Save Me Time!
- It can be hard to know if you are buying too much or too little coverage for your needs.
- The most common forms of overinsurance are deductibles that are too low and replacement values that are overly high.
- You can also be overinsured for your contents and other structures, but these are harder to remedy.
The Rest of the Story
Before we discuss how you end up overinsured, let’s briefly discuss why you end up overinsured.
There are two potential sources of overinsurance:
- Lack of knowledge by the homeowner of what they’re buying.
- Insurance agents who want higher premiums because they generate greater commissions if your bill is larger.
As for the first, if that applies to you, hopefully we can fix that! Regarding the second, not all insurance agents think this way, but yours may.
The best way to find out is to read the advice below and see if your agent may be pushing you to buy too much coverage.
Deductibles That Are Too Conservative
People tend to be too cautious with their deductibles as we have written about elsewhere. If you can afford a higher deductible, you should consider raising it and setting money aside to fund the increased risk exposure as having a low deductible is a low return investment.
Replacement Values That Are Too High
As we’ve discussed in other articles, while many people have too low a replacement value if their home was lost, there are cases where people have way too high a replacement value.
This can occur due to insurance company models that don’t understand your local market and assign too high a rebuilding cost to your home. It can also happen if you or your agent inadvertently believe you should be insuring the resale value of your house rather than the cost to rebuild.
Unnecessary Other Structures Coverage
If you read our article on how Other Structures works, you may remember that this part of the policy provides coverage for up to 10% of your policy’s replacement value for damage done to structures not attached to your home (e.g. fences or sheds).
What if you don’t have structures worth 10% of your home’s replacement value? Can you reduce this overinsurance to save money? Nope. You are required to be overinsured by most carriers.
Lack of Contents
Similarly, most policies default to provide content for lost or damaged possessions at 50% of your home’s replacement value. What if you don’t have that much in contents? If you look hard, you may find a policy that will allow you to buy less, but typically insurance companies require you to keep 50% coverage.
Notice, this overinsurance is compounded if you have a replacement value that is too high as you are forced to buy 50% of a larger number.
While there isn’t much you can do today about these last two overinsurance issues, it is helpful to be aware of where you are overpaying in case policy options change in the future.
Fix The Replacement Value First
Of these four, if you can only fix one, it is probably best to address the replacement value.
If you are confident you are overinsured, you are paying extra premium and getting nothing in return. By correcting it, you save not only on the cost of insuring your house, but also the cost for the related structures and contents coverages.
While carrying too low a deductible may not be a great financial return, you at least get some value out of it if you have a claim. Since something is better than nothing, being overinsured on your deductible is less troubling than being overinsured on your home’s replacement value.