Dwelling coverage

When you buy a home, you’ll get a policy with dwelling protection, the amount of which is determined by the cost of rebuilding in your area. The insurer details the size and features of your home so, for example, in the event of a fire that destroys the property, the policy will pay out enough money for you to rebuild the property and replicate what you started with. (If you’re a condominium owner, check out whether the insurance the condo association bought for the entire building is sufficient.)

When buying a homeowner’s policy, seek out coverage that includes guaranteed replacement cost. This ensures that the insurance company will rebuild the home even if the cost of construction is more than the policy coverage. If the insurance company underestimates your dwelling coverage, it has to make up the difference. Each insurer defines guaranteed replacement cost differently, so be sure to ask insurers how they define it. Some companies pay for the home’s full replacement cost, no matter how much it ends up being, while other insurers set caps or limits. For example, some insurers may pay up to 25 percent more than the dwelling coverage on your policy.

When you’re renting, you don’t need to have dwelling protection because you don’t have an ownership stake in the building. Should something happen to the building, it could, of course, affect your ability to live there or affect your possessions, but those are different matters not covered by dwelling coverage, which is strictly for the benefit of the building’s owner.

Personal property protection

Personal property coverage basically covers the contents of your home — furniture, clothing, and other possessions. On a homeowner’s policy, the amount of personal property coverage is usually dictated by the amount of dwelling coverage. For example, you may get personal property coverage that’s equal to 50 to 75 percent of the dwelling coverage, which should be more than enough for most people. Unless you own a ton of expensive furnishings, ask your insurer if you can choose a lower percentage for this coverage than they use as an automatic default. Otherwise, you will be throwing away money on coverage you’ll never use.

When you’re renting or you’re the owner of a condominium, you need to select the level of personal property coverage you desire. You can estimate this figure by totaling up the cost of replacing all your personal items.

You need to have a good grasp of what you own. Take an inventory of all your personal property, even if you don’t need to total its value. The best way to do so is to take pictures or make a video. Be sure to take an inventory again every year or two or after you make some larger purchases. Also consider keeping receipts for the bigger-ticket items you buy for documentation purposes. No matter how you document your belongings, don’t forget to keep the documentation somewhere besides your home — otherwise, it could be destroyed along with the rest of your house in a fire or other disaster.

I generally don’t recommend paying for a rider for extra coverage (a rider is add-on coverage that specifically covers particular items not covered in your standard policy) unless you have items of significant value (such as artwork, jewelry, and so on).

Liability insurance

We live in a litigious society, so even though you may rightfully say the odds of someone suing you over an incident at your home are low, there’s still a risk. Liability insurance protects you against legal claims due to an injury that occurs on your property. Get enough liability insurance to cover one to two times your financial assets.

As a renter, it’s potentially useful to have liability protection if you like the idea of having some liability protection in the highly unlikely event that you are sued by someone harmed at your apartment. For example, suppose you have a wild roommate or two who like throwing parties where people may not behave themselves. In addition to placing your security deposit at risk, there’s a small chance of being sued in some unusual cases when there’s trouble. So, in addition to insuring your personal property, another useful feature with renter’s insurance is liability coverage.

Renter’s insurance

If you don’t have a lot of personal possessions or losing them wouldn’t be a financial hardship given your overall financial situation, you can probably skip renter’s insurance. In my own case, when I was renting for a few years after college, I chose not to carry renter’s insurance. Consider renter’s insurance if having to replace your possessions at your own expense would be a big deal financially or perhaps not even possible without taking on consumer debt.

And, as I just discussed, you might also consider renter’s insurance for the liability protection. For sure, lawsuits are unusual in rental situations, but they do occasionally happen.

Plenty of apartment complexes and landlords now require their renters to carry and provide proof of renter’s insurance coverage. They mandate this because they would rather not have disagreements over who is at fault for a problem that leads to damage of personal property, for example. Suppose the apartment directly above yours has a significant water leakage one day while you’re at work, and by the time you return home, some of your furniture and other property is damaged. If you and the other tenant have renter’s insurance, that should cover the personal property loss, and the two of you won’t have to battle it out possibly with each other or the building owner as to who is at fault and financially liable.

