Homeowners Insurance: Time for an Annual Check-Up

An annual check-up on your homeowners insurance can result in a healthier policy and a healthier pocketbook.

What type of coverage do I have?

The most effective type of coverage is known as “replacement cost,” which covers, up to your policy limits, what it would take today to rebuild your house and restore your belongings, says Jerry Oshinsky, a partner at Jenner & Block in Los Angeles who has represented homeowners in litigation against insurers.

“Extended” replacement cost coverage provides protection to your policy limit, say $500,000, and then perhaps another 20% of the cost after that. Percentages vary, but in this example you could recoup up to $600,000 on a $500,000 policy, assuming your losses reach that high. Extended coverage can compensate for any unanticipated expenses like spikes in construction costs between policy renewals. Now harder to find due to the industry shift toward extended replacement coverage, “full” or “guaranteed” replacement coverage covers an entire claim regardless of policy limits.

A less attractive alternative is “actual cash value” coverage that usually takes into account depreciation, the decrease in value due to age and wear. With this type of policy, the $2,000 flat-screen TV you bought two years ago will be worth hundreds of dollars less today in the eyes of your claims adjuster. Kevin Foley, an independent insurance broker in Milltown, N.J., favors replacement cost coverage unless you can save at least 25% on the premium for going with actual cash value coverage instead.

Even if you have replacement cost protection for your dwelling and personal property, don’t assume everything is covered. Structures other than your home on your property—such as a detached garage or swimming pool—require separate coverage. So too do luxury items like jewelry, watches, and furs if you want full replacement cost because reimbursement for those items is typically capped.

How much coverage do I really need?

OK, now that you’re clear on what type of policy you have, you need to figure out how much policy you truly require in dollar terms. Let’s say you purchased your home five years ago and insured it for $200,000. Today, it’s worth $225,000. Simply increasing your coverage to $225,000 may nonetheless leave you underinsured. Here’s why.

The key to determining how much dwelling coverage you need isn’t the value of your home but the money you’d have to pay to rebuild it from scratch, says Carlos Aguirre, an agent for Liberty Mutual Insurance in Arlington, Texas. Call your local contractors’ or homebuilders’ association and inquire about the average per-square-foot construction cost in your area. If it’s $150 and your home is 2,000 square feet, then you should be insured for $300,000.

There’s no rule of thumb for how much your homeowners insurance should cost. Insurers use numerous factors—age, education level, creditworthiness—to determine pricing, so the same policy could run you more than your neighbor. In recent years the average annual premium was $804. Oshinsky advises against scrimping on insurance because big increases in coverage probably cost less than you’d think. He recently purchased a liability policy that cost $250 for the first $1 million in coverage. Adding another $1 million increased his premiums only $12.50 more.

How can I lower my premiums?

The higher your deductible, the amount you pay out of pocket before coverage kicks in, the lower your premium. Landing on the appropriate deductible level requires remembering that insurance should cover major calamities, not minor incidents, says Foley, the independent insurance broker. Most homeowners should be able to absorb modest losses like a broken window pane or a hole in the drywall without filing claims. If you can, then you’re wasting money with a $250 deductible.

Foley’s rule: If you’re a first-time homeowner and don’t have a lot of savings, moving up to a $500 deductible will probably stretch your budget. However, if you live in a ritzy home and drive an expensive car, then you should be able to afford a $1,000 deductible. In Milltown, N.J., for example, the premium for a $200,000 home with a $500 deductible would be $736, according to Foley; moving up to a $1,000 deductible drops the annual premium to $672. That’s $64 in savings.

Every major insurer offers discounts to various groups, such as university employees or firefighters. Figure about 5%. Ask which affiliations would entitle you to a discount and how much. If an AARP membership would result in a $50 savings, pay the $16 dues and pocket the $36 difference. Many insurers also offer discounts ranging from 1% to 10% or more for installing protective devices like alarms and deadbolt locks, for going claim-free for an extended period, or for insuring both your car and your home with the same carrier.

By: G. M. Filisko

Joan Rogge Presents – A Financial Plan for Your Home

Joan Rogge

JOAN ROGGE, REALTOR, WELLES BOWEN TOLEDO OFFICE

Office:         419-535-0011
Cell:             419-944-3129
Fax:             419 535-7571
VM:             419-539-2700       ext.125
joanrogge@wellesbowen.com

Visit Joan’s website by clicking here

Article From HouseLogic.com

By: Richard Koreto
Published: August 28, 2009

Your home is probably your biggest investment. To manage it, create a financial plan that takes into account repairs, upgrades, mortgages, insurance, and taxes.
Do you pay each home-related expense as it comes? If so, you’re missing opportunities for upgrades, or much worse, heading into a financial crisis when a slew of surprise maintenance items hit. So take a holistic look at what it costs to operate your house and set up a home financial plan.
Use our home financial plan budget worksheet, and start by writing a list of expenses, such as:
•Mortgage

•Taxes

•Home insurance, including liability

•Repairs and maintenance, such as new furnace, roof, painting

•Voluntary upgrades, such as a swimming pool, a premium range, a new powder room

What will you learn from this home financial plan weekend exercise?
•How much you have to spend

•How much you need to allot in the short- and long-term for necessary maintenance and voluntary improvements

With this new found grip on your home’s expenses, you can create a home financial plan that’ll help you there for years with maximum enjoyment and minimum anxiety.
The mortgage: Pay it–and then some
Yup, you already shell out a lot for your mortgage, but can you pay more? Even a little extra each month can add up to an earlier payoff. Let’s say you have $200,000 in outstanding principal and a 20-year fixed-rate mortgage at 5%. Your monthly payment is $1,319.91. But if you can manage to pay another $100 a month, you’ll save $14,887 in interest.

