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Insurance: Above & Beyond?

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Posted On: 08/06/2014

Question: We’re in the process of buying a home. The sale price is $225,000, but the insurance agent wants us to carry coverage for a property costing $285,000. Why do we need so much excess insurance – or do we?

Answer: When you buy a car the price you pay has a package cost, but if you add up the expense of separately replacing the brakes, motor and seats you will come up with a much larger number. The same is essentially true for real estate.

Property insurance is designed to protect homeowners against a variety of perils and the insurance company must be prepared to cover the cost if the entire house is lost. The replacement cost for the property is likely to be higher than the acquisition price of the home. However, it also should be said that the full replacement of the house is very unlikely and that an insurance company offsets this threat by providing coverage for a large inventory of homes.

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Still, you likely want to go back to your insurance broker and ask several questions:

First, how much coverage do you really need? Part of the purchase price represents the cost of land but as a homeowner you’re not insuring land.

“The land under the house isn’t at risk from theft, windstorm, fire and other perils covered in a homeowners policy,” explains the Georgia Insurance Information Service, a trade association. “Therefore, the value of the land should not be included in deciding how much homeowners insurance to buy.”

Second, in some instances – and especially with an older home – you may be able to get a lower rate by having the home inspected to show that the roof, electric, plumbing and HVAC all are in good condition.

Third, opt for a higher deductible and premiums will go down. Insurance companies like higher deductibles because it helps them avoid minor claims. Be careful though, a higher deduction means that in the case of an insurable event you’ll need more cash to cover costs. A good approach is to opt for a higher deduction and then take the equivalent of the annual premium savings and deposit the money in a savings account each year until you have enough to cover the entire deductible.

Fourth, see if the property qualifies for special deductions for smoke detectors or other features.

Fifth, in some cases you may be able to get a lower rate by combining a homeowner’s policy with auto insurance, coverage on a second home or both. The advantage to the insurance company is more total revenue and lower marketing costs.

Lastly, shop around, and shop around often. Homeowner’s insurance is something you need and it can pay to check rates at least once a year before policies renew.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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