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Personal Finance > Your Home
Tips on insuring your home
May 19, 1999: 3:40 p.m. ET

Don't forget to include the value of upgrades on your homeowners policy
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NEW YORK (CNNfn) - Let's face it, home improvement projects are one of America's favorite pastimes.
     Homeowners each year spend billions of dollars adding wood floors to their living rooms, renovating their kitchens and building additions onto their houses. Some do it to raise the resale value. Others just want to live in style.
     But experts say too often these upgrade-happy consumers leave their insurance policies behind.
     "Many people don't realize that if you've made any additions to your home, or updated the bathroom, the value of that home increases," said Loretta Worters, a spokeswoman at the Insurance Information Institute. "Every two years you should look at your property value and update your insurance accordingly."
     If the house you bought 20 years ago for $80,000 today is worth $200,000, your insurance coverage should reflect the current value. Otherwise, you'll be drastically underinsured if the unthinkable happens.
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     Just to be safe, Worters suggested you hire an appraiser every few years to value your home. You could also simply stop in at your local real estate office to find out how much similar homes in your neighborhood are selling for.
     If you go that route, though, be careful not to fall into the overinsurance trap. Your policy (and premiums) should reflect only the value of the physical structure of your home -- not the land and not the market value, just the cost of rebuilding your house in the event of a disaster.
     "The insured amount should not include the land or location," said Clint Gillespie, a 25-year industry veteran and chairman of the personal lines interest section of the Chartered Property Casualty Underwriters Society. "The market value of your home really doesn't have anything to do with the value of the home itself."
    
The basics

     For most homeowners, insurance is a must. Banks and other lenders will almost never approve a loan without it. (The Insurance Information Institute reports that 95 percent of homeowners in the United States are insured. The remainder either paid for their house in full or found a lender willing to take the risk.)
     But that doesn't mean you have to take the first pitch that comes your way. The Insurance Information Institute said there are lots of ways to cut your premiums without sacrificing the quality of your coverage.
    
Learning the ropes

     You can start by educating yourself on the types of insurance products available -- and the levels of coverage they provide.
     Let's start with a broad definition: Homeowners insurance provides a combination of property and liability coverage, the latter of which covers you in case someone is injured on your property. It also covers you and your belongings when you are away from home.
     The insurance plans themselves are broken down into two distinct categories. The first is actual cash value, which provides coverage for the cost of replacing damaged property, minus depreciation.
     If your 10-year-old couch burned up in a small house fire, for example, "you'd be lucky to get $50 for it," Gillespie said.
     The second, and more common, type of homeowners insurance is replacement coverage, a more expensive plan that covers the cost of replacing damaged property regardless of physical depreciation. In other words, you're covered for the full amount of replacing that item.
    
The breakdown

     As individual policies go, there are four main types:
  • The first and least commonly purchased is the basic plan, or HO-1, which covers damages to your property due to a very limited number of incidents, including theft and fire. It's no longer available in all states.

    
  • The broad homeowners plan, or HO-2, is more comprehensive and generally picks up where the basic plan leaves off. It usually covers property damaged in bad weather. Both the HO-1 and HO-2 plans fall under the actual cost value category.

    
  • Then there's the FAIR plan, which stands for Fair Access to Insurance. It's designed to provide coverage to those in high-crime areas and others who don't qualify for the "HO" series of plans.

    
  • By far, though, the most commonly purchased type of homeowner's insurance is the standard policy, or HO-3. It covers you for losses resulting from natural disasters (except for floods and earthquakes).

