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Make It a Policy to Get the Correct Insurance : Too much or too little coverage could be an expensive mistake in case of loss.

July 16, 1989|ROBERT J. BRUSS | Bruss is a San Francisco-area lawyer, author and real estate broker.

How much would it cost to rebuild your home if it burned to the ground? Is this the amount of insurance you carry on your home? If not, why not?

The right amount of insurance. Smart homeowners insure their homes for the full cost of replacing their home, excluding the land and foundation value. But foolish homeowners either underinsure or overinsure.

If you don't insure for the full replacement cost of your home, in the event of a loss, the insurance company may not be obligated to pay the full amount of your loss, even if you have only a partial loss.

But many homeowners waste money by overinsuring, usually because the mortgage lender asks for an insurance policy for the amount of the mortgage balance. This is not the right way to determine the correct amount of insurance, because the mortgage balance is irrelevant to the home's replacement cost. Several states now have laws prohibiting lenders from requiring such overinsurance (California is the latest state to pass such a law).

For example, suppose your mortgage balance is $100,000, but it will cost only $80,000 to rebuild your home in the event of a total loss. Obviously, you need only $80,000 of fire insurance.

But many mortgage lenders would demand that you waste money and carry $100,000 of fire insurance. However, many lenders can be convinced such overinsurance is a waste of money. Surprisingly, most insurance companies don't want policyholders to overinsure, even though the insurer earns extra premiums, because overinsurance encourages arson.

How to determine your home's replacement cost. The cheapest way to determine your home's replacement cost is to invite one or more insurance agents to inspect your home and give their estimate of its replacement cost.

If you purchase a guaranteed replacement cost homeowner's insurance policy, the insurer is then obligated to rebuild your home, even if the cost exceeds your policy limits. Most lenders now accept these guaranteed replacement cost policies even if the amount is lower than the mortgage balance.

How to cut your homeowner's insurance cost. In addition to not overinsuring, another way to cut the cost of your home insurance is to raise the amount of the deductible.

The most expensive policies have $100 and $250 deductibles. If you can afford to pay the first $500 of any loss, you can save substantially on your homeowner's insurance premium. Better yet, if you can raise the deductible to $1,000, you will save even more.

Another way to cut your home insurance cost is to lower the liability limit. The liability coverage on your policy protects you in case someone is injured on your property, such as a visitor falling down the front steps. At least $100,000 liability coverage is essential, but $300,000 to $1 million coverage is not unusual.

However, ask your insurance agent if you can save money by lowering your homeowner's policy liability limit and purchasing a $1,000,000 or higher "umbrella policy" from the same insurance company. Umbrella policies are very inexpensive.

Still another method of cutting your homeowner's insurance is to compare personal property coverage. Some policies pay only the depreciated value of furnishings that are damaged or stolen, but other policies pay the full current replacement cost.

Most policies insure personal property up to 50% of the replacement-cost policy limit for the building. If you are willing to accept personal property depreciated-cost coverage rather than replacement cost you can usually save substantially.

Choose an insurance agent as much as you choose the company. When buying homeowner's insurance policies, ask friends for recommendations of the best insurance agents. Although you may be able to purchase cheaper insurance elsewhere, if the local insurance agent is known for top quality claims service, that is the company to select unless the premium is far above the competition.

Ask each agent how claims are handled. If they are settled locally, that is a big advantage. However, if claims must be approved in a distant office, perhaps a slight premium saving isn't worth the hassle. There is no substitute for a local insurance agent who realizes the customer must be satisfied if the agent is to prosper.

Don't confuse mortgage insurance with life insurance. Finally, don't be confused about all the insurance agents who want to sell you mortgage insurance, which will pay your mortgage in case you become disabled or die. These policies have no connection with fire and liability coverage.

They are essentially life insurance. If you already have adequate life insurance, you probably don't need a mortgage-protection policy. However, since these policies are extremely profitable for insurers, don't be surprised if you are continually harassed by many agents who want to sell you such insurance.

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