Insure Your House Properly

By CONSUMER REPORTS 

Homeowner’s insurance is often purchased in haste and needed only when a rare calamity strikes. It is easy to overpay if you insure for the full value of your home, even though it might not cost nearly that much to rebuild. It is also common to depend on an insurance agent to tell you the appropriate level of coverage.

Underinsuring could be a much bigger mistake. If your home were destroyed, your miscalculations could cost hundreds of thousands of dollars. It is estimated that 70 percent of American homes are underinsured by an average of 35 percent.

To find out what coverage you need for your home, we recommend that you determine – as precisely as possible – what it would cost to rebuild your house and replace its contents. A custom-home builder will know local construction costs, or you can reasonably arrive at an approximate re-placement cost on your own by taking some measure-ments of your home and doing a bit of homework on local building costs. You will also need to prepare an inventory of your home’s contents. The best way to document what you own is to take a camcorder or a still camera from room to room, noting where you bought each item and how much you paid.

Supplement that with receipts, and store the information in a bank safe-deposit box. The whole job will take you about one day.

You’ll find out how well the insurer you choose will back up its promises only when you can least afford to have doubts – after you have filed a claim. But here are some guidelines to follow that will help you make the best possible choice if you are buying a new policy or renewing your current one:

• A standard policy (called an HO-3) is appropriate for most owners of single-family homes. It will protect your home and contents against damage caused by fires, lightening, ice, snow, vandalism and theft, and (in most states) windstorms and hail, among other named perils.
• Insure your home for 100 percent of its reconstruction cost. A policy that offers unlimited replacement-cost coverage is the best choice. Remember to upgrade your coverage to reflect any major home improvements you make.
• Protect your personal belongings. When you insure your home at 100 percent of its replacement cost, your carrier will typically cover your possessions for 70 to 75 percent of the value of the structure. That may be sufficient, but even if you’ve purchased guaranteed-replacement cost coverage for your home, ask specifically for replacement-cost coverage for its contents. Without it, you will receive only the depreciated value of anything damaged or stolen.
• Cover your assets. A homeowner’s policy also provides liability protection against injury or damage done to others while on your property. We recommend that you have $250,000 to $300,000 of basic liability coverage.
• With a typical policy, you can save 12 percent annually on your premium by raising your deductible from $250 to $500 – and twice as much by raising it to $1,000. Even if you end up paying out-of-pocket costs on a single claim, you will probably save money over time, since the average homeowner files a claim only once every 10 years or so. • Consider a building-code endorsement if you own an older home. It will pay a proportion of the insured value of your dwelling to upgrade wiring, plumbing or other structural features required to bring your home into compliance with changes in local building codes if damage forces you to rebuild.
• Your basic policy won’t cover any business property or office equipment in your home valued at more than $2,500. You may need to buy additional coverage.

Your regular homeowner’s policy won’t insure for losses resulting from mudslides or flooding. For that you will need federal flood insurance.