If the landlord for an apartment you’d like to rent mandates renter’s insurance, they may be able to suggest insurers that specialize in such coverage for you to contact. You can also use my short list of home insurers in the “Shopping for homeowner’s insurance” section later in the chapter. Comparison shop the minimal coverage you are required to carry and get price quotes for different deductibles.

Natural disaster protection

A deficiency of homeowner’s insurance is that it generally doesn’t cover damage to your home and personal property caused by earthquakes and floods. To cover such situations, you need to buy separate natural disaster protection coverage.

The Federal Emergency Management Agency (FEMA) provides coverage of up to $250,000 for your dwelling and $100,000 for your personal property. Some private insurers also sell flood insurance policies that you should comparison shop with the FEMA policy. Private insurers can accommodate higher-value properties and also include loss-of-use coverage so you have money to rent a replacement property while your dwelling is repaired or rebuilt.

The National Flood Services’ website (nationalfloodservices.com/new-mfq-floodtools/) can show you the relative flood risk for a given address and where floods have occurred historically nearby. You can also see how many flood insurance claims have been filed in your area over the past decade and the average dollar amount of those claims.

In terms of costs, for example, if your insurer estimates it would cost $200,000 to rebuild your home, you can buy a flood insurance policy through FEMA that provides $200,000 of building coverage and $80,000 of contents coverage for about $467 annually if you live in a low-risk area. If you’re a renter, simply get the $80,000 contents-only coverage for $280 per year.

Inquire with your current insurer or the insurers you shop among (such as those I recommend later in this chapter). If the cost of flood or earthquake insurance seems expensive, compare that expense to the costs you’d likely incur should your home and personal property be a total loss.

Shopping for homeowner’s insurance

To get the best homeowner’s insurance for the least cost, you can be proactive. Try these money-saving strategies:

• Take a high deductible. Because the objective of homeowner’s insurance is to protect against large losses, not small ones, take the highest deductible with which you’re comfortable. Take into consideration how large an emergency reserve you have and the stability of your employment income.
• Ask about special discounts. If your property has a security system or you have other policies with the same insurer, you may qualify for a lower rate.
• Improve your credit score. Many insurers use your credit score (see Chapter 4) as a factor in setting some of your insurance rates. They do this because their studies have shown that folks who have higher credit scores tend to have fewer insurance claims.
• Shop around. Each insurance company prices its homeowner’s and renter’s policies based on its own criteria. So the lowest-cost company for your friend’s property may not be the lowest-cost company for you. You have to shop around at several companies to find the best rates. Here’s a list of companies that usually have lower-cost policies and do a decent job with customer satisfaction and claims paying:
  • Amica: This company isn’t the cheapest, but it boasts consistently high customer-service ratings. Call Amica at 800-242-6422 or visit its website at www.amica.com.
  • Erie Insurance: This firm operates mainly in the Midwest and Mid-Atlantic region. Check your local phone listings for agents. Call 800-458-0811 for a referral to a local agent or visit the company’s website at www.erieinsurance.com.
  • GEICO: You can contact this company by calling (800) 841-2964 or by visiting its website at www.geico.com.
  • Liberty Mutual: Check your local phone listings for agents, call 800-837-5254, or visit the company’s website at www.libertymutual.com.
  • Nationwide Mutual: Check your local phone listings for agents, call 877-669-6877, or visit the company’s website at www.nationwide.com.
  • State Farm: Check your local phone listings for agents, call 844-803-1573, or visit the company’s website at www.statefarm.com.
  • USAA: This company offers insurance to members of the military and their families. Call the company at 800-531-8722 or visit its website at www.usaa.com to see whether you qualify.

If you’re interested in more information specific to your state, you may benefit from the information that your state insurance department collects regarding insurers’ prices and complaints (not all states do this, however). Look up your state’s department of insurance phone number online or visit the National Association of Insurance Commissioners website at www.naic.org/state_web_map.htm to find links to each state’s department of insurance site.

