6 years ago ·
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Paying for insurance is something that many people don’t like doing. It’s a bill for a “possible”, a “maybe”, a “just in case”. With the cost of everything going up, insurance seems like a bill that can be sacrificed. The Insurance Information Institute reports that the cost of homeowner’s insurance on average rose by 3.6% in 2015. With salaries not rising as fast as insurance rates, saving money is key.
So, how can you obtain the appropriate amount of coverage and save on your premium? It takes a little education (homeowner’s Insurance 101) and research. This article will provide information on:
- Is homeowner’s insurance required?
- Identifying the amount of coverage, you need.
- How your premium is calculated by the insurers.
- Things that affect your premium.
- How to lower your premium.
Let’s get into it!
Is Homeowner’s Insurance Required?
Auto insurance is a requirement; however, homeowner’s insurance isn’t. If you no longer have a lien holder that mandates you to purchase homeowner’s insurance, by law you are not required to have it. I recommend keeping a homeowner’s insurance policy. Liability and risk are everywhere.
You may be thinking, “I have a home warranty that will cover me”. Home warranties provide several protections. They cover things like refrigerator and air conditioning repair in the event of a mechanical breakdown. What they don’t provide is coverage for things like theft and/or weather events.
Identifying the Amount of Coverage, You Need
You purchase many types of insurance: auto insurance, life insurance, health insurance, etc.; and just like those other policies, you want to make sure that you are purchasing all the coverage required and needed. Have more coverage than you need, and it leads to high premiums; not buying enough coverage can cause a financial crisis. Your location must also be considered. Are you in a location that is prone to hurricanes, earthquakes, or floods?
- Life is full of surprises and we have no control: floods, tornadoes, and liability incidents like animal bites and falls.
- Have you spent more than a few thousand dollars creating your perfect home? Consider your personal property.
- What about parties and events at your home? Someone that slipped on your icy front doorstep could sue you. Those types of incidents have medical bills and court costs associated with them.
- Think about temporary housing and your financial situation. Can you afford to cover a hotel stay while the damage to your home is being repaired?
Types of Coverage
There are three coverage levels/tiers for your homeowner’s insurance policy:
ACV– Actual Cash Value: an ACV policy is the cheapest level/tier of homeowner’s insurance protection. This coverage factors in the depreciation (the reduction of the monetary value of an asset with the passage of time, due in particular to wear and tear) to the home and your belongings and pays today’s value with depreciation up to the policy limit.
Replacement Cost: unlike ACV, replacement cost means that the insurance company will pay whatever today’s cost is to replace the damaged belongings up to the policy limit. Replacement cost doesn’t calculate depreciation.
Guaranteed Replacement Cost: similar to replacement cost coverage, guaranteed replacement cost doesn’t factor in depreciation. It also allows the policy owner to exceed their policy limit. Basically, this coverage pays whatever it takes to replace the things you lost. This will be your most expensive level/tier for coverage and not all insurers offer this level/tier of coverage.
How your Premium is Calculated by Insurers
The insurance company’s goal is to charge enough premium to cover your claims, operational expenses, and still make a profit. One of the main factors considered when calculating homeowner’s insurance premiums is the individual’s credit. Your credit score can impact your premium. Insurance companies evaluate risk so, the higher the chances of an accident/incident, the higher your premium.
Have you ever heard of C.O.P.E? In the insurance world, C.O.P.E stands for construction, occupancy, protection, and exposure. These are basic factors used for rating for homeowners and/or building insurance. You will have to answer highly detailed and specific questions for each factor.
Why is C.O.P.E important? It tells insurers everything about the property that they are rating to insure.
- Construction: this tells the insurer the materials used to build your home, including the type of framing, support, interior finishing, and the heating and cooling systems in the home.
- Occupancy: for a residence, occupancy is important because theft and vandalism are more likely to occur in a vacant home. This means more claims and that means higher premiums. Having the property occupied may save you money on your premium.
- Protection: having sprinkler systems, smoke detectors, fire alarms, and fire extinguishers can save you money. Insurers like to know that the home is protected.
- Exposure: is your home near the ocean? In a flood area? Near a fire department? Insurer’s rate your home’s exposure to things like hurricanes and proximity to hazardous buildings, like a firework factory.
Deductibles
For many, a low deductible is more important than a low monthly premium. For others, it is more important to have lower monthly premiums and a higher deductible. When you file a claim, your deductible is your out of pocket expense toward the repair/replacement of your home and/or belongings. Consider what you can afford; raising your deductible from $500 to $1000 can lead to considerable savings.
Shopping Around
It is best to discuss your needs with an Insurance Agent. Independent Insurance Agents have many associations with insurers. An agent can do the hard work of researching your needs. Be prepared to have certain information: year the home was built, the age of plumbing, roof, and electrical; the number of claims filed over the years, the location of the home, etc.
If you prefer to do initial research on your own, consider the following websites for information, calculators, and the average cost of homeowner’s insurance by state:
https://www.insurance.com/average-home-insurance-rates
https://www.valchoice.com/consumer-insurance-information/home-insurance-premium-calculator/
www.reviews.com
Discounts
Discounts are the best! Be sure to tell your agent about the protection of sprinkler systems and fire extinguishers. This will help drill down the insurers that offer discounts. Many insurer’s offer a variety of policy discounts including discounts for having a non-smoking residence.
Reviews.com created their list of The Best Cheap Homeowners Insurance for 2018. They rated 5 companies with comprehensive coverage, reliable customer service, and best opportunities for discounts. Below are the top 5 with their consumer report score and number of discounts:
- Amica: A+ rating- 10 discounts
- Allstate: A+ rating- 11 discounts
- State Farm: A++ rating- 9 discounts
- Progressive: A+ rating- number of discounts varies by state
- MetLife: A+ rating- 8 discounts
Please consider discussing your needs with an insurance agent. It’s the best way to get the coverage that you need. Additionally, if you have an active homeowner’s insurance policy that hasn’t been reviewed in over 2 years, you are likely paying too much. It is important to review your policy for updates/changes every 2-3 years.
Veronica Castillo is a licensed insurance veteran with 11 years of insurance industry experience. Her expertise rest within property and casualty claims handling and policy interpretation (personal auto, commercial auto, bodily injury, med pay/pip, and worker’s compensation). She is currently working as an Independent Writer in the both the Insurance and Human Resources-Legal industries. She loves a good investigation and advocates for the disabled workforce. Find her on LinkedIn.