For homeowners tight on cash, there are plenty of ways to reduce costs, but insurance isn’t the first place that should be trimmed, experts warn.
“We are all concerned with saving money and it is important to shop around when looking for insurance coverage,” says Loretta Worters, a spokeswoman for the Insurance Information Institute. “However some people are reducing their coverage or dropping important coverage plans altogether to try to save money and this can leave you dangerously underinsured in the event of a disaster.”
According to insurance experts, when it comes to homeowners insurance, people often make mistakes that leave them underinsured and holding massive bills if something goes wrong.
Navigating the insurance world to find the best coverage for your budget can be tough, but have the right coverage can prevent future financial headaches if something does go wrong.
Here’s a look at the top mistakes home owners make when it comes to their insurance.
Mistake No. 1: Insuring the property for the real estate value
Home owners often mistakenly insure their property for its real estate value instead of the cost to rebuild. When real estate prices go down, that enables them to reduce the amount of insurance on their home and save some money.
“You should make sure that you have enough coverage to completely rebuild your home and replace your belongings,” says Worters, noting that a better way to save is to raise the deductible. “An increase from $500 to $1,000 could save up to 25% on your premium payments,” she says.
Mistake No. 2: Not getting additional coverage
Natural disasters can happen with little to no notice and can have devastating consequences. For instance, flood insurance is almost always a separate policy.
“One of the largest mistakes that homeowners make is assuming that their policy covers their home and belongings in the event of every potential risk - such as flood,” says Ben Saine, product management director, homeowners insurance at insurer USAA. “Sadly, many people find out the hard way after a major storm that they didn’t have the coverage that they truly needed.” Saine says homeowners need to check to see what natural catastrophes are common in their location and make sure they are adequately covered.
Mistake No. 3: Getting rid of flood insurance
Superstorm Sandy that barreled up the East Coast last October proved that homes not located in designated flood zones can still experience major water damage.
“Many homeowners are unaware they are at risk for flooding, but in fact, 25% of all flood losses occur in low risk areas,” says Worters. “Furthermore, with the significant snow fall this winter, spring related flooding may be particularly severe, thus increasing the importance of purchasing flood insurance.”
Mistake No. 4: Shopping on price alone
Everyone likes a deal, so it’s not surprising that many homeowners will go with the cheapest policy they can find—but that could cost them in the long run.
According to Saine, many of the lowest-priced polices only offer coverage at a depreciated amount and don’t give homeowners the best service if there is a loss. He says it’s better to choose a provider that can cover the home adequately and will be easily accessible if something goes wrong.
“You need to ensure that your policy covers all of your home and its belongings at the replacement cost, not at the actual cash value,” says Saine. “For example, if your insurance policy only covers your roof at actual cash value and it’s damaged in a storm, the insurance company would only pay the depreciated amount for your roof. This means you may be stuck paying thousands of dollars out of pocket to replace your roof.”
It’s also important to consider the financial health of the insurer to make sure the company is financial stable to cover any claims.
“It is important to choose a company with competitive prices, but also one that is financially sound and provides good customer service,” says Worters.