Liability protection

Because of the inevitable accidents that happen with cars, auto insurance provides liability protection for injury caused to people and property. In fact, most states require this coverage by law. Liability protection comes in a couple of different forms:

• Bodily injury liability: This type covers injury to people. You should have sufficient bodily injury liability insurance to ideally cover at least twice the value of your assets.

  If you have little in the way of assets, know that your future earnings may be garnished in a lawsuit.

• Property damage liability: This type covers the property, which includes other people’s cars. The level of property-damage liability coverage in an auto policy is generally set based on the amount of bodily injury liability protection. Coverage of $50,000 is a good minimum to start with.

• Uninsured or underinsured liability: Auto policies also allow you to buy liability coverage for other motorists you may have an accident with who lack coverage or whose liability protection is minimal. This uninsured or underinsured motorist liability coverage allows you to collect for lost wages, medical expenses, and pain and suffering incurred in the accident.

  If you already have comprehensive health and long-term disability insurance, uninsured or underinsured motorist liability coverage isn’t really necessary. Just be aware that if you skip this coverage, you can’t sue for general pain and suffering or insure passengers in your car who may lack adequate medical and disability coverage.

Collision and comprehensive

Collision coverage applies to claims arising from collisions of your car (and usually covers cars you rent as well). Comprehensive coverage is for claims for damage not caused by collision. For example, comprehensive coverage would cover damage done by someone breaking into your car.

Both collision and comprehensive coverage have their own deductible. For reduced auto insurance premiums, take the highest deductibles you can comfortably afford (I suggest at least $500 and ideally $1,000).

As your car ages and declines in value, you can eventually eliminate your comprehensive and collision coverage. Remember that insurers won’t pay you more than your car’s book value, regardless of what it costs to repair or replace it. You can easily research your car’s approximate current value on websites such as Kelley Blue Book (www.kbb.com).

Riders you should bypass

You can add various optional coverages, known as riders, which appear to be inexpensive but really aren’t when you compare the cost against the small amount of protection they provide. Here are common ones that auto insurers and agents pitch and that I would generally bypass:

• Roadside assistance and towing: These provisions provide coverage if your car breaks down. You may already have this protection if you belong to an auto club like AAA. If you (or your parents on your behalf) want the peace of mind of knowing a particular service will come to your aid if your car breaks down, bypass this coverage and sign up for AAA or a similar service.
• Rental car reimbursement: This rider provides for a limited coverage amount for a rental car should your car be stolen or damaged and not drivable.
• Riders that waive the deductible under certain circumstances: The point of the deductible is to reduce your policy cost and eliminate the hassle of filing small claims.
• Medical payments coverage: This coverage typically pays a few thousand dollars for medical expenses. If you and your passengers carry major medical insurance coverage, this rider isn’t really necessary. Besides, a few thousand dollars of medical coverage doesn’t protect you against catastrophic expenses.

Getting a good buy

In the previous sections, I explain what you do and don’t need on your auto insurance policy. Here are some additional ways to get the most for your money:

• Consider insurance costs before buying your (next) car. The cost of insuring a car should factor into your decision of which car you buy, because the insurance costs represent a major operating expense. Call insurers and ask for insurance price quotes for the different models you’re considering before you buy.
• Ask for special discounts. A security alarm, antilock brakes, or having another policy with the same insurer may qualify your car for lower rates. And make sure you’re given appropriate “good driver” discounts if you’ve been accident- and ticket-free in recent years. Some insurers may not penalize you for one recent ticket — ask what their policy is.
• Shop among the best companies. Use the insurers list I provide in the “Shopping for homeowner’s insurance” section earlier in this chapter to obtain quotes for auto insurance. In addition, also try Progressive (800-776-4737; www.progressive.com).

Extended warranty and repair plans

Isn’t it ironic that right after a salesperson or company persuades you to buy a particular television, computer, high-end smartphone, or car — in part by saying how reliable the product is — they seek to convince you to spend more money to insure against the failure of the item? If the product is so good, why do you need such insurance?

