Thursday, March 29, 2012

Homeowners Insurance, Once Again

Homeowners insurance costs are rising nationwide.  How can these costs be managed?

I have written about this three times before.   As I noted in my last posting, $100 a month is a lot of money, and over 30 years, adds up to a ton.   And yet, most homeowner's policies are about this much, which most people pay, as they get cradle-to-grave coverage type policies.

In the past, this was possible, as insurance was cheap, so no one bothered to think about the costs.  You called your agent and said "I need a homeowner's policy" and he took care of it and your mortgage company paid the bill through their escrow account.  No big deal!

But in recent months, rates have risen yet again.  It is not hard to understand why - Hurricanes, Tornadoes, Earthquakes, Wildfires, Mudslides, Floods - all sorts of natural disasters have been occurring recently, and insurance companies are paying out a lot of claims.

Suddenly, insurance, like property taxes, is rising up from an incidental expense of home ownership, into a major one.   At one point in my life, I was paying (or would have paid) close to $4500 a year in homeowners insurance costs.   Needless to say, this is a staggering amount of money, and one more reason why many folks are finding it harder to make ends meet.  You buy a house in Florida, and then the taxes triple, the ARM kicks in, and then the insurance goes through the roof.  It is a "perfect storm" of financial woe, for many folks - and one reason I left Florida.

When I wrote my first posting, we owned two homes and the costs were killing me.   My regular company, State Farm, raised our rates significantly, and then refused to write on our island home, so we had to shop around.   I was able, without too much trouble, knock $500 off the cost of one policy, and later, nearly $1500 off the cost of another.

A reader wrote about "replacement cost coverage" which raised a whole host of other questions.

This year, I had to shop this again, as costs were going up, and coverage here on the Island was going to run me about $2500 a year (!) with flood insurance.  And for the first time, I started to really examine what "homeowners insurance" really is and what it covers.

Like many car policies, when you buy a plan, it comes with a lot of "standard" coverages, including, sometimes, things the agents add-on that you might not need.  And there are two different standards of replacement cost - actual, or predetermined value (HO3 or HO8).

Stripping away some "junk" coverages may be a first step to reducing costs.

But first, as with car insurance, if you have a loan (mortgage) on the property, you have to clear anything you do with the mortgagee.  Your mortgage company will have limits on how much they will accept in terms of replacement cost, type of replacement cost, as well as deductible.

In terms of liability, like with car insurance, it is often cheaper to get an umbrella liability policy (a million dollars worth is about $200 a year) rather than add-on liability to your home.   However, the umbrella policy will generally require a minimum of $300,000 on your home.

With all that out of the way, let's look at the "junk" first.

1.  Medical - like with car insurance, many agents add on $1,000 to $10,000 in medical coverage, which is a trivial amount.   Some insurance companies make this part of the policy and it is not optional.   However, if it is optional, consider dumping it.   Yes, it is "only" a few dollars a year.   But it only provides a tiny amount of coverage and likely will never pay out.  You have health insurance (or should) and you have liability insurance.  When is this $1000 coverage going to be of any use?   And yea, you should have $1000 in the bank, if you own your own home.

2.  Loss of Use - I was shocked to see that on one policy, I was covered for $75,000 "loss of use" for my home.   If the house was damaged to the point where I could not live in it, they would pay me to stay elsewhere.   A friend of ours lost their house to a house fire, and the insurance company put them up in the Willard Hotel in Washington DC.  As their agent put it, "You have all this coverage to use up, so  you might as well spend it!"

To me, this is just wasteful.  A house fire should not be like a spa vacation, nor should a car accident.   If my house burned down or was damaged in a storm, I could rent an apartment locally, for no more than $1000 a month or so.   The "loss of use" coverage would cover me for 75 months at that rate - far longer than it would take to re-build my house (or buy a different one).

While it may be handy to have this coverage, consider what you really need and whether you want to pay for this.  To me, $25,000 seems like more than enough coverage.

Again, some insurance companies make this a flat amount based on home value.  Other times, agents simply add it in, proportional to home value.  Investigate to see which is the case and make a calculated call.

3.  Contents Coverage - This is not junk coverage per se, but could be an area where you are buying more insurance than you need.  The retail value of the contents of your home can be pretty significant.   If you went around your house, and added up the retail costs of everything you own, it would be a staggering number.   In addition to the big ticket items like electronics, furniture, appliances, kitchen cabinets, and the like, there are hundreds, if not thousands of small items that cost $29.95 that you might not think about.  Dishes, silverware, lamps, vacuum cleaners, tools, telephones, artwork, rugs, linens, clothing - the list goes on and on.  Even for an average middle-class American, contents could easily exceed $100,000 - in retail value.

But that's the rub, isn't it?  Most of this stuff, particularly electronics, is not worth what you paid for it, anymore.   So the actual loss may be far less.   Again, my friends in the house fire were happy to get "all new" stuff from the insurance company, which was nice.  But were they really made whole?   One problem in filing such a claim is that you might need proof of every item you want to claim (having photos helps).  In most cases, insurance "adjusters" make you an offer, based on the average contents of a home, and you settle that way.

