Ensure You’re Most Assuredly Insured: Home, Auto, and Extended Warranties
It is generally agreed that insurance is not exactly the most palatable way to spend your money. After all, you’re regularly paying for a product you don’t want to ever actually have to use. From one perspective, one might view it as sort of a rigged system.
Insurance companies usually pay out less in claims than they receive in premiums, so insurance buyers collectively lose money. No one likes to lose money, but no one likes to face financial catastrophe, either. That’s what insurance is meant to protect against. Major financial risks. For most people, that would include loss of a home, for example. Ultimately, this is the big picture perspective—and why being knowledgeable about insurance is so important. Insurance is not a luxury; it’s a necessity.
If you’ve been on the edge of your seat in anticipation for the finale in this series on insurance (see the first three parts here, here, and here), sit back, relax, and enjoy the read. The insurance featured in this post? Home, auto, and extended warranties. A topic trifecta.
I’ll cover some critical things to know about these insurance products, and (bonus!!) offer suggestions and personal tips (from my own experience) on investing in the types of protection you need at the right price.
Homeowners insurance
(This contemporary stunner is what would be classified as a “Frank Lloyd Wright meets Malibu Barbie Dream House” style home.)
If you’re getting a mortgage for your new home, your lender will require homeowners insurance. And even if you’re among the lucky 22% of home buyers purchasing without a mortgage, you still should get homeowners insurance to protect against costly perils like fire and wind damage.
You may be wondering: at what point during the homebuying process should you begin shopping for homeowners insurance? How much coverage should you get, and which features should you choose? Where the heck do you even start?
Not to worry! I shall address these and other common questions below.
Where and when to start?
Although you don’t actually own the home before your closing, mortgage companies typically want evidence of insurance—also called a binder—a few days before the closing.
I suggest starting with an independent agent who can compare premiums and isn’t beholden to just one company. If you shop early, you also give the insurer more time to “underwrite” your home—that is, to determine the appropriate level of coverage. That’s particularly important if your home has lots of unusual or costly details, like woodwork made of a rare species or a fancy built-in sound system.
How much coverage do you need?
Don’t assume you have to cover your home at its market value or its tax appraisal value or even the value of your mortgage loan. The number that a homeowners insurance company is interested in is how much it would cost to rebuild your home tomorrow. That amount doesn’t include the price of your land, so in many cases the insurable amount will be lower than the home price. Typically, a home that’s completely destroyed by, say, a tornado may still have its foundation intact. The insurance company will look at online real estate listings and other available data to come up with the amount of coverage, and/or it will send an appraiser directly to the house.
The purpose of homeowners insurance is to cover large catastrophic losses. It shouldn’t be thought of as a maintenance policy.
When should you file a claim?
The purpose of homeowners insurance is to cover large catastrophic losses. It shouldn’t be thought of as a maintenance policy. Claim frequency and severity of the claim play a considerable role in determining rates, especially if there’s more than one claim relating to the same issue like water damage, wind storms, etc.
The amount of the deductible you choose is also a factor in the claims that you may potentially file. The higher the deductible, the more out of pocket you have to pay. Also, the higher the deductible, the lower your annual premiums.
I suggest going as high as you can handle with your savings—say $2,500—and file only when something happens in your home that’s more expensive than that.
What’s covered?
Not everything. For instance, water damage from a pipe or other system that breaks inside the house is covered, but water coming from the outside will not be (e.g., if your home is flooded because a lawn sprinkler broke or was left on). In general, events that are preventable by reasonable home maintenance—mold, pest infestations, leaks from roofs worn by wear and tear—aren’t covered.
You may need to buy separate coverage for perils that a standard homeowners policy doesn’t cover. Keep in mind that some perils, such as liability coverage for dog bites from breeds such as pit bulls and Rottweilers, may not be insurable at all. For jewelry, furs, and fine art, you can buy a separate policy that covers accidental loss. Consider business insurance if you run a business out of your home, even as a renter. Work with your agent to buy separate flood and earthquake protection. You may need a separate hurricane or windstorm policy, with a separate deductible, if you live in a high-risk zone.
Sewer backup coverage, to address a blockage in your sewer line, costs around $40 to $100 a year. Flood insurance costs, on average, around $700 a year but can be purchased for far less in a low-to moderate-risk area and may be much higher in high-risk areas.
What if you rent a home?
Your landlord’s policy insures only the rental unit itself, not your belongings in it. If the value of your possessions is substantial, consider rental insurance, which on average costs $15 to $20 per month. It also covers you for liability (do you own a dog with a dangerous reputation?).
