10 Common Home Insurance Mistakes That Can Cost You Thousands
If you haven't considered these potential insurance options, you could be in danger of losing a lot of money. Here's how to avoid the traps.
You could be losing money
Home insurance is an absolute essential, but every year, thousands of consumers find out they've purchased inadequate policies, by which time, it's too late. Here are the most common household insurance-related mistakes—and how to avoid them.
Being seduced by low prices
Does that amazing one-time deal on home insurance look too good to be true? That's because it probably is. Jay Feinman, a distinguished of law at Rutgers Law School, points out that being sucked in by low prices is one of the biggest mistakes made by consumers. "Too often homeowners shop mostly on price," reveals Feinman. "But coverage and quality are just as important when buying insurance."
Not doing your research
Let's face it, searching for the right home insurance policy isn't the most exciting task, but it's certainly not one you want to rush. Do so and it's highly likely you'll end up with a policy which doesn't match your requirements. "Make sure your policy gives all the protection you need," urges Feinman. "And check that the insurance company has a good record of paying claims promptly and fairly." Do this by speaking to friends who've made claims on home insurance policies, and looking at online rating sites such as reviews.com. If you're in the market these are 15 questions to ask before buying your first home.
Not keeping your insurer in the loop
Think of your insurance agent as your new best friend. Almost. He or she—not your workmate, neighbor or Uncle Frank—should be the first to know if you fence your backyard, turn your basement into a game den, or transform your spare room into an office. Insurance companies can use seemingly insignificant reasons to refuse to pay out, so make sure you notify your insurer of any big projects, and always request—and keep—your insurer's acknowledgment letter. Here are 11 home improvement projects you can do yourself.
Not understanding exclusions
We all have better things to do with our lives than read the small print of home insurance contracts. But neglecting to do so could be the costliest mistake you'll ever make. If you purchase a policy that doesn't cover you for specific types of disaster, most companies will still allow you to make amendments. But discover you're not covered after a flood/landslide/fire/alien attack, and there's nothing you can do. "One of the most common mistakes is not understanding the exclusions to risk policies, such as floods from outside," says Etti Baranoff, PhD, associate professor of Risk, Insurance, and Finance at Virginia Commonwealth University. "This type of flood is excluded, while floods from inside the house are covered."
It's risky to assume that home insurance is something you'll never need. When searching for the right policy, try to image the various scenarios you could potentially encounter and make sure you're covered for the worst possible one. It might mean spending slightly more on the initial cost, but experiencing a flood, fire, or burglary and finding out you're not covered will cost you much more. "Most homeowners don't buy enough insurance," reveals Feinman. "The goal is to 'insure to value'—buying enough insurance so that the policy would repay the cost to rebuild the home and replace its contents if it burned to the ground."
Underestimating the value of your home and its contents
So you know what amount you purchased your home for, and you know how much your neighbor's house went for (or at least what they told you it went for). But hundreds of factors can affect the value of a property, ranging from the distance to the nearest house to the layout of the bathroom. This is why Feinman always recommends taking the time to correctly and thoroughly evaluate the cost of your home. "Work with a knowledgeable agent, use software available online, or get a reliable estimate of the cost to rebuild," suggests Feinman. "Then ensure you've purchased adequate policy limits and extended replacement cost coverage." By the way, here are 31 home improvements that will boost the value of your home.
Assuming everything (including the kitchen sink) is covered
Many homeowners don't realize that the average policy doesn't cover the most common types of disaster. "Homeowners often assume that typical policies—often called "all-risk insurance"—cover all sources of loss," points out Feinman. "Typical homeowners' insurance policies don't cover floods, earthquakes, wildfires, mudslides, sewer backups, and other risks, and they may have special deductibles or other limitations on causes of loss."
Assuming you'll get more than you will
Think again if you're assuming that the flood which wrecks your dishwasher will result in a juicy check that covers what you paid for it ten years ago. Be realistic—take a look at websites like Craigslist and look at how much second-hand dishwashers are going for. If you're lucky, your insurance provider might payout for a similar amount. "Consumers often wrongly assume they'll get the full replacement cost," warns Baranoff. Find out the real estate terms you need to know before buying a house.
Not knowing the risks faced by homeowners in your area
Is your home in an area especially susceptible to natural disasters such as flooding or thunderstorms? Have there been a number of landslides in the past few years? If so, consider opting for additional separate, specialist policies. "Always check on possible risks in your area and purchase separate policy riders or special insurance such as flood insurance if needed," urges Feinman.
Not accounting for inflation
You might well have paid $200,000 for your apartment in 2000, but your home will almost certainly be worth more now, and it's all too easy to underestimate the increase in value. "A big mistake is not having the correct limits on the value of the home," says Baranoff. " Consumers can buy endorsements such as 'inflation guard' that ensure there is full coverage of at least 80 percent." Next, check out the 22 secrets your real estate agent isn't telling you.