I.I.I. Advises Homeowners to be Properly Insured

November 11, 2004

For many people, their home is their most valuable asset. To protect their investment, homeowners should make sure their insurance is updated regularly to include improvements, major purchases and increased rebuilding costs, according to the Insurance Information Institute (I.I.I.).

“Homeowners should contact their insurance agent or company representative at least once a year to make sure that their insurance is up-to-date,” says Jeanne Salvatore, vice president, Consumer Affairs, I.I.I. “A major alteration or addition to your home or lifestyle change such as a marriage or an elderly parent moving in with family heirlooms should also trigger a call to your insurance company.

“Over the last several years, homeowners have taken advantage of record low interest rates and have upgraded their kitchens, bathrooms and added rooms to their homes, said Salvatore. If these improvements are not properly insured, homeowners can find themselves underinsured in the event of a fire, hurricane or other major disaster,” she said.

According to the U.S. Census Bureau, homeowners spent more than $20.9 billion on additions, $91.8 billion on alterations and $44 billion on maintenance and repairs in 2003.

The cost of building or repairing a home has also reportedly increased dramatically.

In fact, the cost of lumber alone increased 20.1 % from September 2003 to September 2004, according to statistics from the U.S. Department of Labor.

To properly insure your home, the I.I.I. suggests that homeowners ask their agent or company representative these three questions:

* Do I have enough insurance to rebuild my home?
* Do I have enough insurance to replace all of my possessions?
* Do I have enough insurance to protect my assets?

Breaking out a home insurance policy into the three essential areas of coverage – the house, one’s possessions and liability to others – makes it easier to obtain the appropriate coverage.

Do I have enough insurance to rebuild my home?

To accomplish this goal, people need to cover the cost of rebuilding their home at current construction costs. Unfortunately, some homeowners simply purchase enough insurance protection to satisfy their mortgage lender. Others confuse the real estate value of their home with what it costs to rebuild it. Quite simply, people need to have enough insurance to rebuild their home in the event that it is completely destroyed. In one’s discussion with their agent or company representative ask about the following:

Replacement cost
Most policies cover replacement cost for damage to the structure. A replacement cost policy pays for the repair or replacement of damaged property with materials of similar kind and quality.

Guaranteed or extended replacement cost
These types of policies provide additional insurance coverage over what it should cost to rebuild the home. This type of coverage can be useful if there is a widespread disaster that pushes up the cost of building materials and labor. A guaranteed replacement cost policy would pay to rebuild the home regardless of cost. Increasingly, however, insurers are offering extended replacement cost policies, which provide 20% or more over the limits in one’s policy.

Inflation guard
This automatically adjusts the rebuilding costs to reflect changes in construction costs. Find out if the policy includes this coverage or if one would have to purchase it separately.

Building code upgrades
If one’s home is badly damaged, they may be required to rebuild it to meet new (and sometimes tougher) building codes. Many insurers offer ordinance or law coverage that pays a specific amount toward these costs.

Water back-up
This insures one’s property for damage by the back-up of sewers or drains. Most insurers offer this coverage as an add-on to a standard policy.

Do I have enough insurance to replace all of my possessions?
Most homeowners insurance policies provide coverage for one’s personal possessions for approximately 50% to 70% of the amount of insurance they have on the structure of their home. This means that if they have $100,000 worth of coverage on the structure of their home, they would be covered for $50,000 to $70,000 worth of personal items.

To determine if this is enough coverage, conduct a home inventory. This is a detailed list of everything one owns and the estimated cost to replace these items if they are stolen or destroyed by a disaster.

People can insure their possessions in two ways. They can either insure their belongings for their actual cash value or their replacement cost.

Cash value policy
This pays the cost to replace one’s belongings minus depreciation.

Replacement cost policy
This would reimburse people for the cost to replace the item. Suppose, for example, a fire destroys a 10-year-old TV set in the living room. If people have a replacement cost policy for the contents of their home, the insurance company will pay to replace the TV set with a new one. If they have an actual cash value policy, it will pay only a percentage of the cost of a new TV set because the TV has been used for 10 years and is worth a lot less than its original cost. Some replacement cost policies also replace the item and deliver it to folks. Generally, the price of replacement cost coverage is about 10% more than actual cash value.

Do I have enough insurance to protect my assets?
Homeowners insurance includes liability protection. This covers people against lawsuits for bodily injury or property damage that they or family members cause to other people. It also pays for damage caused by pets. It pays for both the cost of defending people in court and for any damages a court rules people must pay – up to the limits of their policy. Generally, most homeowners insurance policies provide a minimum of $100,000 worth of liability insurance, but higher amounts are available. It is important to purchase enough liability insurance to protect one’s assets. People may consider purchasing an excess liability or umbrella policy. These provide additional coverage over and above what is covered in the home (and auto) insurance policy.

Standard home insurance policies provide coverage for disasters such as fire, lightning, hurricanes and winter-related damage such as burst pipes. They do not include coverage for flooding or earthquake. A separate policy needs to be purchased for these disasters.

For more information on how to properly insure one’s home, access the Insurance Information Institute’s Web site at www.iii.org.

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