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Tips to Find the Best Homeowners Insurance Coverage

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For most middle-class families, the home is the most valuable asset -- often outstripping even the 401(k) and 403(b) for all but the most diligent savers.

Yes, for generations the home has been an important store of value for Americans. It's often a treasured asset -- a legacy that older Americans can pass down to their children and grandchildren. In other cases, it's a vital source of retirement income -- converted to cash either via an outright sale or rental, or thought the conversion of home equity to a reverse mortgage.

The problem: Your home is at risk. Every day, Americans lose their homes to a variety of hazards -- and not just to the obvious.

Fortunately, loss or severe damage to a personal residence lends itself well to insurance. But too many Americans don't adequately protect themselves against possible devastating losses -- losses they simply can't afford.

These mistakes are almost always avoidable -- if the homeowner is well advised. Here are some of the most common mistakes homeowners make when insuring their homes.

Not getting flood insurance
It cannot be stated plainly or forcefully enough: Standard homeowners insurance policies do not cover flood damage. Yet every time there's a major flood or hurricane in an area that is only rarely affected by flood, we see a huge number of families who have no financial protection against flood damage whatsoever.

The risk, for the individual homeowner, is huge. The average claim actually paid out for Hurricane Sandy, the storm that ravaged Florida and the Northeastern Seaboard in 2012, was $58,358. The average paid claim after Hurricane Katrina was $97,052 -- per policy affected.

But only 13% of Americans have a flood insurance policy, according to the Insurance Information Institute.

If you can't afford to lose this amount of money, you need flood insurance. For private homeowners, this is normally only available via the National Flood Insurance Program. This is a federal program that underwrites up to $250,000 for your home, and another $100,000 for its contents.

Is your home or contents more valuable? You probably should look at buying additional coverage. For more information, visit Floodsmart.gov.

Poor or non-existent household inventories
If you have items of value in the home, you should document those items -- before the disaster strikes. Otherwise, an insurer could challenge your claim. Fortunately, the insurance industry has provided a number of tools to make the inventory process easier. Among them: KnowYourStuff.org. This interactive website makes it easy for you to upload digital photographs of your valuables, along with other identifying information, such as serial numbers and model numbers. You can even download a handy app for your iPhone or Android to make it even easier. If you have many valuable items, such as an art, antique, or musical instrument collection, you may need to speak with your agent about securing additional coverage for your belongings.

If you use your home for business purposes, you may also need to arrange for additional coverage.

Inventory information is confidential, and stored off site, so you don't have to worry that the same disaster that destroyed your home will also destroy your inventory documents.

Underestimating replacement cost
Remember -- market value and replacement costs can be very different. For example, with many older homes, local ordinances require you to rebuild according to new building codes, not the codes in force at the time the home was first constructed. For example, you may have to totally replace plumbing or wiring, use different materials, or put your whole house up on stilts when you rebuild, depending on local ordinances in your area. Look at your policy to see what code upgrades it will include. You may need to speak with your agent about adding ordinance or law coverage, and/or extended replacement coverage, which expands your policy limit by 25% to account for increased replacement costs.

Not insuring against local risks
Some areas have risks specific to the locality that are not covered under standard homeowners insurance policies. For example, sinkholes are a major problem in parts of Florida. Earthquakes are a part of life in California. Some areas are at elevated risk of wildfires, and insurers may require you to take specific steps to mitigate your risk of loss by fire. The mistake many people make is assuming their off-the-shelf homeowners policy covers sinkholes, earthquakes, and the like. Typically, they do not. Usually you must purchase separate specialty coverage to insure against these kinds of location-specific risks.

Not understanding depreciation
Many policies don't insure your property for actual repair or replacement cost. Instead, they deduct a depreciation allowance from your property each year. They cover only the cost of a repair minus the depreciation allowance.

Here's how it works: Say it's going to take $30,000 to replace a newly installed roof. A roof has an expected life of, say, 15 years. Each year, the insurance company deducts 1/15th of the cost of the new roof from your coverage. After five years, the actual cash value of your roof is only $10,000, not $15,000.

The financial theory is sound: If your roof blows off in year 14, you were about to replace the roof anyway, so your theoretical loss is not all that high. You'll be OK if you've been saving up for the expected new roof all along. However, many people, shopping for insurance on price alone, get blindsided by the smaller amount the insurance company pays, once depreciation is deducted.

Failure to take advantage of multi-line discounts
Customer acquisition is a huge cost for insurance companies. They have to compensate their agents for hours and hours of phoning and prospecting and paperwork for every new customer. So if they have a chance to upsell new lines of insurance to existing customers, it's worth it to them to provide a discount -- to you. If you are paying for car insurance to one company, basic homeowners insurance to another company, and fire insurance to a third, talk with your agent about consolidating all these coverages under one roof, in exchange for a discount on your premium.

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