The catastrophic damage in Louisiana and throughout the Northeast caused by Hurricane Ida is an important reminder of the value of homeowners insurance. According to the Insurance Information Institute, 2019 reported that 5.1% of insured homes had a homeowner’s claim. 97% of those claims were attributed to property damage, and 3% were losses from liability claims. While we all hope never to need our homeowner’s insurance, few of us are so lucky. Therefore, when purchasing/reviewing your homeowner’s insurance policy, it is important to gain a detailed understanding of specific terms/definitions, out-of-pocket costs, and when it may be time to explore better options. Below are just a few components of your policy that are vital to know when comparing policies and understanding your coverages:
Replacement Cost vs. Actual Cash Value Coverage
One of the biggest oversights I see people making is not knowing if they have “Replacement Cost” or “Actual Cash Value” coverage. Replacement cost coverage insures your property for what it would cost to fully replace or repair your damaged property without taking depreciation into account. On the other hand, actual cash value coverage takes depreciation into account based on the number of years you owned the property. For example, say your $10,000 roof is damaged from a falling tree and needs to be replaced entirely. Under replacement cost coverage, your insurance would pay for the entire cost, or $10,000 in this case, to replace the roof. Under actual cash value coverage, a life expectancy of 20 years would be applied to your roof. If you had your roof replaced 10 years earlier, you would receive $5,000 from your insurance company and not $10,000 based on 50% depreciation of the roof’s value. As you can see, these policies are significantly different and will influence your out-of-pocket costs to replace damaged property. While replacement cost insurance may cost more, the peace of mind may be worth it.
Out of Pocket Costs
Other items to understand about your insurance include potential out-of-pocket costs like deductibles and co-insurance. Deductibles are the expenses an insured person will pay before insurance coverage kicks in. Co-insurance is the shared expense insured persons must bear alongside the insurance company. For example, a policy may have a $1,000 deductible and co-insurance thereafter of 80% and 20%. This means you as the insured will come out of pocket for the first $1,000, and thereafter, the insurance company will cover 80% of costs while you cover the other 20%. Make sure and understand these potential nuances in your coverage to better plan for future emergency costs.
Am I Getting the Best Deal?
One of the biggest financial mistakes I see people make is complacency with their insurance coverage in terms of not exploring better options. The insurance industry is highly competitive, so periodically shopping around can potentially improve your coverage and lower premiums and out-of-pocket costs. See Quote Wizard for easy to compare policies!
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Marshall Clay CFP, J.D., is a Partner and Senior Advisor at The Welch Group, LLC, which specializes in providing Fee-Only investment management and financial advice to families throughout the United States. Marshall is a graduate of the United States Military Academy in West Point, New York, the Cumberland School of Law in Birmingham, Alabama, and is a CERTIFIED FINANCIAL PLANNER™. In addition, Marshall is a frequent guest on local television stations as an expert on various financial planning matters.
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