Everyone, no matter how rich or poor, enjoys saving money.For example, a few weeks ago a multimillionaire real estate investor friendtook me to a lavish lunch, which must have cost him at least $100. As we wereleaving the restaurant, he saw the city “meter maid” coming down thestreet. All of a sudden he sprinted to beat her to his Lexus with an expiredparking 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 enjoyssaving money, a good place to start is with your insurance coverage.
Most property owners leave it up to their insurance agentsto obtain the right insurance coverage at a reasonable cost. But that can be acostly mistake.
Understanding property insurance coverages and how to cutpremium costs while increasing coverage can pay off with major savings.
DON’T INSURE FOR THE MORTGAGE BALANCE. Millionsof homeowners make a very expensive mistake by insuring their homes for theamount of their mortgage balance. Mortgage lenders encourage this”error” by telling their borrowers to buy homeowner’s insurance forthe amount of the mortgage balance.
The costly result is often unnecessary overinsurance formore than the home’s replacement cost. But lenders don’t complain and neitherdo insurance agents because they collect sales commissions on the unnecessaryoverinsurance.
Overinsurance usually occurs when high land value (whichwon’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 indestructibleland value. Therefore, I am required to insure only for my home’s replacementcost, which is about $200,000 less than my mortgage balance.
Worse, many homeowners are vastly underinsured because theycarry replacement-cost insurance for only their low mortgage balance. In theevent of a major fire loss, these homeowners will be shocked to discover theirinsurers don’t have to pay the full loss amount.
The best way to avoid being over- or underinsured is to askyour insurance agent to estimate your home’s replacement cost. Disregard landvalue. To illustrate, suppose you own a 2,000-square-foot house and in yourarea it will cost $200 per square foot to reconstruct your residence if itburns to the ground. The result is you should carry about $400,000 replacementcost insurance, even if the market value of your property is greater.
In other words, your mortgage balance has absolutely nothingto do with the amount of homeowner’s replacement cost needed.
RE-SHOP FOR PROPERTY INSURANCE EVERY THREE YEARS. A longtime ago somebody suggested I re-shop for property insurance every three yearsjust to be certain (1) I wasn’t paying too much and (2) I had adequateinsurance for my risks.
Over the years, my need for homeowner, rental property andbusiness insurance has changed. A few times I discovered I could save severalhundred dollars by switching my insurance to a different broker who was anagent 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 improvemy coverage, and (2) on the few occasions when I had claims, he made sure I gotpaid in full even when he had to battle with the insurance company on mybehalf.
That’s what a good insurance agent is supposed to do.
However, if I were unhappy with the premiums being too highor the lack of full payment for my few claims, I would switch to anotherinsurer in a heartbeat. In fact, I did so a few years ago to save money on myhealth insurance when my premiums became outrageously high although I never hadany claims.
RAISE YOUR UMBRELLA, LOWER YOUR LIABILITY INSURANCE. A fewyears ago my insurance agent made a wise and profitable suggestion. He said Ishould cut my liability coverage on each of my properties to $300,000 and takeout a $2 million “umbrella policy” to give me better coverage atlower cost. Don’t tell the insurer, but my $700 annual premium for $2 millionexcess liability coverage is a genuine bargain.
If you have net worth over $1 million, you can probably savemoney 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 insurancepremium dollars and obtain better protection.
Incidentally, my umbrella liability insurance policy notonly provides excess coverage for insured property liability, but it alsoprovides automobile liability coverage if I should be at fault in an autoaccident. Another feature I like with my present insurer is guaranteedrenewability no matter how many claims I might have (although my annualpremiums will probably increase).
DON’T MAKE SMALL INSURANCE CLAIMS. Anotherway my insurance agent saved me money a few years ago was to suggest I raise mydeductible on my property and automobile insurance to $1,000. The result islower insurance premiums, compared with my former $500 deductible amount.
If you can afford to pay small losses yourself, perhaps toreplace a cracked auto windshield or your tree falling on a neighbor’sproperty, the insurance company saves money and you avoid the risk of a higherpremium or cancelled insurance.
Of course, if you have severe damage, such as a windstormrips the roof off your house, you should file an insurance claim for that majorloss costing thousands of dollars.
A CONTROVERSIAL WAY TO SAVE ON INSURANCE PREMIUMS. Anotherway to save on your homeowner’s insurance is to insure for the depreciatedactual 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 theproperty loss. In other words, the insurer won’t pay the full replacement costof the item.
For example, 14 years ago I bought a state-of-art Sony42-inch TV for $2,300. It still has a beautiful picture. However, if I tried tosell it, its value is probably about $100 to a buyer. Actual-cash-valueinsurance 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 bepaid the cost of buying an equivalent TV at today’s prices.
Carrying actual cash value rather than replacement-costinsurance is a controversial way to save insurance premiums. However, if youcan afford to pay for personal-property replacement, why not save on insurancepremiums?
ASK YOUR AGENT ABOUT BUILDING-CODE-COMPLIANCE INSURANCE. A goodinsurance agent should suggest additional coverages you may want and need. Toillustrate, if your house burns to the ground and you want to rebuild, in additionto the cost of reconstruction, the local building code probably requires newupgrades you don’t currently have.
For example, where I live the building code now requires newhouses to have fire sprinklers. If my house is destroyed, my homeowner’s insurancewill pay for that upgrade because I pay a slightly extra premium forbuilding-code-compliance coverage.
SUMMARY: Smart homeowners and real estate investors checktheir property insurance coverages at least every three years by shopping rateswith several local agents to be certain they have adequate coverage at acompetitive insurance premium. Before filing a small claim, it pays to considerif 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 canafford to pay yourself, (2) if you have a net worth over $1 million, considerlowering your property and automobile liability coverage and raising your umbrellaliability policy coverage, and (3) evaluate actual cash value instead offull-replacement-cost personal-property coverage. More details are available byconsulting at least three local homeowner’s insurance agents to compare theirpolicy coverages and costs.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
Copyright 2006 Inman News