to keep your home safe in case of fire. And it will also help to lower your home insurance rates, a win-win.
How close your home is to coastline or body of waterAccording to the Insurance Information Institute, homes located near the coast or coastline are generally more expensive to insure than those that are inland. And homeowners who live near the coastline may have a separate deductible for hurricanes or need a separate windstorm insurance policy for their homes. But Ruiz adds having a home near any body of water could affect home insurance rates because of the risk of flooding. "Any body of water could mean flooding," Ruiz says. Flood damage is not covered by standard home insurance policies. You may want to purchase separate flood insurance even if your home isn't considered a high-risk for flooding. Insurance Information Institute estimates that 25 percent of flood insurance claims come from homes that are not in high-risk areas. Flood insurance can be purchased through the National Flood Insurance Program, which his run by the Federal Emergency Management Agency.
Your credit historyIn all states except California, Hawaii and Massachusetts, insurance companies can use your credit history when creating rates. Each insurance company has its own credit formula, which is different than a credit score. Here is a typical example of factors insurers review, and how those factors are weighted in a credit-based insurance score, according to the National Association of Insurance Commissioners:
- Payment history -- 40 percent: How well you have made payments on your outstanding debt in the past.
- Outstanding debt -- 30 percent: How much debt you currently have.
- Credit history length --15 percent: How long you have had a line of credit.
- Pursuit of new credit -- 10 percent: How much you've recently applied for new credit.
- Credit mix -- 5 percent: The types of credit you have (credit card, mortgage, auto loans, etc.)