How much does your credit score matter?
Your credit score matters quite significantly. Insurance companies will use any means necessary to determine the probability of risk. Around 95% of auto insurers and 85% of home insurers use “credit-based insurance scores” in states they are legally allowed to when determining your underwriting risk (the practice isn’t allowed in California, Maryland, or Massachusetts). Why do they do this? Because actuarial studies show that a person’s financial affairs are a good indicator of whether that person will file an insurance claim. A 2017 study found a substantial increase in premiums for people with lower credit scores.
What about ‘Personal Liability for Damage or Injuries’?
Liability coverage protects you from lawsuits filed by others. This clause even includes your pets! So, if your dog bites your neighbor, no matter if the bite occurs at your place or hers, your insurer will pay her medical expenses. While policies can offer as little as $100,000 of coverage, experts recommend having at least $300,000 worth of coverage, according to the Insurance Information Institute. For extra protection, a few hundred dollars more in premiums can buy you an extra $1 million or more through an umbrella policy (see below).
Is it worth comparison shopping?
Compare insurance costs by shopping around every couple of years to see whether you can get a better premium from a different insurer. Over half of people who change companies do so because switching saved money.
Are there any tricks to help cut premium costs?
Yes. There are several ways to cut the cost of premiums:
Maintain a security system
A burglar alarm monitored by a central station or tied directly to a local police station can lower your annual premiums by as much as 5% or more. Smoke alarms are another biggie. While standard in most modern houses, installing them in older homes can save the homeowner 10% or more in annual premiums. CO2 detectors, dead-bolt locks, sprinkler systems and in some cases even weatherproofing can also help.
When you choose a deductible, you’re picking a number you’re willing to spend out of pocket if you suffer a loss.
Raise your deductible
Like health insurance or car insurance, the higher the deductible you choose, the lower the annual premiums. You can shave hundreds of dollars off your annual homeowners insurance bill by increasing your deductible. I don’t just mean going from $500 to $1,000. Think big. $2,500. Already have a $2,500 deductible? Then think bigger. $5,000. $10,000. Or really big. If you have a $5,000,000 home, you might even consider a deductible of $100,000.
When you choose a deductible, you’re picking a number you’re willing to spend out of pocket if you suffer a loss. It should certainly cover what you think of as run-of-the-mill outlays (when calling the insurer would be more of a hassle than writing a check to the repairman). But if you’re comfortable with laying out even more at the time of a loss, over time you can really save money on premiums.
How much might you save with a bigger deductible? While a typical homeowners insurance policy deductible is $500 or $1,000, you might save $300 a year by going to a $2,500 deductible or $600 a year by going to a $5,000 deductible. On a house insured for $1 million with a $2,500 deductible, you might save $1,000 a year by going to a $10,000 deductible.
Look for multiple policy discounts
Many insurance companies give a discount of 10% or more to customers who maintain other insurance contracts with them (such as auto or health insurance).
Do you really want that pool?
Items such as pools and/or other potentially injurious devices (like trampolines) can drive the annual insurance costs up by 10% or more.
Pay off your mortgage
Obviously this is easier said than done, but homeowners who own their residences outright will most likely see their premiums drop. Why? The insurance company figures if a place is 100% yours, you’ll take better care of it. Note: this must vary from company to company because when I paid off my mortgage I did not get a break on my premium.
Make regular policy reviews and comparisons
No matter what initial price you’re quoted, you’ll want to do a little comparison shopping. Get at least a few quotes. And even after purchasing a policy, I recommend that you comparison shop again at least once every year or two. This should include a review of your existing policy, noting any changes that have occurred that could lower your premiums. Once they have your business, insurance companies don’t want to lose it (often offering to lower your premium or deductible for your loyalty). Use comparison quotes as a negotiating tool.
Personal tips
Since I’ve started looking closely at my home, auto, umbrella, and personal property insurance policies over the last several years, I’ve developed a better understanding of what is covered and the cost differentials for different levels of coverage. It takes time to read the fine print and shop around, but every year it becomes easier and takes less time. Knowledge takes the mystery out of it. I use an independent insurance agent, who has been very responsive to my needs, but I know that no one will look out for my best interests as much as I will. It’s impossible for an agent to know about all the changes that occur in my life.
For example, my husband and I wanted to buy a house on the same street, 5 houses down from where we were living. We had gotten tired of clearing a sloped driveway in the Wisconsin winter. We liked the new house with a flat driveway that got a lot of sun. There were other things we liked better about the new house too, but the driveway was the big one. We managed to buy the new house for a good price and moved before the old house was sold.
