Tuesday, March 29, 2011

Shopping your HOMEOWNERS Insurance

Note: This is an update of a 2009 Article.

 An Independent Insurance Agent can provide you with competitive quotes on homeowner's insurance and save you hundreds of dollars a year.

Many folks don't think twice about their homeowner's insurance. Yea, they've got it, but they don't pay attention too much to what it covers or costs. They picked the Insurance Agent their Real Estate Agent recommended and just assumed that what the Agent quoted was what insurance cost - and that was that.

And since most people pay their homeowner's insurance as part of their monthly mortgage payment, it doesn't seem like a lot of money - maybe $100 a month or so.  But if you could save $500 a year, wouldn't you do that, even if it was less than $50 a month in savings?

The few that do think about their homeowner's policies are the one's that drive up costs for everybody else. They look at the policy like a Chinese take-out menu and think to themselves, "Oh, I'll have a glass claim, and a tree damage claim, and a wind and hail claim, and do I get eggroll with that?" Those are the types of folks who, whenever anything bad happens in their lives, wants someone else to pay for it. And their frivolous claims drive up costs for everyone else - and may constitute fraud as well.

When an accident, storm, fire, or other catastrophe happens, it should not be like a vacation in Jamaica, where not only are you made whole, but you come out ahead. Insurance companies sometimes do this (inexplicably) and it adds to the overall cost of insurance for the rest of us. Other companies take a hard line on payouts, which means lower premiums. But then policyholders (the second type mentioned above) whine about how the insurance "doesn't pay for anything".

Actually, the reason why insurance companies like to sell cradle-to-grave coverage is that it makes money. They use fear and the apparent low price of the coverage to get you to sign up for it, just as pushy salesmen try to get you to sign up for often worthless extended warranties. A few hundred a year for "peace of mind" seems trivial. But again, over the years, this adds up - and if you never have a claim, you've wasted a lot of money on peace of mind.

Frankly, I think you are better off having less insurance and paying less for it. Paying a lot for "cradle to grave" coverage over the years can add up to a lot of money. Paying $500 extra a year for homeowners insurance (it can be done) over the period of your working life, can add up to $15,000 in savings alone - with compound interest at 5% per annum, this could be as much as 34,880.39 invested. Wasting a "little" money on extra insurance can add up to a lot over time.

How can you cut your homeowner's insurance expenses? To begin with, stop thinking of insurance as something that should cover the minor tragedies in your life. Your son throws a softball through a window - you should be thinking of calling a glass company, not your insurance agent.

Yes, some whoop-de-do insurance polices provide glass coverage for not a lot of money per year - and insulated glass windows are expensive. But you know something funny? I've owned a home for over 25 years, plus had rental properties, and and office building. None of them has ever had a broken window. It is a fairly rare occurrence. So paying "only" $25 a year extra for glass breakage protection is a lot of money if you think about it. You can buy a new insulated window at Lowes for $99.

Raising your deductible is the main way to drastically cut costs, while still making sure you are protected for catastrophic coverage. That is what you should think of insurance as - a safety net, not a bank account. Insurance is there to help ameliorate losses, not make you better off than you were before. And it isn't there to pay for trivial things - or at least it shouldn't be.

First, check with your mortgage holder to see how high a deductible they will live with. Most will go to 3% to 5% of borrowed amount. Most insurance companies offer $5,000 and even $10,000 deductibles. Yes, that is a lot of money, but we are talking about paying off your loan if your house burns down. That is the main thing here (and probably the primary reason you have insurance). If you are willing to take a risk on that deducible amount, you will reap the rewards of lower premiums.

For one of my homeowner's policies, the amount saved was nearly $500, by going from $500 to $10,000 deductible. The policy went from $1300 a year to $800 a year. How much a deductible you should use depends on your comfort level, financial situation, and risk factors, of course. But going to even a $1000 deductible can cut costs dramatically, as it eliminates a lot of those frivolous claims that the company has to deal with (and spend money on).

Check also for "junk" coverage on your policy. One insurance company automatically added "Identity Theft Protection" insurance without my knowledge. As I have noted before, the concept of Identity Theft is hyped by financial institutions to keep you scared (see my article Fear, the Least Useful Emotion) and get you to bu these things. But let's assume I had an identity theft situation. If I never read my homeowner's policy, I never would have known I had it anyway, and never thought to file a claim on it. And guess how filing a claim on policies like that works out. Just guess.

Check also the coverage for your home. Some agents routinely over-insure homes. Larger policies mean larger premiums, which in turn mean larger commissions. So check to be sure the amount listed on the policy is not overkill. Granted, the opposite can also happen, if the policy is too small. Check the average cost of construction in your area (per square foot) and calculate accordingly. Bear in mind that even in a catastrophic fire, much structure of a house can be salvaged (such as the foundation) so rebuilding can be less expensive than building a new house from scratch.

