Homeowners insurance is a staple in the lives of everyone owning a home with a mortgage. Picking the right policy can feel more distant when you include the premiums in your mortgage payment because the money does not come directly out of your pocket. Regardless of how you pay for the policy, there are several factors, which are important in terms of what the policy will cover and how much you will pay.
Insurance is Really About Risk Management
When deciding the level of coverage and your deductible, consider your ability to cover financial losses independent of insurance. Anything left un-insured could result in higher out-of-pocket costs. The two key areas to review are the policy exclusions, which identifies losses the policy will not cover, and the deductible, which determines the amount you must pay before insurance coverage begins.
Exclusions commonly eliminate damage from floods, earthquakes, volcanoes, and other natural disasters. Expensive items like fur, jewelry, firearms, and artwork often come with limited payouts. For example, the policy might only pay $250 towards the loss. If you own property worth more or maintains a highly valued collection, you might need to purchase a rider for adequate coverage.
Policy deductibles range from $250 to several thousand dollars, with most homeowners choosing to pay either $500 or $1000. Selecting a higher amount will save money on your policy. However, if you do not have adequate reserves in an emergency fund, you could be left underinsured in the event of a claim.
Shop for the Best Rate at Each Renewal
The cost of a policy will depend on your location, the home’s value, past claims, credit score, and other factors. Look for ways to save money by combining policies (example: home and auto), adjusting your deductible, and comparing prices. Insurance companies use rate categories to set the price of a policy, which vary between companies and can change over time. Don’t assume your current policy offers the most competitive rate.
When comparing prices evaluate the coverage, customer reviews, and price, before determining the best insurance company for your needs. Buying the right type of coverage is as important as the dollar amount of coverage offered. When it comes to insurance, the value is more important than the lowest price. You don’t want to experience a loss and then add the stress of working through a complicated claims process and finding the company does not make timely payments.
Work with an insurance agent who takes the time to explain your policy and has an interest in providing the right level of coverage rather than using a one size fits all approach. The cost of talking to an agent or buying online does not impact the price.
Think Twice Before Filing a Claim
You are paying for insurance and want coverage when you have a loss. However, making frequent claims can keep rates high. Insurance companies rely on a database called CLUE (Comprehensive Loss Underwriting Exchange), which tracks homeowner claims for seven years. Once you file, it can be hard to find lower rates even through price comparisons.
Filing a claim will almost always result in higher premiums, except in states that prohibit the practice. Some companies will not increase premiums on small claim amounts. Know the company policy before filing a low-cost claim.
For small losses, consider paying out of pocket to keep your rates in check and use the policy only for catastrophic events.
Underinsuring Your Home Can Devastate Your Finances
One of the biggest mistakes a homeowner makes is underinsuring your home. In the event of a total loss, you might not receive enough money to replace your home. Perils and natural disasters do not void the mortgage contract, leaving you to make payments on an uninhabitable home.
Saving money by underinsuring the property could leave you with a foreclosure or paying the existing mortgage and rent on a new place.
To avoid this situation, review the coverage provided in the event of a total loss. In most cases, you can choose to insure either the market or replacement value of the home. The market value will provide enough money to pay off the existing mortgage, but may not be enough to rebuild the home. Replacement value takes into account the cost of removal and labor and materials to rebuild. It is often the more expensive coverage, but gives you a higher dollar amount in the event of a total loss.
To Escrow Insurance Payments or Not
When you apply for a home loan, the majority of lenders will encourage you to escrow payments for taxes and insurance. Companies like escrows because it protects the lender's loan and ensures the taxes and insurance remain current. Many homeowners do not realize the escrow is optional, rather than mandatory.
The benefits of an escrow are predictability. You make equal monthly payments, combined with your mortgage and do not have an annual bill for either taxes or insurance.
The downside is that you tend to let your homeowner’s insurance policy roll over each year with the same company without updating. Over time you can become under-insured or end up with non-competitive rates.
When you choose to escrow payments, you will fund one year’s worth of premiums as part of the closing costs. You then make monthly payments into the escrow account each month, giving you enough funds to make the payment for subsequent years.
Opting out of the escrow gives you the responsibility to pay taxes and insurance independently. Most insurance companies allow you to make payments monthly, quarterly, or annually. In some cases, the lender will charge a one-time fee when you choose to make your own payments.
Homeowner’s insurance protects the largest investment most people will ever make. To protect that investment, clearly understand your policy and the coverage offered. Also, take the time to ensure you are receiving the best value for your money.
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