Taking The Mystery Out Of Homeowner's Insurance

What comes to mind when you hear the words "risk management?" Maybe a cold, calculated cubicle farm, filled with call center representatives at a major insurance company fielding claims on homeowners' policies. Or maybe a series of trailing stops on your stock positions in your brokerage account that help you sleep better at night. Or maybe what comes to mind is not repeating what happened with the Wall Street crisis of 2008.

Whatever your image may be of risk management, it is that and more. All of us have areas of risk that must be addressed and mitigated, and many of us have risks that we are not even aware of. Oftentimes, some of the most common gaps can be quickly taken care of just by spending a few minutes on the phone with either your insurance agent for your life, property, and casualty policies, and with your employer's HR department for your health policy (or if you own your business, your business's agent).

Lots of people have a bad taste in their mouths about insurance, and yes, it's not without its share of weaknesses, but by and large, the insurance companies are not "out to get you." The bottom line is, it pays to be informed, and you don't have to be an attorney to understand the details on what is and isn't covered under your policies.

One of the easiest things on the checklist to evaluate is your homeowner's policy. But before you dive into the policy documents or even pick up the phone, it is imperative that you take a few minutes and, at the bare minimum, take care of this fundamental Step 1 immediately!

Step 1: Get Out The Smartphone (Or Video Camera)

Take a video of your entire home, inside and out. If you have the time, take pictures as well. Almost all of us have smartphones these days, and for those who don't, you still have a camera on your phone, so there's no excuse!

Why would I do this?

I'm glad you asked. One of the basic principles of homeowner's insurance policies is understanding the value and condition of what is insured. In the case of a home, having visual proof to provide to your insurance company in the event you have to make a claim will dispel doubt related to the before and after of when a peril occurred on your property.

Imagine your insurance adjuster comes out to your house to survey the damage. Wouldn't you rather be able to show him a video of your home instead of attempting to piece together a story with no evidence?

And by the way, don't forget to video the roof and chimney too!

Step 2: Find Out What Kind of Homeowner's Policy You Have

The next step in shoring up risk with your homeowner's policy is to find out if you have an Actual Cash Value (ACV) policy or a Replacement Cost (RC) policy. Let's say you have an ACV, for example. Let's also say your home cost $300,000 when built, but today it would cost $380,000 to build the same house, with the same materials (or as similar as possible).

Do you think your ACV policy will pay you $380,000 to rebuild your house if it burns down today? Maybe, but probably not. ACV policies often will depreciate the value of the property by a certain number of years, and in the event of a total loss, the payout on a claim will likely be less than the actual today's cost to rebuild the home as it was before the loss.

A better way in my opinion is to have a Replacement Cost (RC) policy. In this case, there is no deduction made for depreciation. So take the previous example with the same home that cost you $300,000 to build. As long as you have made sure that the replacement cost is adjusted upward each year enough to keep up with the increases in building costs, you should be assured that a total loss will not keep you from rebuilding the home just as it was before.

Some RC policies automatically increase their coverage amount annually with the renewal of each policy period. This is when you will want to pull out your Declarations Page on your policy and compare with previous years. Or if you prefer, call your agent.

Step 3: Make Sure Your Possessions Are Covered!

Yet another area you will want to look at is what your coverage is for personal property IN your home. If your house burns down, your most basic coverage will simply pay out on your claim to rebuild the home. But that doesn't mean your personal belongings are necessarily covered. Most policies do include a certain dollar amount of coverage for possessions, but again, remember that valuables such as jewelry and firearms are often excluded from coverage as personal property.

These items usually have to be specifically named in the policy, which will require an added endorsement and additional premium amount (though likely not much). If you want to add coverage, simply call your agent, and the process is usually very quick.

Step 4: Check Out The Deductibles

We all know about deductibles. They can be our best friend or a formidable enemy if we aren't aware of how high they are after a loss has occurred. This is where you are best off talking to your agent so they can tell you exactly how much your premium will increase or decrease as you test different deductible amounts. It may surprise you to find out that lowering your deductible to $500 is not as expensive as you might think.

This is all up to you and how comfortable you are with the amount you set. Just prepare ahead of time with your emergency fund so that the cash is there if you need it!

For the win,

Adam Short