Homeowners insurance is designed to provide financial protection from the most common risks associated with homeownership. Unfortunately, if you mistakenly set up your policy wrong, you may discover that you don’t have the coverage you need until it’s too late. Here is a look at the nine most common homeowners insurance mistakes to avoid and key shopping tips for getting the right coverage.
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Mistake #1: Underinsuring your home
There are two primary reasons to choose a dwelling limit that matches your home’s replacement cost value, which is the estimated price of rebuilding it from the ground up:
- If you have a mortgage, your lender will require this much coverage.
- Insuring your home at its replacement value gives you enough money to rebuild your home after a major or total loss, whether you have a mortgage or not.
Most insurance companies use software to estimate your home’s replacement value. They base this value on your home’s specifications, building materials and quality grade. You need to provide your insurance company with accurate information about your home.
Your home’s replacement value is usually lower than its market value, which includes the value of your land and location.
Most lenders allow you to reduce your dwelling limit to 80% of its replacement value when your mortgage balance gets low enough. However, reducing your coverage to this or any amount below your home’s replacement value may leave you short on funds to rebuild after a major fire or disaster.
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Mistake #2: Not heeding the 80% rule
When you insure your home for at least 80% of its replacement value, your insurance company covers the full cost of covered repairs up to your policy’s dwelling limit, after you pay your deductible.
If you don’t meet the 80% threshold, most insurance companies apply an underinsurance penalty that reduces your payment for any claim. This can saddle you with large out-of-pocket expenses after a loss. Even moderate damage from an incident such as a kitchen fire or windstorm can put you on the hook for $10,000 or more.
Mistake #3: Ignoring your policy’s exclusions
Although standard homeowners insurance protects against many risks, it’s important to know about exclusions and limitations that may require extra coverage. The most significant include:
- Floods and earthquakes: Standard home insurance does not cover floods or earthquakes, but separate insurance is available for each of these risks.
- Sewer and drain backups: Most standard policies also exclude backups of your sewer or drainage systems. However, most home insurers offer a relatively inexpensive endorsement you can add to cover these types of incidents.
- Mold and water leaks: Mold and water leaks are only covered by homeowners insurance on a limited basis. Some companies offer endorsements that slightly broaden your protection from these risks.
Mistake #4: Not getting enough coverage for your belongings
Most people assume that the default personal property limit that comes with homeowners insurance is going to be enough to protect all their belongings. Unfortunately, this is often not true.
Most policies only provide limited coverage for jewelry and many other valuables, including fine art, antiques, silverware, collectibles and even golf clubs. You typically need to add a personal property endorsement to your policy to protect these types of items at their full value.
You also need to make sure your overall personal property limit is high enough to cover all your other belongings.
The best way to determine how much personal property coverage you need is to create an itemized list of your possessions and value of each item or set. Your personal property limit should match or exceed the combined value of your belongings.
Once you’ve created your personal property list, you can add additional details to turn it into a home inventory (see Mistake #5).
Mistake #5: Not creating a home inventory
Creating a home inventory is the best way to document personal property losses to your insurance company after a burglary, fire or other covered peril damages your belongings.
In the aftermath of a disaster, it’s much easier to pull information about your damaged or stolen items from your inventory than it is to rely on your memory.
Make sure to include relevant details about each item, including purchase prices, dates and locations. Include photos of the items in your home and receipts for big-ticket items, too, if you can.
You only need your smartphone camera and a spreadsheet to get started. Smartphone apps are also available.
Mistake #6: Choosing the wrong deductible
Although increasing your deductible lowers your home insurance rate, choosing a deductible that is too high can put you in a financial bind after a burglary, fire or other covered disaster.
Ideally, your deductible should match the highest amount you can reasonably afford to cover your share of a property damage or theft claim.
In many parts of the country, insurance companies separate the deductible you pay for windstorm and/or hurricane damage from your deductible for normal perils such as fire and theft.
Make sure the deductibles in your quotes or on your current policy are not too high. When you shop, ask each company for multiple quotes showing how different deductibles affect your rate.
Mistake #7: Underestimating your liability needs
Most homeowners insurance policies come with a $100,000 personal liability limit by default. Although this may seem like a lot of money, it's often not enough.
If a worker or guest injured at your home sues you for lost wages and/or pain and suffering, the amount they may receive from a jury or in a settlement could easily exceed your policy’s default liability limit. This, in turn, could put your savings or other assets at risk.
Increasing your liability limit to an amount that matches or exceeds your net worth is the best way to protect your assets from these types of claims. Consider purchasing an umbrella policy for additional protection.
Mistake #8: Lying about your trampoline or dog
Most insurance companies send an inspector out to your home after you activate your policy.
If the inspector discovers a risk you have not previously disclosed, the insurance company may raise your rate or cancel your policy. Or it may not cover a liability claim that arises from a risk you have not previously disclosed.
Mistake #9: Forgetting to disclose your home improvements
Since home improvements can change your home’s replacement value, it’s important to let your insurance company know about any additions or renovations you complete.
Otherwise, these improvements may not be covered after a disaster.
Although additions and improvements often raise your homeowners insurance rate, these increases tend to be small. If your improvements include a roof replacement or upgrades to your heating, plumbing and/or electrical systems, you may even qualify for a discount.
Key tips for avoiding homeowners insurance mistakes
The most costly insurance mistakes homeowners make are often the result of unfamiliarity with insurance or a lack of communication with an insurance company. Here’s how to avoid having either of these factors prevent you from getting the right coverage for your home.
Review the coverage limits in your quotes or policy
When you review quotes or your existing policy, make sure the limits for each coverage match your needs. If any seem too high or too low, ask the insurance agent how they arrived at them, and correct any misinformation they may have about you or your home.
Ask about exclusions and endorsements
Make sure you fully understand the risks your home insurance policy does not cover, as well as the insurance options that may be available to fill these gaps.
Adding an endorsement to cover sewer and drain backups is almost always worth the price. Depending on where you live, earthquake and/or flood insurance may also be worth the additional expense.
Discuss your home’s unique features with your agent
Don’t be shy about asking your insurance agent if any unique features of your home need special coverage.
For example, if you have a finished basement, find out how your policy covers basement flooding and whether you need an endorsement or flood insurance policy. Or if you’ve converted a detached garage into a living area, make sure your policy covers the improvements inside, not just the structure.
Don’t focus on price alone
Overpaying for insurance is never good. Not having the right coverage when you need it is worse. In addition to a low price, your insurance company needs to provide coverage that matches your needs and responsive customer service.
J.D. Power’s annual homeowners insurance and claims satisfaction reports are among the most credible customer-service ratings for large homeowners insurance companies. You may also find helpful online reviews of home insurance agents in your area on Yelp, Trustpilot and the Better Business Bureau’s website.
Paying a little more for insurance from a company with high customer-service ratings may save you money in the long run in the form of a fair, hassle-free claims payment.
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