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Conscientious homeowners take great pains to ensure that their homes are adequately insured, but many may underestimate how much insurance they need to adequately protect themselves financially.
Homeowner’s policies generally protect your home and belongings against risks including fire, theft, falling trees and water damage, from broken pipes. The key to evaluating these policies is examining exclusions and coverage limits.
It’s a good idea to take out your policy and review:
- Coverage limits on damage to your home. Is this enough? Would these amounts pay for full replacement coverage, reflecting today’s cost?
- Coverage limits on expensive belongings such as jewelry, silverware, electronic items, art and collectibles. Adequate coverage on items worth more than a few thousand dollars might require riders, bringing higher total premiums.
- Provisions concerning earthquakes, mudslides, floods and sinkholes—which insurance companies have traditionally described as “acts of God.” Damage from these events may not be covered; this may require specialized policies from other carriers.
Another frequently overlooked area can potentially be one of the most costly: your personal liability in lawsuits brought by visitors to your home.
If someone is injured in an accident on your property that can be attributed to your negligence, this can result in a lawsuit and a hurtful court judgment, potentially for hundreds of thousands or even millions of dollars. Defending even a groundless suit can be costly.
A sizeable chunk of premiums for basic homeowner’s policies go toward this liability coverage, but often the potential payouts are capped at $300,000 or less. After judgments exhaust a policy’s coverage limits, plaintiffs’ attorneys sometimes go after personal assets—especially if they regard you as a deep-pocket defendant because you own an expensive home.
To protect yourself from these claims, it’s wise to consider purchasing umbrella liability insurance. These policies provide additional protection—often, upwards of $1 million beyond the coverage limits of your homeowner’s policy. They can be purchased from the same carriers that insure your home and car.
These policies are called umbrella policies because they often include other coverages, including protection against claims that you damaged someone else’s property, auto liability above the limits of your auto policy and coverage for libel or slander.
Such policies probably won’t offer any protection from lawsuits resulting from your business or profession; you need other insurance to cover this. Though premiums for personal umbrella liability coverage are going up—currently, many annual premiums are only around a few hundred dollars—they are still low relative to the financial protection they provide.
One way to cut costs on these and general homeowner policies is to increase deductibles. Many people carry deductibles that are way too low, considering their means to self-insure for these small amounts and the low likelihood of a claim.
You may also be able to reduce premiums by installing a sprinkler system or an externally monitored burglar alarm, maintaining a good credit rating and buying multiple policies (e.g., auto and homeowners) from the same carrier to get a package discount.
So take a look at your homeowners policy to re-evaluate your coverages relative to the current housing market, your existing belongings and your current situation. And if you don’t have an umbrella liability policy, strongly consider purchasing this affordable insurance to increase your peace of mind.
Tim Decker is president of ISI Financial Group (isifinancialgroup.com), a wealth management firm in Lancaster, and a fee-only financial planner (he sells no products). His weekly call-in radio show, "Financial Freedom," airs Saturdays at 10 a.m. on WHP580 AM.
This content is based upon information believed to be accurate by ISI Financial Group, Inc., and is not intended to provide specific financial advice. Always seek professional guidance before making any financial or legal decisions.
