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Saving Money on Insurance

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    Recently I read a newspaper article instructing consumers to consider saving money on insurance premiums by changing the valuation on their homeowner contents from Replacement Cost to Actual Cash Value. I doubt that the author of that article has ever had a contents loss or he wouldn’t have suggested that. Following his suggestion would mean that if lightning struck your home and, let’s say, knocked out your 5 year-old 27 inch television, the insurance company would value your loss at the current (depreciated) value of your used TV! You, of course, would then be off to the store to buy a new TV with very little, if any, money in hand from the insurance company.  There are many ways to reduce the premiums on your insurance policies: some are smart, some are not and some depend on your situation.
    The most obvious and most commonly discussed method of saving is by increasing your deductible on any type of insurance whether it be auto, boat or homeowners. As you increase the deductible there will be a decrease in premium. Keep in mind, however, a couple of important considerations.
   First, never choose a deductible that would be impossible for you to deal with. A $1,000 deductible on your car might save you money, but if you slide off an icy road and incur $4,000 in damage, can you come up with your share of the money without creating a financial hardship on yourself?
   Second, make sure that the premium savings are commensurate with your increase in risk. In other words, if you increase the deductible on your boat from $500 to $1,000 and the premium decreases by only $15, is it worth it? On auto insurance, for instance, I generally like to see savings of 1/3 of the increase in risk before I recommend it. An example would be an increase from $250 to $500 on Collision coverage that results in $90 per year savings. On the down side, if there is a loss in the first year that exceeds $500, the customer will be out an extra $160 (The $250 extra deductible minus the $90 savings). However, if the customer makes it three years without a sizeable loss, he or she will be on the plus side having saved $270 by the third renewal for increasing the deductible by $250. Don’t expect to see the same size savings on homeowners’ policies as on auto polices for the simple reason that there are far fewer claims on homeowners’ policies.
    One place you definitely do not want to attempt to save money is by undervaluing your home. Even though most insurance companies increase the Replacement Cost Value of your home each year, you should not be complacent about accepting that value. It could easily be wrong by thousands of dollars in either direction.
   First, to accept the value is to assume that the company had an accurate value to start with. What if, for instance, the agent was asked to provide $100,000 of insurance at mortgage closing simply because that was the amount of the loan? The Replacement Cost Value of the home might have been $120,000 at that time so the value will always be insufficient.
   Second, the percentage that insurance companies use to increase the value is always an average. It might be a national average or an Idaho average, but in either case it may not reflect the true increase in costs in our area. When valuations are wrong, the majority of the time the home is undervalued but occasionally we do find a home over-insured. This is often the result of a mortgage company’s requirement to provide insurance based on the appraised value of the property rather than the replacement cost of the improvements. For instance, a new home that cost $150,000 to build may be sitting upon a $50,000 lot making the total value $200,000. If a person is financing 90 percent, the mortgage company might require insurance for $180,000. In this case the home purchaser is buying more insurance than he or she needs since the insurance company will never pay out more than it costs to rebuild the home ($150,000 in this example). A few years ago Idaho passed a law that forbids mortgage companies from requiring insurance that exceeds the replacement cost of the improvements, but I have found that many consumers and mortgage companies are still unaware of the law.
    As always, the bottom line is that no one has more incentive to look out for your interests than you do. Ask your insurance agent to run a computerized Replacement Cost Estimator on your home to make sure it is insured to the proper value. These are still simply estimates, but a carefully prepared estimate will let you know whether or not you are in the ballpark.
    There are other ways to decrease the amount of your premium or increase the coverage. The important thing is to make sure you are getting the best value from you insurance dollar. That means balancing your need for adequate coverage against your desire for a reasonable premium. Fortunately, you don’t have to make these decisions by yourself. Your local insurance agent is always available to review the coverage, suggest options and explain the insurance contracts. Be sure to make use of his or her services.
    Mike Mahoney has over 16 years of local real estate experience, and is the general manager of North Idaho Insurance in Sandpoint.

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Mike Mahoney

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