I have to admit, I hate writing that check to the insurance company for my homeowner’s insurance policy. Why waste money when I’ve never had a claim.
Last week I got a fresh reminder of why we do. In the middle of the sweltering summer heat there stood friends of mine staring at what used to be their dream home. It is now a pile of charred rubble with melted toys littering the yard.
It only took an instant and their most financially valuable asset was destroyed. Thankfully, no one was injured and they have insurance to replace their possessions.
When we start working with a new client one item we cover is a review of their homeowner’s policy. Obviously, it is best to review your coverage before you have a claim.
Be realistic about the coverage you need starting with coverage for your structure. Make sure you have replacement cost coverage and not actual cash value, or depreciated, coverage. This will help protect you against inflation.
Additionally, talk to area builders to get a good idea of what it would cost to rebuild your home. Simply using the appraisal district valuation or a general “rule of thumb” may leave you well off the amount actually needed. This is especially true if you have many custom features in your house.
Assess your ownership of jewelry, guns, art or other collectibles. Although most homeowner’s policies provide some coverage for these items, it is often limited to only $5,000. As such, you may need to get an additional endorsement to specifically cover these items. The same concerns are present if you operate a business out of your home.
With any form of insurance, it is all a matter of transferring risk. At a minimum, you want to transfer catastrophic risk—in case the house burns down or blows away. However, you don’t want to buy insurance to cover every broken window or torn shingle. The more you ask an insurance company to cover, the higher your premiums will be. Most of our clients are willing to come out of pocket with a few thousand dollars as long as the insurance company covers the really large losses.
Once we get past a review of insurance we recommend a few other things such as:
- Class A-B-C rated fire extinguishers to cover many fires around the house including combustible materials such as paper and wood, flammable liquids like gas, grease and oil and electrical equipment. Keep one near the kitchen, the garage and the master bedroom. It can’t hurt to carry one in your vehicles either.
- Smoke alarms in every room of your house and garage—not just the kitchen. Although they may not save your house, an extra fifteen seconds of notice may save your life. Carbon monoxide detectors should be used in all areas supplied with natural gas. If the alarms directly notify police and fire personnel you may qualify for a discount on your insurance.
- A fire proof safe large enough to store all critical documents and records.
- Videotape your assets once a year. Store the recording offsite. If you have a catastrophe, it is almost impossible to remember everything you have crammed in every nook and cranny of your house. Even if you do remember, it removes much of the question as to what contents you had in your home.
Although planning for homeowner’s insurance is about as exciting as watching paint dry, you will truly appreciate it if disaster strikes.