Contents coverage is another area to check. It may be part of the policy and based on the value of the house. On some policies, it is not optional and you have to have it. For separate flood and wind policies, however, it may be optional, and you should weigh whether it is necessary. For example, for my vacation home, furnished entirely in wicker and rattan (at a cost of $15,000) is it worth insuring the furniture? Yes, it would be nice to get a "payoff" if a storm hit, but again, that is taking the lottery mentality to insurance. A storm, flood, or fire is NOT a welcome event and you should not be planning your life around potential disasters.

Pricing insurance before you buy a home is also important. The costs vary from State to State, Company to Company, and area to area. Coastal areas may be much higher and also require separate flood and wind policies, as we do here in Coastal Georgia. Other areas with high fire risks may also be more expensive. If you have a choice of where to live, consider the insurance costs. If you end up retiring there, it will make a difference to you.

Also consider the size and type of home you have or want. Larger homes cost more to insure. So the giant mini-mansion is not only more costly to buy and more costly to maintain, heat, and cool, it is more costly to insure. It might impressing strangers with an appearance of wealth, while driving you to the poor house. Buying a house with extra bedrooms for "resale value" or "because the grandkids might visit" is not really cost-effective, in the long run.

It also pays to SHOP your policy around, every so often. You might spend an hour or two talking to agents, but once you've found the best deal, it pretty much runs on autopilot after that. You may get a good deal by insuring your home with the same company than insures your cars - or not. Oftentimes, agents offer these "discounts" merely to mask overpricing on auto policies. You think you are getting a "deal" when you are not. I have found that separate auto and home policies, properly shopped, beats the "combined discount" by over a thousand dollars a years.

Flood insurance is usually offered through FEMA and other government agencies. You usually have little choice here, but you should check to be sure you are rated on the proper flood zone, and also bear in mind that FEMA re-assigns flood zone ratings occasionally. You can get an elevation survey done for your home for about $300 or so. If you are above a certain level, it can save a significant amount on flood insurance. Here in Georgia, I had a survey done, and I missed the golden mark by a mere six inches. If the house were 6 inches higher in elevation, my flood insurance would have dropped by at least $100 to $200 a year.

Again, the extra cost of over-insuring your home may seem trivial. But if you add up the savings over the years you will be living in your home, it comes out to a substantial amount of money. And as I noted in my entry Disposable Income and Cost Cutting, every dollar you save in reduced costs may be equivalent to a pay raise of ten times that amount, in terms of the increase to your disposable income.

At the very least, you should remember that a dollar saved is a dollar earned - tax-free. If you are in the 27.5% marginal bracket, you may be paying as much as 50% in taxes on that last dollar, in terms of Federal, State, Social Security and Medicare taxes. A dollar saved, thus equates directly to a $1.50 earned.

If you think outside the box, and approach each expense as an exercise in creativity, you'd be surprised how much you can save - and how better you can live.

UPDATE:  March 2011

I recently shopped my homeowner's policy here on the Island and saved a whopping $1500 a year in costs.  This is a staggering amount of money.  The local independent agent could write a single policy for both homeowner's coverage and wind coverage, eliminating one whole policy.  Flood insurance, of course, is in a pool, and thus there are no savings, unless I can jack the house up a foot.

Most people go with the recommendation of their Real Estate Agent as to which company to use, and oftentimes, this is the fellow (or gal) who takes the Real Estate Agent out to lunch - a lot.  Shop around, all it takes is a few phone calls.

Also, as one independent agent noted, and as my personal experience confirms, many of the "big" insurance companies are increasingly the worst to insure through.  As I noted, State Farm seems more interested in banking and finance these days and seems to view insurance as some sort of nuisance - they don't even write policies for whole sections of the country.  And other "big" nationwide companies are following suit.

And often, their rates are not very good, either.  I saved $500 a year by switching from State Farm to a smaller company, in New York, and saved $1500 by going from Nationwide to a smaller company here in Georgia.  These are serious amounts of money for anyone at any income level.

I am not sure how these major chains are going to survive.  State Farm has an office on every street corner, it seems, but their policies are very expensive - so who is going to buy them?  Perhaps like Amway, they make more money selling Agencies than they do insurance - and they seem to be minting an awful lot of new agents these days!  Just my hunch, but look for some fallout from this in about 1-2 years, as many of these newly minted agents in increasingly overcrowded markets find it harder to eke out a living. 

Just my hunch - you can't defy the laws of economic gravity for long.  And when you sell an overpriced product and a billion outlets, eventually people will wise up and find cheaper alternatives.

Although, I suppose you could say that about Starbucks, and they seem to keep going.... An apt analogy - State Farm is the Starbucks of Insurance.  And the barista does give you attitude with every cup!