Meridian Magazine : : Print

Insurance: Part of Being Prepared
By Carolyn Nicolaysen

Over the past few weeks, we have witnessed in the news devastating destruction by tornadoes and wildfires. Florida, Georgia and California have all suffered from devastating fires even before the official start of fire season. The summer of 2007 is considered by experts to potentially become the worst fire season in history. Hurricane season is beginning, too, and forecasters say conditions are ripe for up to five storms of category 3 and higher.

Will your insurance coverage be up to the job if such disasters, or a flood or house fire, sweep your home away? Part of being prepared is to be able to answer that question with a resounding “yes”!

Homeowner insurance should be a part of your total financial plan because it protects your home, personal property, and personal liability. It is designed to pay for damages to your home and its contents, and protect you from financial liability if someone is injured on your property. It also protects you and your possessions when you are away from home. In other words, if you are traveling and your luggage is stolen, your homeowners’ policy should cover the loss.

Although most homeowner insurance policies are standardized, you should examine all policies carefully and ask lots of questions before feeling comfortable with your coverage. Most policies cover damage to both the structure of your home, as well as personal property, caused by many natural disasters. Fire and smoke damage, lightening, hail, explosion, and theft are almost always covered.

Flood and earthquake damage are almost never covered in a standard policy, however, and need to be addressed separately.

Home offices, collectibles and antiques may also need separate insurance coverage. Check this out when reviewing your policy. Always insure yourself for more than you expect to pay to replace items which are lost. Remember the sofa you purchased for $700.00 may now cost $1,000 to replace, and an art collection may have appreciated in value.

Two Methods of Determining Loss

Insurance companies employ two methods to determine the value of a loss — actual cash value and replacement cost.

Actual cash value is the cost of replacing damaged or destroyed property with comparable new property, minus depreciation.

Replacement coverage is the cost of replacing an item with an item of the same kind and quality, with no consideration for depreciation. Replacement value is the better of the two types of coverage because it will guarantee replacement. If your property is several years old and you have a cash value policy your possessions may be worth nothing, due to depreciation, and therefore you are left without.

If your policy does not already include replacement coverage, you can add this to your policy for an increase in premium. Especially in an area prone to natural disasters, it may well be worth the additional monthly premium to include this coverage.

Homeowners insurance only covers the structure of your home, not the land. Most disasters will leave your land intact. Some, however, may not. I remember watching the flooding a few years ago in southern Utah where the land itself was washed away leaving nothing on which to rebuild. Flooding, tidal surges, landslides, and earthquakes may all leave you without land. Discuss your options with insurance agents if you live in an area that may be affected in this way.

If you are not yet a homeowner, be sure to purchase renters’ insurance. This type of insurance can also protect you in case of theft, vandalism, natural disaster and liability for injury in your home or apartment. Rental properties often become victim to looting and vandalism after a disaster.

When purchasing insurance, you are buying something you hope never to use, but which must be evaluated and purchased as if it definitely will be used.

How Much Insurance do You Need?

The amount of insurance you require depends on a lot of factors. Consider the following:

How much you owe on your property and the contents. Include the balance on your mortgage and any other loans against your property. Do you have outstanding charges on credit cards in the form of loans for upgrades, repairs or household items such as furniture?
Is your home used as collateral for a business or other loan? If so, you will need enough insurance to cover that loan if both your home and business are destroyed.
What do you really own? You may be surprised. The best way to determine what you really own is to do a home inventory. I like to take a digital camera and photograph every room in the house and the contents of cabinets and closets. Just think of simple things like shoes. If you have four children and everyone in the family has just three pair of shoes, that is 18 pair of shoes to replace. If your shoe cost averages $30.00 (very low!) that is $540.00 just to replace your shoes! When you are finished, place your inventory in a safe deposit box or send a copy to an out of town family member or friend. Pictures will make claims so much easier later.
How much are your assets worth? Do you have other assets that are liquid and could be easily sold or cashed in to help rebuild?
How many dependents do you have? This should include not only children but also parents who may need to move in to your home in the future; plan now for that possibility. Include the care of pets. You may need to pay for their care while you rebuild.
What savings do you have on hand? During a disaster you may need all your reserves just to live, with none left over to help rebuild. This is especially true if you have a home business or your job is also wiped out during a disaster. If you do have a home business, make sure it is also insured.

Ask Lots of Questions

There are no stupid questions when purchasing insurance. An insurance policy is a legal contract that may be loaded with technical terms, and hard to understand. Read it before you sign and if you have a question, ask. Be very specific in the questions you ask and try to get all answers in writing. For example:

