Tips On Homeowners Insurance

(CBS)  Over 1,600 homes have been burned so far in California's wildfire. While no one wants to believe that their home may be destroyed by a natural disaster, it pays to be prepared.

The Early Show's financial advisor Ray Martin says this is the time to take a closer look at homeowners insurance policy.

Martin stops by the The Early Show's studio on Thursday with some advice on insurance homeowners should have and why.

The financial advisor is always looking for smart ways to save money, but when talk turns to homeowners insurance, his opinion is firm — do not skimp on it.

Homes in the West face the danger of fire, those in the South and Northwest are often threatened by hurricane, and states in the Midwest have recently suffered flooding and ice storms. Martin says the threat of being affected by a natural disaster is real, so while losing a home is painful, it's much easier if you are financially prepared.

Martin says most homeowners are not properly insured. They try to save on their premiums, so homeowners insure only 80 percent of their home's value.

Many homeowners have been remodeling or expanding recently. The improvements increases the home's value, and, Martin says, insurance should be increased accordingly. Most people, however, fail to do this.

Martin says if a homeowner had a policy for some time, he or she will probably not have adequate coverage. Not only have home values gone up, the price of materials and labor has increased. If the home has to be rebuilt to include new building codes (For example: to protect against earthquakes) your costs jump even more.

What type of policy should homeowners obtain if they want to be fully insured? Martin recommends an HO-5 (HO stands for home owner). Anyone who has entered into the world of homeowners insurance has probably heard of HO-3 and HO-5 policies. They are the two most common policies offered.

While both policies cover damages to a home's physical structure, only the HO-5 fully covers damages to a home's contents. Having a guarantee that personal belongings will be covered no matter what kind of disaster strikes is particularly important if homeowners have expensive jewelry or art, or a home office.

If homeowners live in a flood plane or earthquake zone, no policy will automatically include coverage for these events. It's easy to track where earthquakes or flooding has happened in the past, and where fault lines and major water bodies lie. Thus, if a home is in a potential trouble spot, insurance companies are going to charge extra to insure the home. Homeowners will need a separate rider for flood or earthquake coverage.

One thing all policies do cover is "loss of use (of home)." Recently, many California residents have been forced to flee their homes as the fires raced toward them, just as many North Carolina residents in the path of hurricane Isabelle evacuated.

Homeowners' insurance will pay them to stay in a hotel and for other associated costs. Those homeowners will receive about 30 percent of the overall policy for the expense to move. For instance, if a home is insured for $200,000, the displaced homeowner may receive $60,000 in loss of use.

Martin says when insuring the contents of your home, make sure that your policy offers "replacement value" not "cash value."

The cash value of an item is the item's worth on today's market. The replacement value of an item is how much it will cost to go to the store and buy a new one. For example, a 27-inch television bought 5 years ago may only be worth $50 now, but buying a new television will set you back $200 to $600.

Insurance companies will ask for a complete list of the contents of the home, including details such as brand names, estimated worth, where and when the item was purchased. Martin says the easiest way to gather this documentation is probably through videotape or photos.

Homeowners convinced that they need to increase their homeowners insurance shouldn't worry about the cost, Martin says. He explains if a home in the Northeast is insured for $225,000, the owner can later get an HO-5 policy, which increases the value covered to $250,000 — only paying an extra $123 a year.

Homeowners who don't want to pay this extra money can increase their deductible. In the above example, if the owner bumped his deductible from $250 to $1,000, he or she saves $169 a year. Now, the owner has better insurance and is paying less.

Martin believes a deductible of $1,000 is perfectly reasonable.

The value of your home goes up every year, but that doesn't mean you need to get a new insurance policy every year. Most companies offer a "guaranteed replacement endorsement." The company automatically increases the value for which you are insured each year. You are then automatically charged a higher premium each year.

If homeowners want to increase or improve the insurance, they can't do so in the midst of a storm. Marketwatch.com explains: "Waiting until disaster is imminent to make changes to your insurance coverage will most likely leave you unprotected. Insurance companies generally place a moratorium on coverage changes in areas in the path of a storm."