I was surprised when the homeowners insurance premium for the old house went UP by $200 even though we were no longer living there. That’s when I learned about personal property coverage, which my agent defined as “If you were to pick up your house, turn it upside down and shake it, whatever falls out is personal property – clothing, furniture, kitchenware, household goods, etc. – whatever isn’t permanently attached to the studs.” She told me that the limit of that coverage is automatically 75% of the limit for which the home itself is insured. I had no idea! My husband and I don’t furnish our home expensively and didn’t think the value of our property came close to the number that was 75% of our home’s insured value. Certainly not in the home we’d moved out of, where we no longer had any furniture. We immediately dropped our personal property coverage to 10% on the old house and to 50% on our new house.
My agent also told me that the “standard” deductible for homes valued under $1,000,000 was $1,000. I figured I could pay more than that out-of-pocket and asked how much I could save on premium costs by increasing the deductible. I wound up increasing my deductible to $2,500 and saved $156/year on my premium. I’m considering increasing my deductible to $5,000, although it may or not not be worth doing so if it doesn’t reduce the premium by a significant amount.
I also asked about flood insurance and learned that the maximum you can purchase from the federal government on a Primary Flood Policy is $250,000 on the dwelling and $100,000 on personal property. This would have cost me $499. If I wanted higher limits, I would have to purchase an Excess Flood Policy, both of which would cost around $1,300/year. I live in an area where the risk of flood is about as low as it gets, so I decided not to get flood insurance. I am covered for sprinkler flood or water backup.
My homeowners premium is reduced because of the following: alarm credit, deductible credit, home new purchase discount, insurance score credit, mature homeowner discount, package credit, preferred risk (no losses in 6 years), and superior risk credit.
Umbrella policy
An umbrella insurance policy is extra liability insurance coverage that goes beyond the limits of the insured’s homeowners or auto insurance. It provides an additional layer of security to those who are at risk of being sued for damages to other people’s property or injuries caused to others in an accident. It also protects against libel, vandalism, slander, and invasion of privacy.
If a policyholder is sued for damages that exceed the liability limits of car insurance, homeowners insurance, or other coverage types, an umbrella policy helps pay what they owe. For example, if you run a red light and accidentally hit another car, there might be significant damage to the vehicle and several people might be injured. If car repairs total $50,000 and the treatment of the injuries eclipses $500,000, you may be liable for expenses that go far beyond the coverage limits of your insurance. An umbrella insurance policy will pick up the additional liability costs beyond the limits of your car insurance coverage.
The added coverage provided by an umbrella insurance policy is most useful to high net worth individuals, such as radiologists, who own a lot of assets or very expensive assets and are at a significant risk of being sued. Or they may own dangerous things that can cause injury (swimming pools, trampolines, dogs, etc.). They might also engage in activities that increase their chances of lawsuits, such as being a landlord, coaching kids’ sports, or participating in sports where they could easily injure others (e.g., skiing, surfing, hunting). Small businesses also use an umbrella insurance policy to guard against potential monetary damages arising due to claims made against them.
The average annual cost of a $1,000,000 personal umbrella insurance policy is $150 to $300. I pay $484 for a $5,000,000 policy. I don’t know that there is a “standard” amount of coverage that radiologists should have, but have seen recommendations that are generally between $1M to $5M.
Depending on the provider, the policyholder who wants to add an umbrella insurance policy is required to have a base insurance coverage of $150,000 to $250,000 for auto insurance and $250,000 to $300,000 for homeowners insurance.
Auto insurance
Vrooom. Now we get to the part about cars! Or trucks. Or your motorcycle. Auto insurance is a policy purchased by vehicle owners to mitigate costs associated with getting into an auto accident. The premiums vary depending on age, gender, years of driving experience, accident and moving violation history, amount of coverage, and other factors. You can reduce your premiums by agreeing to take on more risk, which means increasing your deductible.
Most U.S. states require basic personal auto insurance, and laws vary from state to state. If you are financing a car, your lender may stipulate requirements. Nearly every state requires car owners to carry:
- Bodily injury liability – covers costs associated with injuries or death that you or another driver causes while driving your car
- Property damage liability – reimburses others for damage that you or another driver operating your car causes to another vehicle or other property
Many states also require:
- Medical payments or personal injury protection (PIP) – provides reimbursement for medical expenses for injuries to you or your passengers; it will also cover lost wages and other related expenses
- Uninsured motorist coverage – reimburses you when an accident is caused by a driver who does not have auto insurance
An auto insurance policy will cover you and other family members on the policy, whether driving your car or someone else’s car (with their permission). Your policy also provides coverage to someone who is not on your policy and is driving your car with your consent.
