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Foolish Advice on Homeowners' Insurance

Homeowners' insurance is deceptively simple. It's the coverage you need in the event of significant damage to your house, yet not all policies, or situations, are equal. For example, the homeowner who is covered for a fire may not be covered for a flood or an earthquake.

What's more, coverage comes in many different flavors. For example, some insurers offer guaranteed replacement policies. But these policies, which guarantee to rebuild your home no matter the cost, have proved problematic in recent years. Take the San Francisco Bay area. Insurers hit with a wave of claims from fires during the 1990s were paying $900,000 or more for homes that had originally been insured as $200,000 dwellings.

Guaranteed replacement cost policies are some of the most expensive products that fee-hunting agents offer. If you have an insurance agent with current information on construction and other costs in your area, many analysts believe that guaranteed replacement cost policies aren't worth the extra cost.

Ideally, a good policy would cover you only for what you'd need to rebuild your home on your property. Unfortunately, too many don't do that.

What should you buy?
Residents tend to overinsure when it comes to protection against fire and the like. But  that's not the greatest danger when it comes to homeowners' insurance -- exclusions are. Buying a policy without knowing what you won't get, and why, is like walking into the lion's den covered in catnip.

Consider the thousands of homeowners devastated by Hurricane Katrina. For many of the survivors, the worst damage was caused by flooding. Problem is, most hurricane coverage relates to destruction caused by high winds, rather than high water. If you're thinking that's a ludicrous and somewhat arbitrary line to draw, I'm with you. Just know before you buy that profit-seeking insurers usually disagree.

Foolish questions to ask before you buy
Therein lies the real problem for Foolish homeowners. Too many of us don't know exactly what our insurers will and won't pay for. And we're not at all clear about how what we don't know affects what we pay annually in premiums.

That's why many of the experts at our Insurance and Living Below Your Means discussion boards recommend a regular review of coverage. Doing so annually seems to be a good idea. As you go through the process -- or seek a new policy -- consider these three Foolish questions:

1. What does it cost to build in your area? There's simply no way to effectively price insurance without knowing what it would take to rebuild your home. You'll want to know the per-square-foot average construction cost for your ZIP code. Multiply that by the total area of your home, and you have a replacement cost. Insure for that amount, and then recheck pricing annually. One caveat: This data's rarely freely available, so be sure that your agent is relying on a credible source in writing your policy. Experts at the Fool's Insurance board suggest that Marshall and Swift's software is among the best.

2. What risks does your home face? Exclusions and riders are common for homeowners' insurance. In Colorado, for example, policies frequently exclude damage from mold; it's a very dry climate, and mold doesn't thrive in the Rockies, unless there's constant moisture applied from a longstanding leak. Insurers here tend to view that kind of thing as owner negligence. Other common exclusions apply to older homes, where outdated plumbing or fixtures may lead to greater risks. Be sure you understand what risks your insurer is willing to accept on your behalf; they may be far fewer than you realize.

3. What funds do you have? Many posters to the LBYM board say that the best way to save money on a homeowners' policy is through the deductible. The higher, the better -- assuming, of course, that you have or could easily raise the cash to make common repairs without involving your carrier. As Foolish poster Wheee once put it, "Would I make a claim for $2,000 [in] water damage from a burst pipe ... even if it was covered? Not a chance." Call it another excellent reason to have a well-stocked emergency fund.

Follow the money
Homeowners' insurance is essential protection for any Fool. That includes renters, too. Just because you don't own the place, that doesn't mean you shouldn't protect what's in your apartment in the event of a disaster. So be prepared, but don't pay any more than you have to. Know the replacement costs cold, and update your numbers annually.

For more on protecting your home, read about:


Read/Post Comments (4) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 01, 2008, at 10:31 PM, lanternroom wrote:

    While the average cost per square foot is a starting point, keep in mind that the "average" number may not reflect the true cost of rebuilding your home. For example, ranch houses typically cost more per square foot than two story homes of the same square footage (more roof and more foundation for the square footage of the house). Also, certain features (upgraded floor coverings, vaulted and tray cielings, skylights, upgraded trim, windows and cabinets) can also make the average number innacurate. One other thing to consider, if you have an older home that has many extra features, like coffered cielings, custom woodwork and mouldings, and extensive woodwork that was done by hand with experienced craftsment, the number needs to be increased to reflect the unique features of your home.

  • Report this Comment On November 03, 2013, at 1:40 AM, HarryKyin wrote:

    The best part of buying an insurance cover is to buy PEACE of body, mind & soul. A homeowner has to see all the pros & cons, one cannot simply go to cover everything and pay a heft sum in the premiums. One has to see what all he needs to be covered by the insurance and then it should be suitable to his pocket too.

  • Report this Comment On December 20, 2013, at 9:55 PM, Topfool753 wrote:

    Is this only for Canadians?

  • Report this Comment On June 13, 2014, at 2:35 PM, MrInsBrokerSF wrote:

    Fools may be some of the better informed consumers, still as this article noted: "Homeowners' insurance is deceptively simple". As a Agent/Broker I make my living helping people understand what may be one of the most confusing financial products sold. If you don't really understand what the policy will and won't pay for, you are gambling instead of insuring.

    People often say "I trust you to give me what I need", sounds great, but that's really a lazy way of saying I don't want to bother to learn any of this junk. That sets you up for big disappointment, in other words big unpaid claims if you have needs your agent is not aware of (because you never discussed them), or your insurance company does not offer some of the coverage you need (and maybe you assumed was included).

    Agents don't cost much. We get a small percentage of the annual premium, but what you get in return for that is essentially unlimited access to our expertise whether it's to learn about your current policy, or others you may be considering, and of course our help IF you ever have a claim.

    Compare te cost of an independent agent with a

    local attorney charging hundreds per hour, and any Fool can see the value of the independent agent. I say independent to contrast with the

    one company agents who's company's are so big they are likely the only ones a Fool has ever heard of unless the Fool is also investing in insurers.

    The captive or one company guys may be good, but they tend to focus only on sales, and may be

    have very little influence on claims which is where

    the wise Fool may need the most help.

    Whoever your agent is, unless they give you all the time you need and explain things to your satisfaction, a wise Fool would seek out someone

    who will.

    Also remember: averages are useful in discussions, but meaningless in real life. Your house may be one of a thousand built just like it in your city, but you or a previous buyer may have modified it increasing it's replacement cost. And your Personal Property will not be identical to that of all of your neighbors. Insurance is full of variables and exceptions. Getting it right or this Fool, may mean very minimal coverage with a very high deductible, but another Fool may not be comfortable with that set up, and want a much more conservative policy. It's much like investing:

    you don't tend to do well if you don't have a clue!

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