If you tune into the Weather Channel on a regular basis, chances are you saw Jim Cantore flogging Tropical Storm Alberto. Hurricane season is a good time to bash big bad insurance companies, too. Disaster makes good copy. That's Journalism 101.
I don't like insurance companies. They have boocoodles of warts, slimy practices, and sleazy salesmen. Fortunately, the average customer can usually eliminate surprises by doing some basic preparation.
One big misunderstanding people have is how co-insurance works with homeowners policies. The co-insurance clause requires that you carry coverage of at least 80% of your home's value if you want complete protection in return.
So, if your home is fully insured and it's completely destroyed by a listed peril, then your policy will pay the full replacement value with no depreciation. The coffee stain on the carpet, junior's "impressionist" art on his bedroom walls, the balky garage door opener all go away and are replaced with no depreciation.
You're even covered for partial damage. Let's say you have a goddess of a wife who knows how to fry chicken, but maybe she's forgetful. Grease gets too hot, and your kitchen gets smoke and water damage. Again, your damages are covered with no depreciation.
This is a great deal -- think of the normal wear and tear on a home. But there are a couple of catches. (Of course, there always are.)
You must have your home insured for 80% of its replacement value. If you're underinsured -- this is not uncommon -- then essentially, a penalty kicks in. It's a complex formula whereby the penalty increases the more you're underinsured. Also, the contents of your home may be excluded or subject to depreciation.
What do you do? Evaluate your policy. Arrgh.... Most people would rather be poked in the eye with a sharp stick, and rightly so. Here's a shortcut.
Most of the information you'll need will be on the Declaration Page. That's easy to find because it's labeled "DECLARATION PAGE" in bold print and is usually the very first page of the policy.
Scan down and examine your limits. Don't forget collectibles, high-tech electronics, or guns. Make sure they're covered.
People make two serious mistakes. First, they never discuss their policy with their agent. Second, they focus on the premiums. Only a fool (small "f") would think saving money by lowering coverage is wise.
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For more in-depth info about insurance, take a sneak peek at our new personal finance service, Green Light.