3 Common Mistakes Made When Buying Homeowners Insurance

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With the onslaught of natural disasters seeming to increase in both frequency and strength, this is a good time for many homeowners to reevaluate their insurance coverage. With differences in coverage varying from state to state, as well as from provider to provider, the process can be difficult to navigate at times. Here are some of the most common mistakes made when buying property insurance for your home -- and how you can avoid them.

1. What's the actual value?
There can be some confusion when it comes to the amount of insurance that you need to cover your home. For an insurer, they're looking at the cost to replace or rebuild your home -- not its market price. So when preparing to buy homeowners insurance, be sure to have a professional come out to your home to evaluate the home's construction and materials in order to provide you with an estimate of the cost to replace your home. A local builder can often offer you this type of service for a flat rate. If you choose coverage from the two largest homeowners insurance providers, State Farm or Allstate (NYSE: ALL  ) , they likely have local offices that can help you determine your home's value by having an agent come to your home to do an assessment, but direct insurers that do not have local offices will need you to provide the detail of any special features of your home.

When determining the level of coverage for your home, be sure the policy states you are covered for the full replacement value of the home -- not a flat amount. In the event of a loss, the policy with full replacement value will give you the added security in case the cost of building materials has risen, increasing the total cost of rebuilding.

In connection to the possessions in your home, most insurers will use a flat percentage of your total coverage automatically. So if your home is covered for $100,000 and the insurer has a 75% rate for possessions, you automatically have $75,000 in coverage for your items. But there are limitations on some types of possessions, including jewelry and art. If you have any particularly valuable items, you may want to have them scheduled out separately in your policy in order to afford you more coverage. Be sure to mention these items when talking over your policy details with an agent.

2. Flood versus weather catastrophe
With the colossal damage caused by Superstorm Sandy last year, many homeowners found that they were not properly covered for flood damage to their homes. Most homeowners policies exclude coverage for flooding because coverage can be obtained through the National Flood Insurance Program, which is subsidized by the federal government.

Marsh and McLennan Companies (NYSE: MMC  ) is one of the leading providers of flood insurance outside of the NFIP, though you can generally purchase subsidized coverage through most insurers. Be sure to check out the website to determine your risk of flooding and the right coverage for you.

The importance of flood insurance cannot be understated. With both Hurricane Katrina and Hurricane Sandy, homeowners that had coverage for hurricane losses found that their insurers declared the damage to their homes as flood damage, and therefore not covered by their policies. Don't forget insurers are not necessarily your friend when it comes time to file a claim -- be sure you're properly covered for all events.

3. Shop around
As I mentioned in the opening, coverage can vary widely between insurance providers. When buying homeowners insurance, it can really pay off to comparison shop. Though insurers will likely categorize your risk levels the same, they can price those risks very differently.

Shopping around for the best discounts can also help. Don't be shy when asking about discounts! Talk to your auto insurance provider about multi-policy discounts -- a favorite of Progressive (NYSE: PGR  ) -- or any sort of governmental employment or military discounts, which is how Berkshire Hathaway's (NYSE: BRK-B  ) Geico division started by catering directly to governmental employees.

Covering all your bases
Insurance is a financial necessary evil, and homeowners insurance is one of the most important policies you can have. If you're buying a new home and looking for good coverage, be sure to avoid some of the most common mistakes that could cost you big in the long run.

Be smart about your financial security
Homeowners insurance is a key piece of your financial security puzzle. The capstone of that puzzle should be your investing habits. Though the financial crisis has made it difficult for many Americans to jump back into the market, there are huge gains to be made by starting now. If you've been shying away from getting back into investing, check out our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.

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  • Report this Comment On November 16, 2013, at 12:25 PM, myadjuster wrote:

    This information is fine as far as it goes. As a retired adjuster with a tad more than 40 years of insurance experience, let me offer the following:

    1) know your State's definition of the term "actual cash value" you'd be surprised that these same three words mean different things in different States

    2) watch for special limits for certain types of property such as jewelry; furs; cash; numismatic property; collectibles; fine arts and other items of exceptional value

    3) get a GOOD agent, and talk to him or her. Don't try to pinch pennies. Be forthright and build the best program you can afford

    4) make an inventory of your personal property and back it up with a video. Store the inventory off-site (preferably in a safe deposit box) so that it can be retrieved in time of need.

    5) learn what YOUR obligations are in the event of loss - don't rely on the insurance company to do your part

    6) become an educated consumer; try not to be naive; and maintain reasonable expectations

    7) be patient - you will be dealing with bureaucrats, so you have to be prepared to stay the course

    8) don't take "No" for an answer until you get a full and complete explanation as to why not in terms you can actually understand

    9) remember, paper is cheap. If you don't ask, you won't get. No insurance company is going to volunteer payment. You need to ask for it

    10) if you feel you are getting jacked around, call your State's regulator and make a complaint; if they can't help, every policy provides for arbitration - unless you are in NY where arbitration is NOT mandatory

    11) you don't have to take it lying down, so don't!

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