Some insurance companies provide contents coverage based on a percentage of the value of the house - usually HALF (which tells you how much contents can be worth).  This may or may not be what you really need.  Some companies assign this value and it "comes with" the policy.  Others allow you to opt for lower coverage (or indeed, higher, although they would likely want to see proof you have contents of that value).  If you can reduce this coverage, it may reduce your premiums.

4.   Other Structures:   Often a certain percentage (10%) is allotted to other structures on the property - your storage shed, cabana, or workshop.  Again, this may be a flat amount assigned by the insurance company and not negotiable, or may be struck for a discount on your premiums.   If you have no storage shed or the like, look into this as an area of savings.

So, that takes care of potential "junk" coverages - what about the basic replacement coverage?

A home is a big investment, to be sure, and even if paid for (especially if paid for) you want to make sure it is protected.  But how much protection do you need, and of what type?

Take my island house, which we bought for about $450,000 several years ago.   After a long drought in the Real Estate business, homes here are selling again, some down the street in the low 400's.   We did not do too badly, compared to the rest of the nation.

But how much of that value is in owning the lot (or in this case, having an 80-year lease) and how much is the actual cost of the structure?

I recently visited a friend who lives in an nearly new house on the mainland, in a tidy development of three bedroom, two-bath homes, with two-car garages and designer kitchens.   Like most modern homes, his has all the neat features - the high ceilings, crown moldings, engineered hardwood floors, and the like.   Yet, houses in his neighborhood are selling for $150,000 to $200,000 - far less than here on the island.   If we assume $50,000 for the building lot, the construction cost of such a home is far less than one might think.

Yet, our home was insured for a $250,000 replacement cost.  Were we over-insuring the home?  In addition, we had a more expensive HO3replacement cost coverage, which would pay for replacement cost, regardless of amount.  I went on several insurance company sites and talked to several agents.   Based on square footage amounts and the like, most came up with a lower number - $200,000 to $225,000 as a more realistic valuation of replacement cost.

Since we do not have a mortgage, I do not have to clear the cost value with the mortgage company, so I am free to pick any number I want - as well as the type of coverage.  We decided to lower coverage to $200,000.

Now, one big savings that we enacted last year, was to go to a combined homeowner's policy that covers wind and storms, as well as fire, etc.   Our previous policy, with Nationwide, did not cover wind, so we had to buy a separate policy for that, which cost an extra $1000 a year.   Between flood coverage, basic homeowner's coverage, and the wind policy, our insurance was close to $3000 a year.   This is a staggering amount.  Combining the homeowners and wind policies, into one policy that costs $1100 a year, saves a staggering $1000.

Flood insurance is problematic, as it is all issued by the Federal Government and there is no "shopping around" the policy.  If I was to rebuild this house, I would put it on stilts (and likely be required to) and not bother with flood insurance (although if that were the case, my rates would drop down to nothing, making it affordable).

Presently, the policy costs $859 a year, which has been reduced slightly by a re-categorization of our flood area.  There has not been a flood here since the 1700's, which means either we are due for one, or it ain't gonna happen.   My flood insurance costs would drop in half, ironically, if my home were about 6" higher in elevation.  Getting an elevation certificate from a surveyor can sometimes put you into a different claim bracket.   But in my case, that did not work out.

FEMA will only go to $250,000 on a flood policy.   So before you say all those coastal homeowners are "cleaning up" on "government subsidized" flood insurance, bear in mind that some of these coastal mansions cost a lot more than $250,000.   If you lose a millon-dollar house to a flood, you are not going to be made whole by your flood policy.

I am likely going to reduce my flood coverage to $200,000 as well, although at the present time, it appears that this does not result in more than $50 in savings.  Perhaps the agent is not plugging the numbers in right.

All told, by trimming coverages, I can keep the insurance to a "reasonable" sub-$2000 level for 2012.  Needless to say, however, this is still a lot of money, and one reason not to live on a flood plain or a hurricane zone (although given the rate of natural disasters in the USA right now, is anywhere really "safe" to live?).

One problem with coastal living is that some companies (e.g. State Farm) just aren't writing policies at all, so the number of insurers is limited, and often the ones who do write are companies you never heard of, like All Risks, Johnson & Johnson, or in my case, the Georgia Farm Bureau.  With limited competition, there is little or no incentive to reduce price.

The cost of home ownership is more than just the mortgage payment - often far more.   I calculated that even with no mortgage whatsoever that my costs of living here, including insurance, utilities, property taxes, water and sewer, trash fee, fire fee and our lot rent ($400 a year) comes to a whopping $1000 a month.

And yet on of my neighbors down the street is renting her house out for $1500 a month (utilities not included, of course).  This would lead one to believe that property values may be too high, given the competing rents (although as a vacation rental, you could probably get a lot more).

A smaller house, of course, would have a smaller utility bill (currently about $166 a month), lower taxes, and cheaper insurance.  Maybe, someday down the road, when I am older, and living on the beach loses its allure, I will sell and find some cheaper home or apartment, that will allow me to do more and spend less.

It is a sad thing, but I see older people here on the island "stay in the home" even though they no longer go the beach, play golf, ride their bikes, or do any of the things that people in a resort would do.  Living in a high-cost area for no real reason, makes little or no sense to me.