If you own a home, you’ve got to have home insurance. In fact, most mortgages require it. But unless you have a lender breathing over your shoulder, many people make mistakes in calculating how much coverage to buy – which can lead to a financial hardship should a fire or other disaster strike.
Homeowners’ insurance has two basic purposes:
- To protect you against financial setbacks due to home damage or burglary that are beyond your ability to recover from.
- To protect the lender on a mortgage. If a house is destroyed, and you decide to stop paying on the loan or declare bankruptcy, there is nothing the bank can foreclose on to recover its loss.
This is why lenders usually require home insurance on a mortgage.
So how should you arrive at the coverage amount?
For most people, the appropriate amount to insure for is replacement cost. If a tornado wiped your home off the map tomorrow, what would it cost you to rebuild, in place, and be made whole?
This can be a very different figure from “fair market value,” or what it would cost to buy the house today. It’s also very likely a different figure than what you bought the property for.
Most home insurance companies will use a very basic appraisal technique: You tell the agent what your house is made of – wood, brick, stucco, – the zip code, and the square footage, and they’ll key it into their computer, and voila! You have a ballpark amount based on what it would cost to rebuild a generic house out of the same material if you had to replace the whole thing.
But most of us don’t live in a generic home. There are furnishings, heirlooms, collectibles, tools of a trade, musical instruments, and a variety of other items you need to inventory and value.
You may need to get extra coverage to account for items like these.
If the house is made out of state-of-the-art material, or if it’s an antique home with a lot of outdated construction materials and methods, you need to take that into account, too. For example, you may need to bring in an artisan contractor to recreate some features like carved doorjambs or unique trimming and decorative features that are an integral part of the value of your home.
Some carriers will sell guaranteed replacement cost coverage. That is, they will pay to replace your home, in place, if it’s destroyed, whatever the replacement cost. You’ll pay a bit more in premium, but it could be worth it. However, the onus is on you to document the features of your home and its insurable contents before disaster strikes.
You can also buy a rider that automatically updates your coverage to keep up with inflation. This is important, because inflation can still occur even when house prices fall. The cost of construction materials and labor does not necessarily fall. This is why most experts recommend insuring your home with a replacement value baseline rather than the fair market value as a baseline.
Inventory your property
The insurance industry has a great track record of coming through when disaster strikes. But you need to meet your insurance company halfway. They won’t just take your word for it that you lost a $50,000 Steinway piano in a landslide. You have to demonstrate you owned it and declare it before the incident happens. Take a property inventory. Take photographs and record serial numbers, if applicable.
Here’s one thing critical to understand: Your home insurance policy will almost never cover damage from floods. You need to buy this coverage separately. For more information, see www.floodsmart.gov, the website of the National Flood Insurance Program.
Insurance is the process of transferring risk from the individual – who cannot afford to bear the risk of losing his or her home – to the capital markets, which can. The more risk you transfer, the more it will cost you in premium. To keep premiums affordable, you can retain more of the risk of smaller losses – that you can afford – by choosing a higher deductible. If you have a deductible of, say, $1,000, that means that your insurer will pick up the cost of events over and about that first $1,000 per year. The higher your deductible, all things being equal, the lower your premiums.
Even top-rated home insurers have critics
Who are the best home insurers, according to Viewpoints reviewers?
USAA is often at the top of the list of favorite financial services companies for Viewpoints reviewers – and the home insurance market is no exception.
However, USAA has been known to drop good customers once they’ve filed a claim or two. When looking at insurance companies on Viewpoints, it’s important to read through the reviews to read what peoples’ experiences have been at claim time. Everything else pales in significance.
One reviewer from Washington, DC, shares this experience:
“I have been a USAA customer for almost 30 years and I have insured multiple cars and homes with them. I never had a claim until I moved into the Capitol Hill area of the District of Columbia. In 2006 my tenants in the small apartment I rent started a fire in the stove by turning on the broiler not realizing it was in the bottom part of the stove where they had placed cooking items. They called the fire department since I was away. I filed a claim to replace the stove ($1000 and the insurance estimator included some money for cleaning, $500). I later replaced the stove and the entire kitchen which I paid for, $18,000). In 2009 a gate was broken on the side of my house that protects the area between me and the next row house next to me and my $1700 Kitchen Aid grill was stolen. I reported it and I spent $20,000 installing a rollup steel garage door and extra fencing to protect the area. Then last August 2010 a thief pried open a front window and entered my house. The motion detector went off and they had to leave by the front window because all my doors are double locked but not before they stole a laptop valued at $3000. I then had ADT put motion detectors in every room of my house. In January 2011 I receive a letter from USAA saying that “our members rely on us to provide top-quality service and products at competitive prices. To do so, we regularly assess each member’s policy to identify situations that present a level of risk beyond that which we are willing to insure. After careful review, we determined that we can no longer insure your property …” So after 30 years and an estimated $75,000 paid in insurance premiums and filing for at most $7,000 of claims, they are dropping me?” –TConHill, Reviewer since 2011
USAA only serves military families and veterans. If you don’t qualify for USAA coverage, the next most highly-ranked carrier is State Farm, with an 80 point rating out of 100 possible, based on 765 reviews on Viewpoints.
State Farm has a great network of agents with strong neighborhood presence. That’s very useful, because an in-person agent who can visit your home can add a lot of value that USAA customer service reps can’t do over the phone. For example, a live agent can make specific recommendations to help reduce your home’s risk of destruction by fire, for example, by personal observation. Or he can suggest additional coverage you need that a USAA rep in San Antonio, Texas, cannot identify because he doesn’t have eyes on your home and property and its environs.
Overall, State Farm also has a strong customer service record, though it is also known to drop people after they file a claim or two – even after paying premiums for 20 years or more.
The third highest-ranked of the major home insurers is Travelers. It’s rated 74 out of 100 with Viewpoints reviewers. However, even though it doesn’t have the highest point score, of those reviewers that had specific experience filing homeowners’ claims with the company and trying to get them paid, Travelers customers seem to have a better overall experience.
“This is the first time I’ve ever made a major claim with any insurance company and I could’nt be any happier about the process from the time I called that I needed a new roof till the roof was put on Travelers was with me every step of the way. If your looking for an insurance company that cares about you and your property this is the company to go with, I would highly recommend this company to friends, family and anyone asking for a recommendation!!!!!!!!!!!” –Arkiewalker, Reviewer since 2012
And this, from a reviewer in Georgia:
“We came home to find our house full of water and the refrigerator pouring out water. We had been gone a week. The house was soaking wet. Even the sheet rock had wicked up the water. All our beautiful 10 inch moulding was ruined as was the carpet. Travelers had a crew of restorers out the next morning to start pumping out the water and removing the fallen sheet rock on the floor below the kitchen.” –ctreadway, Reviewer since 2011
Remember that claims have a lot to do with your agent, as well, in this market. If your agent is willing to follow up with you and ensure that everything is done right, and keeps you informed every step of the way and works with you to get your claim paid in a timely manner, that’s an agent worth keeping, even if the company is ranked a bit lower.
Editor’s note: If you have professional experience with insurance, Viewpoints is recruiting experts in priority product categories to write for our blog. Check out this overview of the Viewpoints Category Expert Program, including qualifications, compensation and how to apply.