     Gillespie said most HO-3 policies these days provide automatic replacement value coverage on the cost of your dwelling. In most cases, though, you have to purchase replacement value coverage separately for the contents within the home. Those items generally are covered only for the actual cash value.
     Gillespie noted there is one other plan on the market, a new one called the HO-5. It's a bit more expensive than the commonplace HO-3 plan, but it provides automatic replacement value coverage (full-coverage) for both the physical dwelling of your home and the contents within.
     Beyond that, the bells and whistles offered by individual insurance companies can vary widely.
     If you're worried about being underinsured for any reason, some companies will sell you extended coverage, which costs a few dollars more each month but covers you for 125 percent to 150 percent of the cost of rebuilding your home after a disaster. If your home was insured for only $100,000, for example, and it cost $130,000 to replace it, you'd be covered for the full amount.
     Others cover the cost of additional living expenses in the event you and your family have to stay in a hotel while your home is being repaired. This type of coverage, which usually caps out at 20 percent of the value of your home, often covers the meals you ate out during that time, and even the extra commuting costs you may incur getting to work.
     The point is, you should know what you are paying for, and purchase any extras you feel you may need before you need them.
     "The most important thing for consumers is that they should always read their policies," Gillespie said. "Nobody does it but they should. Even in the all-risk policies there are places in the contract where the [company] will exclude certain coverage but they'll give it back to you in another section. There are always exclusions and exceptions to those exclusions."
     For that reason alone, he said, it's wise to schedule separately on the policy anything of value, including jewelry and art. That will cover the property against loss, theft and anything else that might happen to it.
     "If you have a 2-carat diamond ring and you put it down on the counter and it disappears, under normal homeowners policies the cost of replacing it would not be covered," Gillespie said. "If it's scheduled, it could fall to the bottom of the lake and it's still covered."
    
Tips on saving money

     As a prospective homeowner, you should begin the process of purchasing insurance by shopping around.
     The institute suggests you talk to your friends and family, or flip through the phone book to get a few price quotes. Don't base your decision on price alone, they advise.
     "Quality service may cost a bit more, but you buy insurance in case you need to make a claim, so it's important to get a company with a good reputation," the institute suggests.
     For added measure, you might want to check the financial ratings of the companies on your list with AM Best or Standard and Poor's.
     You also can lower your monthly premiums by taking a larger deductible. Deductibles - the amount of money you have to shell out toward a loss before your insurance coverage kicks in -- usually start at around $250.
     By doubling it to $500, you can save up to 12 percent on the cost of your policy, the institute reports. If you can handle it financially, bumping your deductible up to $5,000 can save you up to 37 percent.
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Loyalty pays

     If you can, buy your homeowner's, auto and liability coverage from the same company. To keep your business, the company may knock 5 percent to 15 percent off your premium.
     Likewise, you also might gain discounts if you find an insurer and stick with it. The institute said several insurers will reduce their premiums by 5 percent if you stay with them for three to five years. Some will knock off 10 percent if you remain a policyholder for six years or more.
     If you've not yet purchased a home, there are a few things you may want to consider.
     If you buy a new house -- which presumably comes with a solid structure and updated electrical, plumbing and heating systems -- some insurers will reward you with discounts of 8 percent to 15 percent
     The same is true if you live on the East coast and you own a brick home, since they are better able to resist high winds. In the West, your premiums will generally be lower if you buy a solid frame structure, since it's more resistant to earthquakes. You'll also win a few points if you live near a firehouse.
    
A few other tricks of the trade

     The institute said some insurers offer discounts of at least 5 percent for smoke detectors, burglar alarms and dead-bolt locks. If you install a sprinkler system, you might be able to knock 20 percent off those monthly bills. (These systems can be costly, so ask before you act.)
     Another obvious way to cut back on insurance costs (and reduce a primary fire hazard) is to stop smoking. Companies often reduce premiums if the policyholder, and all the residents in the house, are non-smokers.
     As for discounts, don't be afraid to ask. The institute said some insurers reward those who are age 55 and older and retired with discounts of up to 10 percent, since they are statistically at home more and better able to spot fires faster. And don't overlook that alumni or business group to which you may belong. Many groups strike deals with insurance companies and offer members discount rates.
     Lastly, the institute suggests you look to the private market first -- especially if you live in a high-risk area for crime or coastal storms.
     If you're buying through a government plan, you should at least price a few policies offered by private insurers.
     "You may find that there are steps you can take that would allow you to buy insurance at a lower price in the private market," it said.Back to top
     --by staff writer Shelly K. Schwartz

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.