Insurance Series: Home Owner’s and Renter’s Insurance

Insurance Series – Over the next several weeks, I will cover four of the major types of insurance, as well as surrounding issues, that you should have or re-evaluate if you already have. This is post #1 – Home Owner’s and Renter’s Insurance.

No one expects the worst to happen, but it does. Whether it’s a break-in, a pipe breaking, a fire, or you lose your wedding ring (ask my wife about that one), chances are that you will need to use Home Owner’s or Renter’s insurance at some point. The purpose of this post is to outline various issues surrounding renter’s and home owner’s insurance and what level is appropriate. Also, a lot of renter’s should have renter’s issurance so I’ll briefly plead that case.

Renter’s Insurance

Long before we ever owned a home, my wife and I lived in an apartment (berber carpet, no padding, oh those were the days). Shortly after moving in, we called one of my friends that works for an insurance agent and began asking questions about renter’s insurance. They were already insuring our car at the time. Come to find out, the cost to add a renter’s insurance policy was essentially $0 in our case. Here’s why. Insurance companies give discounts for coupling various types of insurance or insuring multiple assets. The discount on our auto insurance was equal to the cost of renter’s insurance. Later, when we switched our car insurance to Geico, the annual rate for renter’s insurance jumped up to only $72. Meaning, renter’s insurance is generally pretty cheap and well worth the expense.

In the case of renter’s insurance, the building owner has the liability if the structure is damaged in a natural disaster. You are responsible for all of your assets. Meaning, your clothes, dishes, furniture, TV, etc. What many people don’t realize is that renter’s and home owner’s insurance cover items in your car as well. So does that include your car stereo being jacked? No. Here’s a simple way to determine what in your car is covered though. Imagine for a moment that you are Hulk but without the bulging green veins. If you picked your car up and shook it with the trunk open, anything that falls out is covered by your renter’s or home owner’s insurance. So your CDs or iPod are covered. So when trying to determine how much coverage to buy, estimate the cost to replace all of your personal items and not the cost to repair the structure.

One last note, if you are a renter and sublet your apartment with your furniture or other belongings still in it, then renter’s insurance should be a no brainer.

Home Owner’s Insurance

With the purchase of a home, home owner’s insurance can become a bit more complicated. For example, if you belong to a Home Owner’s Association (HOA) then the HOA may cover some of the insurance.

Non-HOA

If no one else is insuring any part of your home, then you bare the full responsibility to insure against structural damage and loss of personal belongings. To help choose an insurance company and how much coverage is appropriate, I’ve compiled a short list of things you should consider.

1. Know yourself and your goals
2. Know your budget and how much you can afford monthly
3. Understand in detail the costs and benefits of each insurance product (ask lots of questions)
4. Insure against high-cost, high-severity losses only (see Deductible and Coverage below)
5. Work only with high-quality individuals and institutions
6. Review your insurance needs annually

HOA

We belong to an HOA that insures from the walls out on our townehouse. Meaning, we are responsible for our personal belongings as well as everything inside of the walls. For example, flooring, carpet, and cabinetry. If you move into an area that has an HOA, find out what, if anything, they are covering and then insure accordingly.

C.L.U.E. Report

When determining your insurance premiums and whether or not to insure you, insurance companies use actuarial tables to estimate what you will cost them in the future in claims. This estimate is based on past behavior – how many claims have you had (frequency) and how much did they cost (severity). All of this information is available to you as well via a C.L.U.E. Report. This service is offered by ChoiceTrust. The report contains a seven year record of your “personal property loss history, inquire history, and instructions on how to dispute the claims on your report.” The same report is available for your auto insurance as well.

Deductible and Coverage

Determining your deductible can be tricky. Probably the simplest way to determine your deductible is to evaluate how much you have in savings and could therefore cover out of pocket versus the impact on your budget of the higher monthly cost of a lower deductible. The purpose of insurance is to hedge against the risk that something happens by investing money now. An insurance company is a way to pool money from many people to cover the cost when something does happen. However, there is always some element of self-insurance. Let me explain. By having a deductible above $0, you have decided that you have the resources to self-insure against some fixed dollar amount, which is equal to your deductible. Therefore, when you set your deductible, think of that as self-insurance and what you can afford later versus on a monthly basis. At a minimum, insure against high-cost, high-severity events and evaluate your financial ability to self-insure against events with a small economic impact (small is relative to your financial situation).

Action Plan

In brief, having renter’s or home owner’s insurance is part of your total financial plan. First, check your C.L.U.E. Report for any discrepancies as they may unfairly increase your premiums. Second, shop your insurance around with several reputable companies or acquaintances. Third, try to bundle all your insurance with one company for the best rates (this does not always work). Fourth, insure against high-cost, high-severity events and save or self-insure for your deductible and other smaller life events. Last, re-evaluate your premiums and coverage on an annual basis.

Have any good horror stories when you were glad you had insurance?

(This post is featured in the Carnival of Personal Finance #221 – Labour Day Edition hosted by Financial Highway)