Extended warranty and repair plans are expensive and unnecessary short-term insurance policies. Product manufacturers’ warranties typically cover any problems that occur in the first year or even several years. After that, paying for a repair out of your own pocket isn’t a financial catastrophe.

Some credit-card issuers automatically double the manufacturer’s warranty without additional charge on items purchased with their card. However, the cards that do this typically are higher-cost premium cards, so this is no free lunch — you’re paying for this protection in terms of higher fees.

Home warranty plans

If your real-estate agent or the seller of a home wants to pay the cost of a home warranty plan for you, turning down the offer would be ungracious. As Grandma would say, you shouldn’t look a gift horse in the mouth. But don’t buy this type of plan for yourself. In addition to requiring some sort of fee (around $50 to $100) if you need a service call, home warranty plans limit how much they’ll pay for problems.

Your money is best spent hiring a competent inspector to uncover problems and fix them before you purchase the home. If you buy a house, you should expect to spend money on repairs and maintenance; don’t waste money purchasing insurance for such expenses.

Dental insurance

If your employer pays for dental insurance, you can take advantage of it. But don’t pay for this coverage on your own. Dental insurance generally covers a couple of teeth cleanings each year and limits payments for more expensive work.

You can pay for dental services when needed. Don’t be shy about asking upfront what a dentist’s fees are. Also know that without insurance, a dentist will generally charge you a higher fee than the negotiated rate that they have with insurance companies. You can ask the office manager if they would charge you a similar rate to those they accept from insurers.

Credit life and credit disability policies

Credit life policies pay a small benefit if you die with an outstanding loan. Credit disability policies pay a small monthly income in the event of a disability. Banks and their credit-card divisions usually sell these policies. Some companies sell insurance to pay off your credit-card bill in the event of your death or disability, or to cover minimum monthly payments for a temporary period during specified life transition events (such as loss of a job, divorce, and so on).

The cost of such insurance seems low, but that’s because the potential benefits are relatively small. In fact, given what little insurance you’re buying, these policies are expensive. If you need life or disability insurance, purchase it. But get enough coverage, and buy it in a separate, cost-effective policy (see Chapter 15 for more details).

If you’re in poor health and you can buy these insurance policies without a medical evaluation, you may represent an exception to the “don’t buy it” rule. In this case, these policies may be the only ones to which you have access — another reason these policies are expensive. The people in good health are paying for the people with poor health who can enroll without a medical examination and who undoubtedly file more claims.

Daily hospitalization insurance

Hospitalization insurance policies that pay a certain amount per day, such as $100, prey on people’s fears of running up big hospital bills. Healthcare is expensive — there’s no doubt about that.

But what you really need is a comprehensive (major medical) health insurance policy. One day in the hospital can lead to thousands, even tens of thousands, of dollars in charges, so that $100- or $200-per-day policy may pay for just a small portion of a 24-hour hospital day! Daily hospitalization policies don’t cover the big-ticket expenses. If you lack a comprehensive health insurance policy, make sure you get one as discussed in Chapter 14.

Cell-phone insurance

I understand that if you just shelled out $800 or more for the latest smartphone, you’d want to protect against the loss or damage of said device. If you can’t afford to replace such a costly cell phone, then I would argue don’t spend that much on one in the first place.

But if you insist on costly smartphone purchases, the insurance isn’t worth it. My review of recent plans shows that the coverage will cost you $150 to $300 just for the first two years. If you do have a loss, you’ll also get whacked with a $100 to $200 deductible!

Little stuff riders

Many policies that are worth buying, such as auto and disability insurance, can have all sorts of riders added on. These riders are extra bells and whistles that insurance agents and companies like to sell because of the high profit margin they provide (for them). On auto insurance policies, for example, you can buy a rider for a few bucks per year that pays you $25 each time your car needs to be towed. Having your vehicle towed isn’t going to bankrupt you, so it isn’t worth insuring against.

Likewise, small insurance policies that are sold as add-ons to bigger insurance policies are usually unnecessary and overpriced. For example, you can buy some disability insurance policies with a small amount of life insurance added on. If you need life insurance, purchasing a sufficient amount in a separate policy is less costly.