Home insurance may be one of the factors you consider least in your total finances. Even so, every year when that renewal package comes you’ll just sign it and pay it without even reading what you’re signing or knowing what you’re paying for. Unfortunately, years of recurring insurance abuse has led companies to clamp down on their policies and payouts, so it’s more important than ever to know what’s in your policy. The days of insurance covering any and all expenses from any type of repair are over. The insurance company’s job is to take in the most money possible and pay out the least money possible. That is their job and they can’t be blamed for behaving like it. The kicker is that unless you own your home outright, your mortgage lender will almost certainly require you to purchase homeowner’s insurance. So if it’s something that you are most likely required to buy anyway, the least we can do is become educated consumers and be able to choose the product that most closely fulfills the function we expect it to perform. And while we’re at it, maybe we can also save a few bucks without reducing coverage levels.
Think like an insurer
The best way to buy the best insurance for you is to think like an insurance company. Remember, the goal of the insurance company is to take in the most money possible and pay out the least money possible. That might sound harsh, but another way to look at it is to think about any steps you as a homeowner can take to make yourself seem less risky in the eyes of an insurer. Less risk of a payout means the insurer will want your less risky business and will incentivize you with lower monthly premiums. Each premium reduction is of course on a case-by-case, and company-by-company basis, so the only way to know what your company offers is to ask your agent. However, there are common industry practices that are very helpful to be aware of.
First, let’s take a look at disaster prevention. Insurers have access to decades of data and know exactly how prone to a specific disaster an environment is, and they also know exactly what types of materials hold up best under certain disastrous conditions. Storm shutters, reinforced roofs, and strong roofing materials will yield premium savings if high, hurricane-force wind is a possibility. Modernizing your heating, electric, or plumbing means less of a risk of damage from fire and water. Retrofitting an old home can make it more earthquake-resistant. Thinking outside the box is helpful too. Besides the peace of mind an automatic power generator affords, it means that your pipes won’t freeze and possibly burst if you lose power. Your insurance company knows that and will reward you for it. Also consider wildfire prevention. Having empty space surrounding your house and removing dead or dying trees will be looked on very favorably.
Next up is home security. Preventing weather damage is one thing, but insurance companies will also reward you for taking steps to mitigate how much damage gets done under man-made disasters. A deadbolt on your doors or a functional burglar alarm system isn’t just ensuring the safety of your family, it’s also ensuring the safety of your physical belongings, which reduces the cost of covering those physical belongings. Installing a sprinkler system isn’t for everyone, but one of the reasons they are so common in public buildings is the insurance savings that comes from preventing a small, recoverable fire from spreading into a catastrophic loss. To really go all out in this category, you can install an alarm that will ring at fire, police, or other monitoring stations.
Last are some miscellaneous lifestyle choices that an insurer will make you pay for even if you don’t realize it. Pools and trampolines are a ton of fun and great for entertaining guests, but from the insurer’s perspective that backyard entertainment is a liability that you have opted into. If you do ever install a pool or trampoline, you should research the expected premium increase when you calculate the total cost of the equipment. The next subject is a little more sensitive, but we’re thinking like an insurer here. Owning a Rottweiler, Doberman Pinscher, or Pit Bull will limit your coverage or in some cases even void your policy. There’s no arguing with it, and there’s just no way around it.
Aside from being able to recognize the benefits from an assortment of specific home features, the other job of an educated consumer is to make some front-end choices that will get the most value out of the insurance system in the most practical way. It sounds almost too simple to state, but never forget the power of shopping around. The reasoning has to do with complicated assessments of how risk pools are composed at any given time, but suffice to say, two different companies will never charge exactly the same amount to cover exactly the same house on the exact same day. While you’re at it, take a look at your car insurance. If an insurance company carries both home and auto policies, they’ll likely give you a discount for bundling together two policies at once.
Also, be aware of how much coverage is the right amount of coverage. The cost you paid for your property includes the price of the land it sits on, which means the sale price of the house is almost certainly not the same as the cost to rebuild the house. An insurance company would be more than happy to insure you for the sale price of the whole property, but that will likely work out to the insurer’s benefit if they ever do have to cover a major claim. If the cost to rebuild is lower than the cost of the whole property, it means you have too much insurance and you’re paying too high of a monthly premium. If the cost to rebuild is higher than the sale price of the house, it means you have too little insurance and a major claim won’t be fully covered. Consumers should expect a home insurance policy to actually be able to cover the home in the event of catastrophic damage–no more, and no less.
Insurance shopping isn’t the only place where educated choices will be rewarded. Before you even get to wondering which kind of policy to buy, smart home shopping will determine your future risk level and how good your best case scenario is. Things that will help are if the home is close to a fire hydrant or fire station; if the community has a professional instead of a volunteer fire department; and if the electrical, heating, and plumbing are less than 10 years old. No matter what, you should always check a home’s CLUE report before buying it. The Comprehensive Loss Underwriting Exchange keeps a complete history of all claims filed at a property. If a home has a long history of claims it will be assumed to be at higher risk of future claims and you will end up paying for it when you go to insure the house even if you had nothing to do with the past claims.
As a final curve ball for the consumer, no standard policies include flood or earthquake coverage. It is always up to the individual to decide if they want flood and earthquake added in to their policy. If you don’t live on a fault line, the chance of incurring serious damage from an earthquake is so small that it can make a lot of sense to pass on the earthquake coverage. Flood coverage needs to be looked at a little more closely. Flood repair costs average in the tens of thousands of dollars. Even if you only live in a low to mid-risk flood zone, it makes a lot of sense to opt into the flood coverage. It makes quite a lot more sense to opt into flood coverage in a high-risk zone, but the premiums will be higher than other areas. Flood-resistant structural improvements are a significant one time cost, but the good news is they will significantly lower flood coverage premiums in the long run.
For one last strategy in reducing insurance premiums we have to take a very close look at what a deductible is and how it works. The deductible is the amount the homeowner has to pay in any claim before the insurer pays the rest. A low deductible, say $50, appears very attractive at first glance when compared with a one or two thousand dollar deductible. However, focusing on the amount of the deductible is the wrong way of looking at it. A low deductible is only beneficial if one were to make many separate insurance claims. But that should never happen, and insurance company practice is to penalize customers who file small frivolous claims. Obviously insurers don’t like paying out claims, but they especially hate paying out many small claims. Filing a claim that won’t be covered is even more detrimental, as each claim represents hours of research and follow up from the company. What you may not know is that a person’s insurance claim history stays with them for at least 5 years and possibly through their entire life, and will be considered when calculating the premium cost of any future insurance purchase. The best way to protect yourself from skyrocketing premium costs is to only ever file a claim in the event of catastrophic damage. The point of insurance is to protect yourself from becoming suddenly homeless in the event of catastrophic damage, not to get all the fancy new upgrades you can think of for free. Filing a claim should be a last resort because of the premium increase a claim will yield. Since it is not in the homeowner’s interest to file small claims, you should raise your deductible to as high as your company offers. Using homeowners insurance for claims under $5,000 will never work out in your favor, so just raise your deductible to as close to $5,000 as possible, pay all small claims yourself, and pocket the savings you’ll see in your premiums. In the most simple terms, a low deductible means paying a bunch of large monthly payments and one small payment, whereas raising your deductible to as high as you can afford means a bunch of smaller payments and only one larger payment.