Is Your Home Underinsured?

A recent survey reports that 1 in 3 respondents are buying less homeowners insurance to save money.

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In the Insurance Information Institute's Insurance Pulse Survey, released earlier this year, nearly half of respondents thought the amount of homeowners insurance they need is dependent on the real estate value of their home. One in three respondents reported buying less homeowners insurance to save money.

That's a mistake, says Loretta Worters, vice president of the Insurance Information Institute. "The real estate value of a home—that is, the price you can buy or sell it for—has absolutely nothing to do with the amount of insurance needed to financially protect the homeowner in the event of a fire or other disaster," she adds.

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If you reduce your homeowners insurance coverage and need to file a claim, you may be surprised to discover that it doesn't cover the full cost of rebuilding your home. "In fact," points out Mark Schussel, vice president of public relations for Chubb Insurance, "a home may cost even more to replace [than it did to buy] because of economic pressures." Upgrades like custom fixtures, special trim, or historic materials also increase your home's replacement cost.

J.D. Power's 2011 homeowners insurance survey indicates that 16 percent of policyholders surveyed do not carry adequate coverage to rebuild their homes. Instead of lowering your homeowners insurance coverage, here are four other strategies to make sure you're getting the coverage you need at a cost you can afford.

1. Increase your deductible. Although a higher deductible increases your upfront costs if you file a claim, it can lower your premiums (assuming you can afford to pay that higher deductible should you need to). "Insurance is designed to protect you against significant financial harm," says State Farm spokesperson Dick Luedke. "It's not as well-designed to protect against smaller losses that you can afford and not significantly change your financial position." Worters says increasing the deductible from $500 to $1,000 could save you up to 25 percent on premiums.

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2. Maximize your credits. Many insurance companies offer credits for safety features like central station alarm systems, temperature monitors, or sensors that detect water or gas leaks. If you live in a gated community or recently renovated your home, your insurer may offer credits for those, so make sure your insurance company knows about any renovations or new features. (Luedke points out that if you use an insurance agent, he or she should make sure you're getting all the credits you're eligible for.) Or consider adding these features to increase your credits. "For a relatively modest price, you can add smoke detectors, heat sensors, or temperature monitors to that central system," says Schussel. "It may cost you a little bit of money upfront, but it can save you substantially more money in the long run."

3. Bundle multiple policies under one provider. Purchasing multiple insurance policies (for instance, car and homeowners insurance) from the same provider can lower your insurance costs. The savings vary depending on the company and the state, but Worters says bundling your insurance policies could save around 10 percent versus purchasing policies from different companies.

4. Look for guaranteed or extended replacement cost coverage. Although it's best to have an accurate assessment of your home's replacement cost, if you own a historic home or are concerned about the limit on your home insurance coverage, guaranteed or extended replacement cost coverage could be a smart idea. Although it can cost about 10 percent more to buy a guaranteed versus actual cash-value policy, Worters says it's worth the extra cost in many cases.

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For instance, Chubb offers extended replacement cost coverage on its homeowners policies (uncapped in most states), meaning the policy would cover repairs or replacement of your home even if it exceeds the policy's cost limits. "Let's say the property limit on your policy is $500,000, but it costs $700,000 to replace your house," explains Schussel. "Extended replacement costs would cover it regardless of that policy limit, which is particularly key if you have an older home. You may be required to upgrade to the current building code: the electrical systems, the plumbing systems. That could be a substantial cost that you may not have anticipated."