Though saving money is important, shaving off key protections in order to reduce homeowners insurance premiums can be costly in the event of a disaster. “The best way to avoid living the cliché of being ‘penny wise and pound foolish’ is to know what less-than-full coverage will cost you,” says Lynne McChristian of the Insurance Information Institute (I.I.I.). “Talk with an insurance professional before the winds kick up to understand the difference between smart shopping and possible costly mistakes.”
Those potentially costly mistakes include:
1. Going “bare.”
Homeowners without a mortgage are not required to have home insurance—but going without insurance protection means the risk of losing what you’ve invested in what is likely one of your most important assets. For most people, setting aside a pool of money large enough to rebuild a home or replace all their possessions is too much of a financial challenge, leaving them with insufficient funds in the event of a total loss
2. Eliminating windstorm and contents coverage.
While a residential property insurance policy typically includes this protection, homeowners may choose to send a handwritten and signed letter to their insurer asking that such coverage be excluded and acknowledging they will pay for any losses. Excluding windstorm and/or contents coverage can save you hundreds of dollars a year on insurance. “But the downside is you will need to pay thousands of dollars—or even hundreds of thousands of dollars—out of your own pocket if a hurricane strikes,” says McChristian.
3. Declining Building Ordinance or Law coverage.
Homes age and building codes improve. That often means that there can be a big difference in the structural strength of a newly built home and one that is 10 or more years old. If a home is damaged or destroyed, rebuilding to current building codes will raise the cost of reconstruction. Building Ordinance or Law coverage pays for this additional expense.
4. Choosing a high hurricane deductible.
High deductibles lower the cost of insurance, but they also mean higher out-of-pocket costs after a storm. For example, a homeowner with a house insured for $200,000 with a 10 percent hurricane deductible would have to contribute $20,000 toward rebuilding costs. Lowering the hurricane deductible to 2 percent would cut that amount to $4,000.
5. Insuring for less than the rebuilding cost.
Most insurance companies will allow a homeowner to insure for less than what it costs to rebuild–though never below 80 percent of the home’s replacement cost. Homeowners who choose this option would be responsible for paying both their deductible and the additional cost to cover the gap in their rebuilding coverage. In hurricane-prone areas, it is worth considering a homeowners policy that provides broader coverage, called extended replacement cost coverage. After a major natural disaster, construction professionals may be in short supply and building materials in great demand. This combination increases the cost to rebuild. Extended replacement cost policies will pay an additional 20 percent or more above the policy limits to account for such increases.
6. Forgoing flood insurance.
A standard homeowners insurance policy does not cover flood damage. Because it can rain hard —and for extended periods—even during a regular storm, every homeowner should consider purchasing a separate flood insurance policy from the National Flood Insurance Program (NFIP) or from a private insurance company. Excess flood insurance is also available from private insurance companies if more coverage is needed than the amount available from the NFIP.