Who is covered? If a volunteer is injured when helping to clean up after a hurricane, is he covered? How much of his medical bill would be covered?
What is covered? Is my car covered if a tree falls on it when it is parked in the driveway, or do I need a separate policy? Is it covered if it is in the garage? Is the cost of tree removal covered if the tree does no damage?
Am I covered for direct losses due to fire, lightning, tornadoes, windstorms, ice storms, hail, explosions, smoke, terrorism, vandalism and theft?
Are my jewelry and antiques covered?
What happens if I decide not to rebuild my home? Can I rebuild a different house plan — larger or smaller than my present home?
If a pipe bursts and water flows all over my floors. Am I covered? What if the dishwasher leaks and ruins the floor? Am I covered?
What if water seeps into my basement from the ground, either due to flooding or sprinklers? Am I covered?
If a storm causes a power outage and all the food in my refrigerator or freezer is spoiled and must be thrown out, can I make a claim?
Are children and their possessions covered when they are away at college?
Does my homeowner policy cover the loss if something is stolen out of my car?
Is my boat covered if it is stolen? Am I covered if there is a boating accident and I am sued?
Am I covered if I need to rebuild my home to a new, stricter building code?
Exactly what is not covered? Have you ever heard that an “act of God” is not covered? What is an “act of God”?
What personal expenses are covered after a disaster? Be specific! If you cannot inhabit your home because of a fire, will the insurance policy pay for hotel bills? For how long? Car rentals? For how long? Meals? For how long? Medications, clothing replacement, school supplies?
When can you begin collecting? We had a friend who lost his shop and storage building to a fire. Professionally, he was a shop and welding teacher, and the building was full of tools and equipment. He had to purchase new items and submit the receipts to the insurance company who then reimbursed him. Can you imagine trying to do that with an entire household? Think of the amount of money you would have to lay out up front.
Will they charge for an inspector to come out? We recently had a leak in our wall after a severe rainstorm, with blowing winds. A gutter overflowed, and water soaked the insulation and sheetrock, and soaked some carpet as well. When we called the insurance company we were told it was not covered because it was a maintenance issue and therefore not covered. How could they know that over the phone? We were also told if they came out for an inspection and it was not covered, we would be charged for the inspection. Obviously, we were not happy.
How do you report a claim? Do they have a 24-hour hotline? No matter what the answer to this question, always call immediately after a disaster strikes. In the case of a widespread disaster such as an earthquake, claims will be handled in the order they are received so leave a message on a machine if you can’t get someone on the phone. Always have several phone numbers for your insurance company and agent in your 72-hour kit.
What is the premium (amount you will pay)? How often is it due? Is there a grace period? When will it increase? Will it increase every time I make a claim — to the point that I won’t want to make a claim because of the penalization?
How much is my deductible?
Does the policy cover actual cost or replacement cost?

Obviously, these are not all the questions you will need to ask, but they should help get you thinking about concerns specific to your situation.

Reduce the Cost

Now that you have asked some questions, there may be some ways to reduce the costs of insurance.

Comparison shop. Once you have decided how much coverage you need, you can begin contacting insurance companies online, by phone, or through an insurance agent or broker and begin obtaining quotes. Get quotes from several different insurers because premium cost can vary widely. A policy may cost less because it offers fewer, or different, features and benefits. Be sure the company you've settled on is reputable, with good customer service and claims-paying ability. Saving on premiums will be of little importance if you have trouble collecting on a claim. All insurance companies are rated by major rating agencies (e.g. Standard & Poor's, Moody's, A.M. Best) on their ability to pay claims. You can access these ratings online, or through public libraries. Experience is still the best test so ask friends and neighbors what their experience has been. It may take some time, but a little work could save you lots of money.
Raise your deductible. Deductibles are the amount of money you have to pay toward a loss before your insurance company starts to pay a claim. The higher your deductible, the more money you can save on your premiums. If you can afford to raise your deductible from $500 to $1,000, you may save as much as 25 percent. If you live in a disaster-prone area, your insurance policy may have a separate deductible for certain types of damage.
Don’t include the value of your land when deciding how much coverage you need.
Purchase your home and auto policies from the same insurer. Compare to make sure this will be less expensive than buying them from separate insurers; it usually is, but not always.
Make changes to your home. Ask your insurance agent or company representative what changes you can make in and around your home that will make it home safer and also reduce your insurance premiums. These may include eliminating a shake roof or wood siding, installing a sprinkler system, storm shutters, clearing a defensible area around your home or retrofitting.
Improve your home safety. Add smoke detectors, carbon monoxide detectors, and security alarms. Your savings will increase if these alarms are connected to a central monitoring station. Ask your insurer for recommendations. If you have a fire hydrant in the front yard, be sure to mention it to your insurer.
Ask about discounts. Some insurers offer discounts for seniors, teachers and other professions, and those with good credit scores, to name a few.
Stay with the same insurer. If you have kept your coverage with a company for several years, ask about a reduced premium.
Review your policy and make changes as you sell or give away valuable possessions. This would also apply if you move valuables from your home to a safety deposit box.
Check out private insurance if you are in a government plan.
Notify your insurance company if your community goes from a volunteer fire department to a paid department, which is on call 24/7.

Re-evaluate your insurance needs periodically. As your circumstances change, so will your needs. Review your insurance to see if you need more (or less) coverage or an additional type of coverage if:

You are getting married
You are divorced
You are starting a family
You have a handicapped child
You are renting housing
You are purchasing housing
You are purchasing a car
You are making a major purchase such as a boat, airplane or home theater
Your child is going off to college
You are starting a new job
You are starting your own business
You are selling a business
Your income increases or decreases substantially
You are caring for an aging family member
You sustain a major injury that will affect your income now or in the future
You are retiring
Zoning or building codes change in your area
The value of your home greatly increases or decreases
You will be leaving your home vacant for an extended period of time
You are renting out your home

Poor planning when it comes to insurance can cause heartache for years after a disaster strikes. Ask yourself three questions now:

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 in case of a lawsuit?

If you can answer yes to all of these questions, you can check this off your list of things to do now, just in case the unthinkable happens to your family.