As we enter the summer months in Arizona, and the extreme weather that often comes with the hottest time of the year, there is no better time to think about your property and casualty coverage. It’s an ideal opportunity to think about the type and coverage amounts on your home(s). Even though we don’t about hurricanes in Arizona, we do worry about wind, hail and floods. For those who lived through the surprising hail storm of 2010, you can recall the epic amount of damage that occurred to both homes and automobiles during that fateful day in October. The occurrence of super storms seems to be more prevalent the past few years, and meteorologists and insurance agents fear this trend will continue.
Looking at the broader economy, many of you may have seen the price of lumber increasing substantially. The chart below shows just how dramatic the increase in this critical building material has been over the past 12 months:
The increase in lumber has a direct relation to your homeowners coverage because it is more expensive to build and/or replace damage to your home. Thus, looking at current replacement and new build costs, it’s a critical time to re-evaluate your coverage levels, taking into consideration the expense of replacing or repairing damage to your home. Chances are, you may not have adequate coverage if these increased costs are considered.
Does your homeowners policy includes an ‘Extended Replacement Cost’ (ERC) coverage? This coverage can increase your replacement cost by 125%, 150% or even 200%. In the case of a total loss, these rising lumber costs do not inhibit the homebuilding process. For example, if you have a home covered for $500,000 with a 150% ERC, in the case of a total loss, you will have coverage up to $750,000 allowing for room to cover these increased costs. If you check your policy and you do not have this coverage, reach out to your provider to see what the cost to add this would be. You would be surprised at how cost effective this coverage is, and we are here to help review your coverage to make sure an item like ERC is included.
In property and casualty insurance, deductibles are critical for determining how much your insurance costs and critical to review carefully. Understanding how your policies deductible works is the difference between paying for a loss out of pocket vs your carrier paying out a claim. Most policies have a deductible of 1-2%, and a common misconception is that your deductible is a percentage of a loss, which is not the case: your deductible is a percentage of your dwelling coverage. If you have a $500,000 home with a 2% deductible, you are paying $10,000 out of pocket, regardless of the claim amount. For any claim under $10,000, you are paying out of pocket.
For Arizona residents, we have a separate deductible for wind/hail. It is a common theme for Arizona residents to have their wind/hail deductible at a higher rate than their property coverage deductible because the odds of a loss are less. For some people this is the right choice, but the that brings another question: is the short-term gains from a lower deductible worth the risk of having to pay out $25,000 on a $500,000 home with a 5% deductible? For most, the answer is no. All the money saved up on premiums would be negated as soon as you have your first loss.
Unlike wind/hail, there is another coverage that is dependent on your location; flood coverage. Homeowners insurance does not cover outside water entering your house, only water that originated inside your house (with endorsements). Coverage from floods must be purchases separately and is solely dependent on where you live. To check, go to FEMAS website and input your address. It will let you know if you are in a high risk flood zone.
Just because you do not own your place of residence, does not mean you don’t need property and casualty coverage. The homeowners policy in this case will cover the outside of the house, any personal belongings would not be covered and a renters policy would be in order. Renters policies are incredibly cheap, averaging $200 a year for $40,000 in coverage. These savings can be multiplied if coupled with an auto policy, allowing for multi-line discounts. Most consumers will see a $100 increase to add a renters insurance to an auto policy. Another advantage to a renters policy is it includes a coverage called additional living expenses (ALE). Very similar to Loss of use in a HO policy, ALE will cover any relocation and living expenses until your old home is habitable again.
You need to ensure your policy is looked at once a year. A rule of thumb is evaluate your purchases at renewal time and see if there is any reason you would need additional property and casualty coverage. But what happens if the reason you need more coverage is independent of your actions? What happens if you’re underinsured with no blame to your insurance agent? It’s important to note that it is not too late; insurance policies are incredibly malleable allowing for coverage changes at any point in a policies period.
Contact your Henry+Horne Wealth Management advisor for more information on insurance coverage to protect you and your assets.