Monday, May 10, 2010

A few words about insurance...

Many years ago I read a book called "Don't Get Taken Every Time."  It was a book on how to buy a new car, and was written by a former car salesman.  His thought was that he was in the best position to help people know how to get the best deal on cars, since he knew all the tricks of the car sales industry.  He suggested that he could be trusted, because he was no longer in a position to make money off the customers.

As I watched the news of the flooding in Nashville a week ago, I was struck by how many people lost everything, and didn't have insurance coverage, because they didn't know that flood insurance is separate from a regular homeowners' policy.  Since I'm a former insurance agent, I thought I might be able to share some things I learned in that business that might help someone when they are making insurance decisions.  (Understand that every insurance company has its own products, policies, and procedures, and every state has its own laws.  Check the things you see here with your agent.)  So here's a few thoughts about the process.

Homeowners - Since this is what got me thinking about this, we'll start here.  Homeowners' insurance covers your house and your belongings, in the event of a covered loss.  Typically, covered losses include things like weather damage (wind, tornado, hurricane, etc.), fire, burglary.  Floods are usually excluded.  Flood insurance is offered by the insurance company through a government program.  This coverage is usually mandatory for those living in a flood plain, but optional for all others.  So should you get it?  In the Nashville flooding, I saw pictures of houses in the town of White House (north of Nashville) that were surrounded by flood waters.  The interesting thing about these houses was that none of them were near a creek, river, or other body of water.  The flooding was solely a result of 13-15 inches of rain in a day and a half.  So even if you don't live near a water source, you may still be in danger.  Ask yourself, when it rains a lot, do I have puddles of standing water in my yard?  If so, how high might those puddles be if you had that same kind of rain event that Nashville saw?  Is your house on a hill?  If so, there may be plenty of places the water could run off.  But if your yard is flat, and the street you live on is flat, you probably should at least consider flood coverage.  Ask your agent what it would cost.  If you live outside a flood plain, it should be fairly inexpensive, but could save you many thousands if flooding happens.

Storage lockers - Q - I have things in a storage locker.  Are those covered by my homeowners' policy?  A - Every company is different on this.  Most policies do not cover things in a storage locker at full replacement.  They will often cap the coverage at 10% of the value.  Check with your agent on this one.  You can often buy insurance through the storage company, but their coverages are fairly low, as well.

Claims - Q - I've had a loss - should I file a claim?  A - This partly depends on the size of the loss.  First of all, understand that this is what you have insurance for - to cover you when something bad happens.  However, you need to understand that a couple of things will happen if you file a claim.  Depending on what type of loss you've had, your rates are likely to go up after a claim.  Many companies will not count a weather-related loss against you.  Wind damage to your roof will often not trigger a rate increase, for instance.  But other losses, such as a fire, or a burglary, will.  So if the loss is small, you might be better off covering the loss out of pocket, rather than filing a claim.  For instance, imagine someone broke into your house and stole $1000 worth of stuff.  Let's say you have a $200 deductible.  You file a claim, and the insurance companies pays you $800.  But your rates go up, so over the next three years, you'll pay considerably more in increased premiums than the $800 you received.  Is it worth it?  You're probably better off replacing the stuff yourself in this case, if you can.

Something else happens after a claim, as well - in a sense, you become "uninsurable."  While your current company will probably keep you on as a customer (with increased rates), you will be unable to shop your coverage around to other companies.  Many companies have a policy that if you have a claim in the last three years, they will not write a policy for you as a new customer.  So you're stuck for that period of time with your current carrier at whatever rates they decide to charge you.  Again, weather-related claims are not included in this policy, but most other claims are.

Water - As mentioned previously, flood damage is not a covered loss.  Other water damage may be covered.  One of my customers had a water hose burst, the one that connects to the refrigerator ice-maker.  The customer happened to be on vacation at the time.  Their daughter stopped by the house while they were gone, and found the water pouring out.  By this time, it had probably been leaking 2 or 3 days.  The water had gone down through the floor, and ruined most everything in the basement.  Ultimately, this was a $90,000 loss.  This was covered.  Be sure to ask your agent what kinds of water damage are covered, and which aren't.

Extras - We've all known salesmen who try to throw in extras here and there, that are designed primarily for their profit.  An example would be the extended warranty the sales clerk at Best Buy tries to sell you for whatever you're buying there.  Insurance companies have some of these, too.  Some of these, however, are useful, and you should consider them.  Home warranties - Some agents will mention home warranties, which are typically sold through an outside company, such as American Home Shield.  If you house is new and covered by a builder's warranty, you probably don't need this.  However, if you're buying an older home, with appliances that are 8-10 years old or older, this might be a good thing.  You pay a couple hundred dollars a year, and then if any of your covered home equipment goes out due to wear and tear, accidents, or other problems, you pay a flat-rate fee (it was $60 when I was selling these) for the repair guy to come out and fix the problem.  Covered equipment typically includes all major appliances, heat/air equipment, plumbing, etc.  For an older home, this could save you a lot of money.  For instance, if your heat pump goes out, it could cost several hundred dollars to repair or replace it.  With this policy, your cost is just the flat-rate fee.  It's worth looking into.

Identity theft - In today's world, this has become a huge problem.  Most insurance companies offer some kind of identity theft protection.  Many include it as standard coverage in your homeowners' policy, with an option to increase the coverage for a small fee.  If you know someone who's had their identity stolen, you know that it can cost a lot of time and money to get the problems fixed.  This coverage will help with those costs.  Understand, however, that the stated coverage amount can be somewhat misleading.  For instance, we used to offer a $30,000 policy.  Of that $30,000, only about $2000 was covered for actual stolen money.  So if the thief got money out of your bank account, only $2000 was replaced by this policy.  The remaining $28,000 in coverage was specifically for costs incurred in the process of fixing the problems.  This may include attorneys' fees, lost work time, cost of phone calls, etc.  Some companies offer increased ID theft coverage, in which they actually monitor your credit report and watch for suspicious activity.  This costs extra, but may be worth it.

Earthquake - Your typical policy does not cover earthquakes.  In Tennessee, where I had my business, earthquake coverage was an option to add on.  The home had to meet certain building standards in order to qualify for this coverage, but most homes built today would qualify.  In that area, earthquake coverage was surprisingly inexpensive - maybe an extra 5 to 10 dollars a year.  What many people didn't realize was that we were sitting on a fault that runs roughly from Knoxville down past Chattanooga.  It's been inactive for the most part, though there's occasional light activity.  But it only takes one good shift of the fault to cause a lot of damage.  Earthquake coverage seems like a reasonably inexpensive safeguard that one should probably look into.  Of course those of you living in California will pay much, much more for this same coverage.  Wherever you live, check with your agent to see what it'll cost.

Jewelry - Jewelry and other expensive articles are often included in your homeowners' policy, but with fairly low limits.  So if you have expensive jewelry, art, furs, etc., you need to have additional coverage for these things.

This covers many of the issues that you may want to think about in your homeowners' insurance.  In the next couple blogs, I'll share some thoughts on auto coverage and life insurance.

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