Is Your Home Underinsured?
The Early Show's financial guru, Ray Martin, explains why taking a closer look at your home insurance policies is a good idea. As it turns out, more than half of all American homes are underinsured, meaning that if disaster does strike, your costs to rebuild may not be entirely covered.
Home Insurance Insecurity
Many homeowners who lost their homes in the Lake Tahoe wildfires could discover that their insurance policies will not provide enough money to pay for their rebuilding costs. But it's not that that they don't have the right type of coverage, since homeowners insurance covers loss caused by fires. The problem is that they may not have enough insurance.
Most people have homeowners insurance that provides "extended replacement coverage," which means that if their home is damaged or destroyed due to a covered peril, their policy will pay out no more that up to 120 percent of the dwelling limits in the policy – and not a penny more. The problem with this is that it could cost a lot more to rebuild or replace your home and if your policy limits are not enough you will end up paying the difference.
Nearly six out of every ten American homes are underinsured, with folks having only enough insurance to pay about 80 percent of the costs to replace or rebuild their homes. This is according to Marshall & Swift/Boeckh LLC (or MSB), a leading provider of building replacement cost data.
With the median value of an existing single family home of about $220,000, a homeowner with this average shortfall in coverage is at risk to pay an additional $44,000 or more towards the actual cost to rebuild their home that their insurance does not cover.
How Home Underinsurance Can Creep Up On You
Most people buy insurance on their home when they buy the home. The amount of dwelling coverage is typically an estimate of the market price people pay for the home and it may be a good starting point. But the mistake many people make is that once they buy home insurance, the only thing they keep up with is paying the premiums – they never read their policy and never revisit whether the coverage in their policy is adequate. This "set it and forget it" thinking is what gets many people into an underinsurance situation. The really sad part is that most people only find out that they are underinsured when they have a loss and then it's too late to increase the coverage. In fact, if you do want to increase the amount of coverage on your home, you can't do so when the peril is upon you. Insurance companies generally place a moratorium on coverage changes in areas that are in the path of a storm, typically several days before the expected peril is forecast to strike.
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Many homeowners do not update or periodically increase the coverage on their homes. When you remodel and improve your home, you also need to call your insurance agent to update your coverage. And even if you don't make improvements to your home, you can be sure that it will cost more to replace it today versus when you bought it. The reason is the surging price of building materials, energy and labor, all which have increased replacement costs up by over seven percent a year since 2001.
And if your home is located in an area prone to severe weather, such as tornados or hurricanes, then your rebuilding costs could also be pushed higher by new building codes that protect against wind damage or earthquakes and therefore adding to the costs to rebuild the home.
Owning a home is a big responsibility and the homeowner bears the responsibility to select the proper policy coverage limits, a position that is supported by laws in many states. If you have a home insurance policy that costs $2,000 per year, you could be wasting your money. If you have a loss and the dwelling coverage falls short, you may not have enough money to rebuild your home.
Disappearing Replacement Coverage
Today, most standard homeowner's insurance policies no longer provide "guaranteed replacement cost" coverage. Back in the "good old days" this was a provision in policies that provided homeowners peace of mind that their home would be replaced no matter what the coverage limits were stated in a policy. But most insurance companies, seeking to limit their exposure to loses, have changed their policies, and notified their customers with letters that include a "notice of change of coverage" in the annual policy updates.
The problem is that these little notices include a big change in coverage and it's doubtful that most homeowners fully understand the importance of this change, or even read the notice.
Most homeowner's policies today include only "extended replacement cost" coverage or "specified additional amount of insurance." This only provides coverage up to the dwelling limits specified in the policy, plus an additional amount of up to 20 percent, and NOT a penny more. This places more responsibility on homeowners to ensure that they have adequate dwelling coverage limits in their homeowner's insurance policies.
Some states, such as California, have become so concerned about the underinsurance problem that they have passed laws requiring insurance companies to change policy language to state that policies provide "limited replacement cost coverage."
Do You Have Enough Insurance To Rebuild Your Home?
Every homeowner who has not reviewed their home insurance in three years should pull out their policy and ask themselves this question: Do I have enough coverage to rebuild my home?
You can also call your insurance company and ask them the same question, but sometimes they may provide little help here or some may even steer you wrong.
Some insurance companies may offer a home replacement cost analysis based on the owner's statements about things like the number and type of rooms, the quality level of the existing construction and the home's special features. Ideally, the insurance agent should also visit the home to asses its replacement value and take into account the specific risks to the home, local market conditions and current building codes that would contribute to the costs of replacing the home. Some insurance companies will offer this service through their local agent network.
But rather than taking the estimate of an insurance agent as the measure of your home replacement cost, I urge homeowners to use MSB's computer program at accucoverage.com, to calculate your homes replacement cost. You can log onto the site and input information on your home. Use their free worksheet in advance to make the process easier and more complete. For just $7.95 you can receive and print an AccuCoverage report that will include an estimate the insurable replacement cost of your home based on the same reconstruction cost data for your local area that is used by much of the insurance industry. If your report indicates a replacement cost that is 120 percent more than the dwelling limits in your policy, call your home insurance company immediately and increase your dwelling limits.
Once you've increased your home's coverage, you will need to revisit it every several years, or anytime you have made improvements that increase the value of your home. Many insurance companies offer a dwelling coverage escalator. This feature automatically increases the dwelling limits in the policy each year. Ask your insurance company about this add-on, which can cost an additional $50 or so per year – a small amount to pay for additional peace-of-mind.
Do You Have The Right Type Of Coverage?
But having enough dwelling coverage isn't the end of it. You also want to ensure that the policy guarantees that your home contents will be covered no matter what the reason for the loss. This is particularly important if you have a larger home, many furnishings, jewelry, art, or a home office.
You need to have a type of home insurance coverage called an HO-5 policy. Only this type provides replacement cost coverage for contents damaged or lost due to all risks.
As more people buy vacation homes and second homes, they need to be sure to properly insure these homes too. When buying or updating homeowners coverage on a second home, be sure to disclose to the insurance company that the home is a vacation home, the amount of time you occupy it and if you also offer it for rent when you are not using it. Coverage for vacation or second homes should include additional liability coverage, loss of use and loss of rental income benefits.
Flood Insurance
No standard home insurance policy will cover flood damage. Homeowners in flood zones can buy flood insurance under the National Flood Insurance Program through the Federal Emergency Management Agency, and claims are often serviced by your insurance company. The maximum coverage available is $250,000 and the average cost is about $500 per year for $200,000 worth of coverage. If you need more flood insurance coverage, private insurers such as American International Group can provide policies with higher coverage limits. Some owners of high-risk properties may have to resort to obtaining coverage through Fair Access to Insurance Requirements, or FAIR Plans, which are state mandated insurer organizations that cover high-risk properties in about 36 states.
Coverage For Loss Of Use
One thing most homeowner's policies do cover is "loss of use." Many of the insured homeowners in New Orleans who were forced to evacuate their homes found that their costs to stay in a hotel and other related living costs were generally covered at an amount that is typically about 30 percent of the overall policy dwelling coverage. So for instance, if your home is insured for $200,000, you may be entitled for up to $60,000 in reimbursement for your expenses associated with your loss of use.