Personal auto insurance only covers personal driving. It will not provide coverage if you use your car for commercial purposes—such as making deliveries. Neither will it provide coverage if you use your car to work for ride-sharing services such as Uber or Lyft. Some auto insurers now offer supplemental insurance products (at additional cost) that extend coverage for vehicle owners that provide ride-sharing services.
Personal tips
When the premium was greater than 10% of the value of my husband’s car, we cancelled collision and comprehensive coverage, saving over $200/year. His Ford Explorer had a retail value of $2,900 and the insurance would have only paid out $1,500-$2,500. I also cancelled auto towing and medical coverage on my auto insurance (covering other people in my car, not lawsuits), two things that are automatically “recommended”, which I didn’t think I needed.
Extended warranties (like for your iPhone!)
What about minor financial risks, like your iPhone shattering on the pavement, or the washing machine going kaput? Because insurance will usually be a money loser, I don’t want to pay premiums to protect against risks I can easily pay for out of pocket.
Extended warranties are a type of insurance that covers what I would consider “minor risks.” Every time I buy an appliance, automobile, or phone, the salesperson tries to sell me an extended warranty. They usually don’t cost much but I know there’s very little chance I will ever need it so I don’t buy it. And I’m in a position where I can buy a new phone with cash.
While it may sound like a good idea in theory, extended car warranties often come with a high price tag (thousands of dollars) and don’t necessarily cover everything that could go wrong. Plus, many people who buy extended warranties never use them. In that case, an extended warranty becomes a cost with no financial return. According to a Consumer Reports survey, 55% of respondents who bought an extended warranty didn’t use it and only a quarter of survey participants said they’d buy one again. And the cost for repairs among respondents who used their warranty was typically less than the cost of the warranty. Here are other “cons” of buying an extended car warranty:
- Overlap: If the coverage period of the extended warranty overlaps with the manufacturer’s warranty, you may pay for a warranty you’re already getting at no cost. And with a new car, the extended warranty likely will not be in effect until the manufacturer’s warranty expires.
- Coverage: Extended warranties typically don’t cover everything that might go wrong with your car.
- Service requirements: You may only be allowed to have your car fixed at certain repair facilities.
- Depreciation clauses: Some extended warranties may only pay for a portion of the cost to repair or replace parts that need to be fixed, based on the car’s mileage.
- Reliability: Under most extended warranties, either the dealer, manufacturer or an independent third party is responsible for paying for repairs. If the entity that’s supposed to pay the bills goes out of business, you may be stuck with a warranty you can’t use.
Personal tip
One type of “extra” insurance that I have bought is travel insurance. Several years ago, my husband and I plunked down $10,000 for a cross-country bicycle tour. It was the trip of a lifetime. We were going to ride our bikes over 3,000 miles in 34 days. We spent months preparing by riding 100 miles a day or more on our bikes.
The trip was going great until my knee started to hurt from an overuse injury. I kept riding (foolishly thinking that continuing to stress my knee would make it better) until the guides had to drag me off the pavement into the van (okay, that’s a bit of hyperbole, but just a bit). My knee had swollen to the size of a grapefruit and after riding 800 miles along the Pacific Coast highway, through Nevada, Utah, and Colorado to the Grand Canyon, I had to fly back home for a knee MRI and physical therapy. Fortunately, I had travel insurance, and it kicked in immediately. A pediatrician on the tour was kind enough to examine my knee and fill out my insurance paperwork. I was refunded for all the trip days my husband and I couldn’t finish as well as first class plane fare back home. I wasn’t the only person who suffered an injury during the trip and had to abandon. If you pay a lot of money in advance for a trip and there is a risk of injury or illness (elderly people tend to need to cancel trips for medical reasons, for example), travel insurance may make sense.
Final remarks
You did it! You just finished reading my 4th installment on insurance! A note: if you missed any of them, you might want to go back to the last three posts to learn about other types of insurance (e.g., malpractice, life, disability, health, and long-term care).
It takes some time and effort to learn about the ins and outs of each type, but you should consider it a life-long investment. Once you’ve mastered the basics, you will be in a better position to make sure that going forward you get what you need, and only what you need, at a reasonable price.