Run the numbers (http://realestate-calc.com/Mortgage_Calculators/Mortgage_Calculator_Input_Add_Payment.asp) yourself for your home financial plan.

Advantages of an early payoff, says Alan D. Kahn, a financial planner in Syosset, N.Y.:
•Less debt means more money to spend later.

•It feels darn good to own your house outright as soon as possible.

•Minimal tax loss. Toward the tail end of the life of a loan most of your payment goes to the principal, not the interest, so you’re getting only a small tax break anyway.

Of course, if you’re still saving for retirement, put the 100 bucks elsewhere:
•A retirement plan

•An account for the inevitable home repairs

•An account for discretionary improvements, which can raise your home’s value

Insurance: Protect your property
Your vegetable garden is pointless without a fence to keep out rabbits; likewise, your home financial plan will come to nothing without an insurance “fence”:

Homeowner’s insurance. Basic coverage (http://www.houselogic.com/articles/homeowners-insurance-are-you-over-or-underinsured/) for your home and everything in it. The average cost is $636 per year but this varies widely by state.
Liability coverage. Protects you from a lawsuit if someone gets hurt on your property, for example. Your best bet: An umbrella policy (http://www.houselogic.com/articles/umbrella-insurance-and-homeowner-liability/). For about $300 a year you can by a typical $1 million policy.
Various disaster insurance policies. Optional policies (http://www.houselogic.com/articles/insuring-against-natural-disasters/) cover flood, earthquake, and hurricane damage. As part of your home financial plan, you have to research to see what disaster coverage, if any, you need in your area, and what your standard policy already covers. For $540 a year you can buy flood insurance, for example.
Don’t under- or overbuy insurance
For your basic policy, get homeowners insurance with full replacement coverage (http://www.houselogic.com/articles/homeowners-insurance-time-for-annual-check-up/) in case your house burns to the ground.

That sounds simple, but heads up on calculation. Remember that you own a house as well as the land on which it sits. So even though you bought your home for $300,000, it may cost only $100,000 to rebuild it. Your policy limits should reflect this. This difference will vary widely by region.

Another heads up: Don’t make the common and potentially disastrous mistake of thinking that because your home has fallen in value you need less insurance. If you bought a $1.2 million townhouse in Florida during the boom, it’s true it now may only sell for $600,000. But the replacement cost of the townhouse hasn’t changed much, so you can’t improve your home financial plan by cutting insurance costs that way.

Other ways to cut your insurance budget:
•If you make structural improvements, such as adding storm shutters, your insurer may give you a break.

•If you belong to certain groups, such as AARP or veterans’ organizations, your premiums may be lower.

Repairs and renovations: By choice or necessity
You own a home, so you’ll be spending money on everything from a new faucet to-surprise!-a new roof. Freddie Mac and other authorities say as part of your home financial plan, you should be prepared to spend 1% to 3% of the market value of the home annually on maintenance. To be extra-prudent, open a savings account and make regular payments until your account reaches 1% to 3% of your home’s current value.

To help you budget:

Start with the inspection report you received when you bought the house. Did the inspector indicate that you would need a new roof in five years? A new furnace in 10?

Keep a log of your major appliances’ age so you can estimate when they’ll need replacing. Some estimated life spans:
•Roof: 20-25 years

•Heating systems: 15-20 years

•Range/ovens: 11-15 years

•Water heaters: 8- 13 years

Then get estimates on what replacements will cost and start saving.

Consider ongoing non-emergency maintenance, too. Do you live in New England? Price a snow blower and get bids from plow services.

Resist the siren call of the home equity loan (http://www.houselogic.com/articles/a-guide-to-equity-loan-options/) to take care of everything. That just defeats your efforts to pay off the mortgage early.

Separate out what you want from what you need. A $50,000 kitchen remodel is nice, but you’ll recoup only 76% of the project cost your home’s resale, according to Remodeling magazine (http://www.remodeling.hw.net/2009/costvsvalue/national.aspx).

If you can afford to redo, go for it. Just don’t confuse your necessary repairs (new oil furnace-about $4,000) with your discretionary upgrades (Viking range-$6,000 and up).
Taxes: (Almost) no way around them
Even if your lender handles your property taxes from an escrow account, you need to budget for them in your home financial plan. They creep up almost every year, it seems. Take responsibility for tracking the changes in your area: Look over past tax bills to get a sense of how quickly they’ve risen in the past.

Or if your lender handles escrow and you haven’t saved your bills, ask for an accounting. The median annual property tax payment is $2,198, but that hides the enormous range in medians from state to state:
•New Jersey: $6,320

•New York: $3,622

•California: $2,829

•Alabama: $383

•Louisiana: $188

You can generally deduct property taxes on your federal return. A tax pro can tell you how much of a tax break you’ll get, to help you fine tune your home financial plan.

You may be able to reduce your tax burden by getting a reassessment. Do your homework first: Are comparable houses taxed less than yours? Ask the local assessor what formula is used to set tax rates. You can challenge the assessed value (http://www.houselogic.com/articles/appeal-your-property-tax-bill/) and get yourself a rollback.

If you’re in a special group, you might get some help from state or local programs. Check around to see what’s available in your area. New York State, for example, has its Star Program (http://www.orps.state.ny.us/star/index.cfm) for giving senior citizens some relief from school-related property taxes.

Richard J. Koreto is a managing editor of finance, taxes, and insurance at HouseLogic. He has been editor of several professional financial magazines and is the author of “Run It Like a Business,” a practice management book for financial planners. He and his wife own a pre-Civil War house in Rockland County, N.Y.

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