Homeowners Insurance: Why You’re Likely Paying Too Much for Inadequate Coverage

[caption id="attachment_1879" align="alignleft" width="240"]Andrew Altfest, CFP by Andrew Altfest, CFP®
Executive Vice President and Managing Director[/caption] I recently reviewed a few of our clients’ homeowner insurance policies. In each case, the policies contained unnecessary costs and inadequate coverage. This can be a stumbling block for dentists. With this in mind, I’d like to share some common insurance problems you can avoid. Insurance planning is inefficient, partly because property owners are asked to make their own insurance decisions. This entails looking at all risks covered by policies — dwelling, contents and personal liability — then deciding how to address these risks most efficiently, now and in the future. It would be natural to think your broker or agent already did this for you, but it might not be so simple. First, the insurance you have will vary depending on whether you are working with a captive or independent insurance agent or broker. A captive agent works for a single company, and might not give quotes for the entire market. Independent agents and brokers work for more than one insurer, and can quote multiple  companies’ rates. Which should you choose? The right answer is both. A captive agent might have limited selection. Independent agents can quote rates for more insurers, but might not be able to present a quote for the insurers exclusively represented by a captive agent. No matter whom you choose,  the work on policies often is frontloaded. This means most of it is done in the beginning of the client relationship, then is too infrequently revisited to check for gaps or better options. Here are some of the disconnects from the client homeowner policies I’ve reviewed that you can avoid. Paying too much Below are a few areas to look for cost savings: Deductibles: Often, insurance policies give several levels of deductible options, meaning the amount of loss you must absorb before insurance kicks in. I have seen deductibles range from $1,000 to $25,000.  I often recommend higher-deductible plans, and here’s why. In one example I saw, raising a deductible from $5,000 to $10,000 reduced the policy’s annual premium by over $1,100 per year. That means if you do not put in a $5,000 claim for five years, you will have saved money by having a lower premium. Note that policies can have different deductibles for riders and optional coverages – evaluating each can save you money. Contents: Policies are initially quoted with off-the-shelf coverage, such as for contents and other structures (brownstone owners generally don’t need coverage for a garage). Because contents is quoted as a percentage of a home’s insured value, typically at 50 percent or 70 percent, you might be quoted a policy with contents coverage well beyond the value of your possessions. Discounts: Homeowners insurance costs can be further reduced by bundling  coverages with a single carrier.  Also, umbrella/excess liability insurance can be heavily discounted for a group. Inadequate Coverage Many policies do not provide enough coverage. I just reviewed a 10-year-old policy with an amount of coverage only one-quarter of the replacement value of the house. In the event of a devastating fire, the homeowner would have been out more than $1.5 million. Here are a few more things to keep in mind when reviewing your coverage: Replacement cost: Most policies offer “replacement cost” coverage. This means the carrier will pay to rebuild your house or apartment when there is a qualifying claim. However replacement-cost coverage does not ensure adequate coverage. Insurance companies will only reimburse to your home’s insured value. Many insurance companies will not send an appraiser to look inside your home, so the replacement cost of above standard finishes might not be reflected in a policy’s insured value. More generous coverage might include “guaranteed replacement cost,” which will cover the full rebuild amount. However, your enhanced replacement cost coverage might not be as generous as you think. Check whether there are limitations, such as caps of 115 percent or 125 percent of the home’s insured value. Even if you have guaranteed replacement cost with no limits, take a close look at your home’s insured value. In the event of a disaster you might decide to be paid a lump sum instead of rebuilding.  I have found that insurance companies can be too conservative with their building assumptions, particularly in high cost areas. Whichever coverage you have, make sure you have inventoried your contents, listing them, providing serial numbers, and by taking photos. Even photographing your interior finishes is a good idea. Loss Assessment Coverage: if you own an apartment, check to see whether you have enough loss assessment coverage. Loss assessment coverage protects you from a building assessment due to your building having inadequate coverage when the building is damaged or someone has been hurt on premises. Your loss assessment coverage should be tied to your building’s Master Policy. Since we do not sell insurance our dentist clients trust us to be their independent advisors and advocates. Proper homeowner’s insurance is, of course, just one piece of the financial planning puzzle for dentists. To discuss this or another financial planning issue, feel free to call us at (212) 406-0850.

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