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 Floodsmart.gov 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.
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