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THE Wealthier + Wiser Blog

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Underinsured and overexposed – Has your home and auto insurance kept pace with the economy?

When it comes to planning for your future, ensuring you have the proper home and auto insurance coverage on your residential real estate assets remains critical to your long term success. Frequently, we see clients seeking discounted insurance to lower their premium cost, neglecting the bigger picture. The bigger picture – 1) adequately insure your home(s) and auto(s) with the right amount of coverage 2) shop carriers for the best pricing given your unique needs.

So what do you need to be aware of? With home insurance you could find yourself underinsured and not even aware of it. Without an agent to stay on top of your evolving lifestyle, and the annual cost of living adjustments that impact your assets, there are lapses in coverage that could be missed. The first step in home insurance is insuring to value. If you have a mortgage, most lenders will require you obtain a minimum of home coverage to cover their interest in the property. This is NOT the recommended coverage for your home. Most commonly, the amount of insurance required by lenders would leave you underinsured in a total loss. More specifically, and what I see more often, is that home replacement costs are not updated nearly as frequently as they should be.

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It’s funny but most clients think that their residential real estate assets appreciate wildly over time and many over anticipate the growth of their primary residence asset. However, looking at the data for the US housing market, home prices appreciate, on average, 3% per year. See the chart below:

If you are a homeowner, it is great to see your assets gain value, but is your home and auto insurance keeping up? For many of my clients who got their insurance when they bought their house, these concerns ring true. One of the most concerning things when reviewing client policies is outdated and underinsured coverage. Home coverage should be reviewed on a yearly schedule. We see clients who have had the same insurance policy from when they first bought their house. The old policies are often riddled with lapses in coverage and significantly under cover what is required. Meeting with your agent on a regular basis to discuss how your policies can be updated can mitigate any unneeded holes in your insurance policies. As a rule of thumb, your policies should be reviewed at least once a year. Anytime you make a new home purchase, renovate, or even redecorate, it can’t hurt to call your insurance agent up and let them know of the changes made. Best case: a lapse is identified before the risk occurs. Worst case: you know your agent a little bit better.

By reviewing your insurance yearly, you can determine any increases to inflation, lumber, or outside pressures that will have an affect on your insurance, whether you like it or not. Surprising to most, there are outside factors that can adversely affect your available coverage in a very short period of time, unlike inflation. An example being lumber. From April 2020 to August 2020, the lumber market had gone up by 220%, causing single family homes to increase in value by almost $40,000. For all the reviews underwent during this time I noticed one common trait: rising lumber prices raises reconstruction costs which leaves your previously accurate dwelling coverage under covered. In the matter of months, reconstruction costs were through the roof leaving millions of Americans underinsured. The best way to protect against these outside pressures? Ensure your extended replacement cost (ERC) is up to date. Your extended replacement cost is the amount above and beyond your dwelling coverage that your insurance will pay out in the case of a total loss.

Be sure to purchase an extended replacement cost of 25% to 100% to ensure if you have a total loss, construction costs don’t go above and beyond your dwelling coverage. This extended replacement cost should not act as a buffer for home improvements. One in four renovations can increase your home value by on average 25%. With this in mind, you may think that your extended replacement cost will cover the difference, and this is not the case. Any renovations to your home need to be relayed to your insurance carrier so your policy can be accurately updated. If you build a deck off your home and have a total loss, your carrier may not honor that claim, although you have coverage for it, simply because your policy did not accurately describe the risk. Another example of this is getting a new family pet. Around 43% of people will not notify their insurance carrier when they got a new animal. In many cases this can have drastic effects if by chance this animal is on an exclusion list, such as a dangerous dog breed. Any damage caused by an animal not specifically listed on your policy can leave you open to lapses in coverage and exuberant medical bills.

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This piece is designed to empower the reader with tools necessary to ensure you are protected. When we complete a full review of someone’s home and auto insurance policies, it should be no different to how you review your own policies. Take a minute to evaluate your assets and liabilities to see how they’ve changed over the years. Once you understand exactly what you need covered, you are best able to ascertain the need for coverage. During periodic review of your home and auto policies consider any additions to your house you forgot to mention. Even the smallest renovations can add value and can go uncovered on your home owners policy. Once you begin to do this on an annual basis, the chances of you opening yourself up to unwanted risk is minimized, as you have an in depth understanding of how these policies can adapt to your lifestyle and to global trends.

Insurance agents need to know about your financial life and lifestyle so they can depict coverage that is suitable for your individualized needs. Part of the process of customizing your insurance coverage is revealed in explaining this information broadly to an insurance agent. An agent needs to understand your assets/liabilities and long term plan to adequately recommend coverage. Many clients find that their experience seeking home and auto coverage was merely an exercise seeking the cheapest coverage. We ask our clients if their current agent did the due diligence required to ensure comprehensive coverage at a fair rate. Be sure to understand the thought process behind the decisions about your current home and auto coverage. Was the plan design simply to come in cheap? Are you over insured? Does the insurance fit together and coordinate with your total net worth picture?

At Henry+Horne Wealth Management, our comprehensive approach allows us to understand how to properly right-size clients home and auto coverage. Contact us with any questions you may have or if you’d like a comprehensive review of your home and auto insurance coverage.

Brett Carlin