Everyone, no matter how rich or poor, enjoys saving money. For example, a few weeks ago a multimillionaire real estate investor friend took me to a lavish lunch, which must have cost him at least $100. As we were leaving the restaurant, he saw the city “meter maid” coming down the street. All of a sudden he sprinted to beat her to his Lexus with an expired parking meter so he wouldn’t get a $20 parking ticket.
Yes, even multimillionaires enjoy saving $20.
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If you are a homeowner or real estate investor who enjoys saving money, a good place to start is with your insurance coverage.
Most property owners leave it up to their insurance agents to obtain the right insurance coverage at a reasonable cost. But that can be a costly mistake.
Understanding property insurance coverages and how to cut premium costs while increasing coverage can pay off with major savings.
DON’T INSURE FOR THE MORTGAGE BALANCE. Millions of homeowners make a very expensive mistake by insuring their homes for the amount of their mortgage balance. Mortgage lenders encourage this “error” by telling their borrowers to buy homeowner’s insurance for the amount of the mortgage balance.
The costly result is often unnecessary overinsurance for more than the home’s replacement cost. But lenders don’t complain and neither do insurance agents because they collect sales commissions on the unnecessary overinsurance.
Overinsurance usually occurs when high land value (which won’t burn in a fire) is included in replacement-cost insurance. For example, approximately 50 percent of my home’s market value is in the indestructible land value. Therefore, I am required to insure only for my home’s replacement cost, which is about $200,000 less than my mortgage balance.
Worse, many homeowners are vastly underinsured because they carry replacement-cost insurance for only their low mortgage balance. In the event of a major fire loss, these homeowners will be shocked to discover their insurers don’t have to pay the full loss amount.
The best way to avoid being over- or underinsured is to ask your insurance agent to estimate your home’s replacement cost. Disregard land value. To illustrate, suppose you own a 2,000-square-foot house and in your area it will cost $200 per square foot to reconstruct your residence if it burns to the ground. The result is you should carry about $400,000 replacement cost insurance, even if the market value of your property is greater.
In other words, your mortgage balance has absolutely nothing to do with the amount of homeowner’s replacement cost needed.
RE-SHOP FOR PROPERTY INSURANCE EVERY THREE YEARS. A long time ago somebody suggested I re-shop for property insurance every three years just to be certain (1) I wasn’t paying too much and (2) I had adequate insurance for my risks.
Over the years, my need for homeowner, rental property and business insurance has changed. A few times I discovered I could save several hundred dollars by switching my insurance to a different broker who was an agent for a “no name” insurance company.
But I stuck with my same agent for the last 30 years because (1) he periodically suggests how I can save on my insurance premiums or improve my coverage, and (2) on the few occasions when I had claims, he made sure I got paid in full even when he had to battle with the insurance company on my behalf.
That’s what a good insurance agent is supposed to do.
However, if I were unhappy with the premiums being too high or the lack of full payment for my few claims, I would switch to another insurer in a heartbeat. In fact, I did so a few years ago to save money on my health insurance when my premiums became outrageously high although I never had any claims.
RAISE YOUR UMBRELLA, LOWER YOUR LIABILITY INSURANCE. A few years ago my insurance agent made a wise and profitable suggestion. He said I should cut my liability coverage on each of my properties to $300,000 and take out a $2 million “umbrella policy” to give me better coverage at lower cost. Don’t tell the insurer, but my $700 annual premium for $2 million excess liability coverage is a genuine bargain.
If you have net worth over $1 million, you can probably save money by following the same strategy. Check with your current insurance agent, plus one or two others, to see if a similar tactic can save you insurance premium dollars and obtain better protection.
Incidentally, my umbrella liability insurance policy not only provides excess coverage for insured property liability, but it also provides automobile liability coverage if I should be at fault in an auto accident. Another feature I like with my present insurer is guaranteed renewability no matter how many claims I might have (although my annual premiums will probably increase).
DON’T MAKE SMALL INSURANCE CLAIMS. Another way my insurance agent saved me money a few years ago was to suggest I raise my deductible on my property and automobile insurance to $1,000. The result is lower insurance premiums, compared with my former $500 deductible amount.
If you can afford to pay small losses yourself, perhaps to replace a cracked auto windshield or your tree falling on a neighbor’s property, the insurance company saves money and you avoid the risk of a higher premium or cancelled insurance.
Of course, if you have severe damage, such as a windstorm rips the roof off your house, you should file an insurance claim for that major loss costing thousands of dollars.
A CONTROVERSIAL WAY TO SAVE ON INSURANCE PREMIUMS. Another way to save on your homeowner’s insurance is to insure for the depreciated actual value rather than for full replacement cost of personal property.
That means when an insured loss occurs, such as due to fire, theft or accident, the insurer will pay you only the depreciated value of the property loss. In other words, the insurer won’t pay the full replacement cost of the item.
For example, 14 years ago I bought a state-of-art Sony 42-inch TV for $2,300. It still has a beautiful picture. However, if I tried to sell it, its value is probably about $100 to a buyer. Actual-cash-value insurance will pay me only $100 if that TV is stolen or damaged in a fire. However, if I carry the more expensive replacement-cost insurance, I will be paid the cost of buying an equivalent TV at today’s prices.
Carrying actual cash value rather than replacement-cost insurance is a controversial way to save insurance premiums. However, if you can afford to pay for personal-property replacement, why not save on insurance premiums?
ASK YOUR AGENT ABOUT BUILDING-CODE-COMPLIANCE INSURANCE. A good insurance agent should suggest additional coverages you may want and need. To illustrate, if your house burns to the ground and you want to rebuild, in addition to the cost of reconstruction, the local building code probably requires new upgrades you don’t currently have.
For example, where I live the building code now requires new houses to have fire sprinklers. If my house is destroyed, my homeowner’s insurance will pay for that upgrade because I pay a slightly extra premium for building-code-compliance coverage.
SUMMARY: Smart homeowners and real estate investors check their property insurance coverages at least every three years by shopping rates with several local agents to be certain they have adequate coverage at a competitive insurance premium. Before filing a small claim, it pays to consider if the insurer might nonrenew or substantially raise the renewal premium.
Additional ways to save on insurance premiums include (1) raising the deductible amount to eliminate small insurance claims that you can afford to pay yourself, (2) if you have a net worth over $1 million, consider lowering your property and automobile liability coverage and raising your umbrella liability policy coverage, and (3) evaluate actual cash value instead of full-replacement-cost personal-property coverage. More details are available by consulting at least three local homeowner’s insurance agents to compare their policy coverages and costs.
(For more information on Bob Bruss publications, visit his
Real Estate Center).