Building a house is expensive. Buying a house is expensive. Maintaining a house is expensive. It’s all just expensive. And what’s worse is that on top of it all sits an expensive insurance policy that can be difficult to understand.
Many homeowners don’t realize there is a lot more than the price you paid for your home that goes into determining the cost of your insurance. And if your agent isn’t asking the right questions, you may be overpaying for protection you don’t need or missing out on coverage you do. So, before we go blindly cutting protection corners to save the bank account, here are three things you should note as you consider your new or existing homeowners policy and ways you may be able to save.
1. Replacement Cost v. Market Value
Many people think they are or should be insuring their home for how much they paid for it (market value). However, more often than not, there is a large difference between the 100% replacement cost and the home’s market value. The market value of a house goes up and down as the market changes. For example, a home selling for $300,000 in today’s market could have sold for $180,000 in 2008.
Fortunately, most homeowners policies insure at the 100% replacement cost. This value and resulting premium are determined by factors such as the above-ground living square footage, materials used (plaster vs. drywall), whether the house is builder-grade or custom, the type of basement, and more. Your agent should be asking you these questions to figure out an educated replacement cost estimate so you can avoid paying a premium for too much or inadequate coverage.
2. Key Endorsements
Beyond the meat and potatoes of a standard policy, you may want to consider additional protection options, depending on factors specific to your unique home and situation.
One of these endorsements is the extended replacement cost endorsement. This provides additional protection over the 100% replacement cost of the base policy. Extended replacement cost can range from 125% to guaranteed replacement. For example, if your house is insured for $100,000 and you have 125% replacement cost, the insurance company will pay up to $125,000 if there is a total loss. Guaranteed replacement would rebuild your house no matter how much it costs.
These could be valuable endorsements because you never know exactly how much it will cost to rebuild your home at the time of a loss. Consider the recent supply chain issues. According to the National Association of Home Builders, the cost of building a house went up 26.1% from May of 2020 to May of 2021, the largest spike since 1970. If you built your home for $200,000 in 2020 and it burned to the ground in 2021, it could cost you well over $250,000 to replace it. A standard policy without endorsements would only be required to cover $200,000.
Another common endorsement to consider is coverage for back up of sewer or drains. Many homeowners don’t know when their insurance policy would kick in for water damage and when it doesn’t. If a pipe breaks, most policies will cover it. But if your sump pump overflows, you need the water backup endorsement in order to be covered. While proper clean up and replacement of your personal items can be thousands of dollars, a water back up endorsement would help cover the costs of restoration after this type of damage.
3. Location, Location, Location
It applies in real estate and it applies to your insurance. Where your house is located impacts what you pay for your insurance premium. A protection class code tells the insurance company key details to help determine how much of a risk your home is. This includes information like how far you are from a fire hydrant, what type of fire department calls on your home, and the probability of crime in your area. Typically, a home in the suburbs with a fire hydrant within 1,000 feet and a full-time fire department is going to be less expensive to insure than a home in the city with higher crime rates or a home in the country without a nearby fire-hydrant and a volunteer fire department.
Opportunities to Save
Most insurance companies offer many discounts and programs to help make your insurance premium more palatable for the level of protection you desire. Some examples include joining an alumni association, joining a credit union, or replacing your roof. Independent agents advocate on your behalf to get you a discount you may not have known you were eligible for.
Knowing what goes into the price you pay for your insurance is crucial in determining how to move forward. What do you value? What are you willing to risk for a lower premium? And what is of utmost importance to have properly protected? At Lighthouse, we take the time to know you, your goals, your lifestyle, and your property to help customize an insurance program that fits your unique set of needs.
No one should decide where you put your dollar but you. We’re here to help make sure you feel confident in your insurance investment.