Castles & Moats

Insurance and Investment Planning...Simply Explained

Homeowners Insurance2018-07-05T21:10:38+00:00

Chapter 3

Homeowners Insurance

One of the things I enjoy most about property insurance is that it’s hard to buy it on the Internet. People should get it through an agent or agency. When I say property insurance I mean homeowners, condominium owners, renters insurance and landlord insurance.

There are a variety of coverages. Let’s start simple. You just moved to Nashville and you’re renting until you choose to own your own home or condominium. Renters insurance does two things…first, covers your stuff. Secondly, covers your assets as there is a liability policy built in. (Never get less than $500,000!) More on this later in the chapter. By the way, the greatest cause of property lawsuits are dog bites. Even a yorkie can hurt a child!

These policies are insanely inexpensive, and in the event or a fire, theft, or catastrophic weather event, cover your personal property at full replacement value. Meaning, that 5-year-old 40” flat screen TV that’s worth $100 will have a replacement value of what a new 4o” flat screen will cost (after deductible.)

Almost all home/auto/umbrella insurance providers will give a “bundle” discount for having all your policies with them. With my companies, it’s normally a 20% discount. The amount you would save on your auto insurance alone will probably pay for the renters’ insurance. Always go for the bundle discount.

So now you’re purchasing a home…maybe your first. Congratulations! That is one of the major life events you will experience.

Homeowners insurance can get a little tricky because it’s easy to compare apples to apples with auto insurance. Five price & coverage quotes from five different companies are easy for the layman to compare. Homeowners is very different because the devil is in the details and no two policies are exactly alike.

To begin with, a licensed agent is required to insure your homeowners’ policy to its “REPLACEMENT VALUE”. The industry standard for us is a replacement cost estimator provided by a company named Marshall, Swift, Boeckh. We input a variety of data on your new home and come up with the amount of insurance required to rebuild it in the current year. That is called Coverage A on your policy.

I’ve seen comparisons from five companies with five different amounts, so who is right, who is wrongOnce again, it’s the fine print that you need to be asking about. Let’s say your new “tall skinny” East Nashville costs $400,000 purchase price. However, the reconstruction cost is $250,000. Many ask why the entire purchase isn’t covered, and people forget, you’re also buying a piece of land…and the purchase price also factors in the 3 key elements of real estate…LOCATION, LOCATION, LOCATION.

If that house was built say in Smyrna/Lavergne/Murfreesboro, it would probably be significantly less as the market dictates the price. But the reconstruction costs would be the same for the middle Tennessee region. Make sense?

Here’s where you need a “professional explainer” to help guide you through the fine print. There are four types of coverages you should know:

  • Actual Cash Value (replacement cost LESS property depreciation)
  • Replacement Value (what it takes to rebuild, current reconstruction costs
  • Extended Replacement Value (a certain percentage or value above replacement value to rebuild.)
  • Guaranteed Replacement Value (regardless of reconstruction costs, insurance company guarantees in writing to rebuild back to original status)

When I’m reviewing any type of insurance coverage with a client, I always use the phrase, “Stress Test”. What that means to them is that let’s go through an example of how the different coverages work, and what they want in their policy going forward. When I ask “What is the worst thing that can happen to your home?” the answer is generally FIRE. I disagree. It’s a bad thing, but it only happens to you. How about wind Let’s take the picture on the next page, and let’s stress test them.

How does this make you feelWhat happens nextIt’s an OMG moment! What does your policy sayWhere is your policyNext county perhaps. Here’s how the above definitions work.

ACTUAL CASH VALUE will never be enough to rebuild your home because of depreciation. Even though your policy states Coverage A of $250,000, the depreciation value might be $50,000 less.

REPLACEMENT VALUE might be enough to rebuild your home in normal circumstances but how about nowWhat will it take in this situation given the scarcity of building materials, labor, and the amount of devastationIs $250,000 enough to rebuild your house that is in that picture somewhere?

EXTENDED REPLACEMENT VALUE is primarily for these situations. I normally recommend 150% of Coverage A…meaning $250,000 x 150% = $375,000 total reconstruction costs. Again, the devil is in the details. Some of the household name brand insurance companies only offer 120-125%.

GUARANTEED REPLACEMENT VALUE was the standard many years ago, but given all the catastrophic scenarios we’ve had in the US in the 20 years, many companies stopped offering it. However, there are a choice few that do. GUARANTEED means just that…no matter the cost, the company guarantees to rebuild your home. ALWAYS ask to see if this is available.

A personal story on liability coverage…no I can’t make this up!

What’s the old saying, “FACTS TELL…STORIES SELL.” Here’s another one from the Carden family archives…that we wish never happened.

Summer 1966…We had been our new home for less than a year. It was the house Mom & Dad had worked hard, saved & built. We lived on a neat street. It was about ½ mile long, and was a dead end…meaning we could ride bikes, play all over the neighborhood, and feel 100% safe back then. Besides, who wore helmets back then anyway?

July 4th…the neighborhood had a big street party. Lots of people were there. Mom wouldn’t let us have firecrackers or cherry bombs because we would probably blow ourselves up…so she let us have sparklers instead.

Sounds safe, right? Basically, sparkers are gunpowder on a rusty wire! So here we are…other neighbors are setting off all kinds of stuff…M-80’s, roman candles (feeling nostalgic?). My brother and I are holding our sparklers…I’m not quite seven, he’s five. I tell him “Throw it David!” …so, he does…and it lands in our nextdoor neighbor’s grandson’s shirt pocket…and it’s still lit.

So, he does what any young boy does with something on fire in his pocket…he freaks out…and in his reaction, he somehow gouges his eye on the wire. Now, stop and think about the repercussions of this…both in 1966…and in 2017.

In 2017, every bus is telling us “We deserve to be paid” by an attorney we all know because of his continuous advertising. How much do you think we would be sued for if that happened TODAY? Oh, we’re talking $1,000,000 plus…guaranteed. In case you forgot, go back, and read the chapter on lawsuits and umbrella policies.

Here’s how it played out in 1966. After his parents getting him to several doctors, and us staying as close to the family as we could, one afternoon the Dad of the young boy came over with a piece of paper for my father. He said “Gene, we really don’t want to do this, but because of my son’s medical bills, we’ve been advised we have to sue you” …and handed dad the legal papers. Here’s a young father of two…just purchased our dream house. How do you think he respondedHow do you think you would have responded?

Remember this is 1966. Here’s how it played out. Mom & Dad went to Sunday School with a very nice man who was an attorney…and probably the best dressed man we knew! He worked with Dad’s insurance company, and our neighbor’s attorneys and everything got settled fairly. The insurance company paid the damages, Dad never had to go to court, and the most important item…We remained friends with our neighbors throughout.

I’ll bet there wasn’t $10,000 of personal liability on Dad’s policy. The whole house only cost $25,000!

Put it in perspective today…

Ready to talk?

If you’re in need of auto, home, landlord, or life insurance, I look forward to getting to know you and becoming your partner in protection.

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