HOW TO MINIMIZE THE INCREASING COST OF HOMEOWNER’S INSURANCE

As many homeowners are learning firsthand, the cost of insuring their homes is going up—way up in some cases. And in some places, homeowner’s insurance is getting tough to find. Because your home is one of your largest financial investments, you don’t want to underinsure in order to offset rising premiums, caution CERTIFIED FINANCIAL PLANNER™ professionals. But you can take steps to minimize those increasing costs.

How much premiums are going up varies widely from state to state, city to city and insurer to insurer, but rate increase are commonly 10 to 20 percent or more—in some cases, 100 to 200 percent. Although the attack on the World Trade Center has prompted attention on property/casualty insurance, insurance premiums were already escalating before that. Factors included rising construction and repair costs, major weather-related losses, household mold, increased use of “credit scoring” which assigns higher rates to people with higher credit risks, and increased frequency of claims by homeowners. Even the stock market is a factor: insurers were making profitable investments when the market was hot in the late 1990s and they could afford to use homeowner’s insurance as a loss leader for more profitable lines of insurance such as life and auto. No longer.

Here are some steps to minimize rising homeowner’s insurance costs while maintaining adequate coverage.

First, be sure you have the right coverage. Many financial planners recommend taking out a guaranteed-replacement-cost policy. The insurer pays for the cost of fully replacing the property even if costs exceed the policy’s stated value of the home. But some carriers are eliminating this option, instead capping payouts at a percentage above the stated value, such as 125 percent. Consequently, you must be more careful that you don’t underinsure—many homeowners forget to upgrade coverage for major home improvements, such as a deck or finished basement. But also don’t overinsure by carrying extra coverage for things that have declined in value or you no longer own, such as a fur coat or jewelry.

Take out specialized coverage such as for flood or earthquake, if appropriate. These aren’t covered under the standard policy. Be aware that if you buy or build in a high-risk area, such as a flood plain or in a forest far from fire department service, you’ll pay more.

Once you’ve selected the appropriate type of insurance for your home, start whittling down the premiums. One of the biggest savings is by taking out a larger deductible. This is the amount you pay up front before the insurer starts paying. Let’s say you have a $250 deductible. Raise it to $1,000, for example, and you can save up to 25 percent in premiums, according to the Insurance Information Institute. Stash the premium savings in an emergency fund so you have the money in order to pay the deductible.

Don’t file for minor claims. Some insurers are beginning to raise premiums or drop coverage altogether for homeowners who file as few as two to three claims, even if minor and legitimate, in as few as three or four years. This has angered consumers, but it appears to be a growing fact of home ownership. Try to use your insurance just for major claims and self-insure the rest. Going with a higher deductible will benefit this issue, as well as save premium money.

Ask about discounts. Insurers give all sorts of discounts, including the use of smoke alarms and burglar alarms, nonsmokers in the family, senior discounts (seniors are home more), the use of fire-resistant roofing material and storm shutters, modernized plumbing or electrical, or just being a long-time policy holder with the same carrier.

Carriers often give discounts of 5 to 15 percent if you buy additional types of insurance with them, such as auto coverage and liability.

Shop around. You can save hundreds of dollars a year. But don’t necessarily take the cheapest deal. Be certain the insurer is financially sound and has a good claims record.

Look for group coverage through your employer, or professional or alumni organization.

July 2002— This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by McGuire & Co., LLP, a local member in good standing of the FPA.

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