Remember the different types of coverage values I mentioned in the homeowners’ chapter? This is where the differences between Actual Cash Value and Replacement Value are huge…and hard to find in insurance policies. This also known as a “dwelling fire” policy.
Many people think this type of policy should be close to the same price and coverage as their homeowners’ policy. That’s not the case here. You’ve all heard of the term “slumlord”. That’s someone who owns a lot of rental properties and collects monthly rents. If he is a true “slumlord” he rarely takes care of his properties as it’s a maintenance expense and it digs into his monthly rental income.
Enter March 2012. The date of one of the most damaging hailstorms we’ve had since I’ve been here…which is 36 years. Hail damage is a covered peril on all types of homeowners & landlord policies. Let’s say the “slumlord” let several of the roofs of his rental properties become old and at the end of their life expectancy. Essential point is that he should have come out of pocket to re-roof these houses, and due to the nature of the weather-related damage, these dwellings all got new roofs…courtesy of the insurance companies.
The result was that many companies that used to offer dwelling fire policies in Tennessee, stopped writing new policies, and cancelled all the existing policies at their renewal date…which you can do with these types of policies. They lost millions because of one weather related event. The companies that still offer these policies have some caveats.
Many will not write a “standalone” policy…meaning they must have the entire account of home/auto/umbrella to offer a policy. If they do, more than likely they are written on an ACTUAL CASH VALUE (ACV) basis. Meaning depreciation factors into the value of the dwelling.
Example: Claim for $10,000 is filed. Deductible is $1000. Repairs are done. Policy holder gets check for $7000.00. (10,000 x 80% less $1000 deductible.
The policy declaration page may say the house is insured to replacement value, but the policy language says differently. Just because it’s cheap doesn’t make it good! Learn to ask questions and get the right answers.
The policies I recommend to my clients are normally FULL REPLACEMENT VALUE policies. However, they cost a little more, and when I get price shopped, I know these other ACV policies are what they are comparing. Yes, they are cheaper, but you’re buying the outcome in the example above. Because insurance is so price driven, it takes a lot of education on my part to inform my clients.
Remember EXTENDED REPLACEMENT COST in the earlier chapter? Some of my companies offer up to 125% of the coverage. Which do you want to pay for? 80% ACV or 125% coverage?
I do want to touch on three more points in this chapter. The first is the phenomenon called SHORT TERM RENTAL, or Airbnb & VRBO. This craze took Nashville by storm…and it’s taken the insurance companies a while to catch up. The major issues about insurance are misleading. If you’re doing this, and your insurance agent and the company he represents does not know it, in the event of a claim, there’s a chance that the claim could be denied and the policy cancelled for non-disclosure of a material fact. Just because you have a Metro Nashville permit & show the $1,000,000 liability coverage needed doesn’t mean you’re covered.
Some companies will provide SHORT TERM RENTAL policies, but you had better know what you’re buying. Just like the example above, many are written on ACV basis, but a select few can be written on Full, or Extended Replacement Basis.
Another part of this is the “owner/occupied Short Term Rental”. You’re using your home as a for profit venture. It’s not covered by many homeowners’ policies…period. I’ve got clients that are musicians & they want to live in their house when they are in town, and do Short Term Rental when they are on the road. I have companies that will do that…and they are expensive!
Insurance buyer beware with regards to doing SHORT TERM RENTAL. Get it in writing…don’t trust words from an agent!
The second point I will talk about more in the “Castles” chapter on “Alternative Strategies”. Investment real estate, when managed property and effectively can be a wonderful source of retirement income. With the decline of company pension plans, Investment real estate can be that monthly check your parents & grandparents got. It also gives you the three key aspects of an investable asset:
- GROWTH (through market appreciation)
- INCOME (through monthly rent)
- TAX ADVANTAGES (through deductible mortgage interest, depreciation, & and a whole lot more…consult a CPA to learn more)
This is probably the most unique SHORT TERM RENTAL I’ve seen in Nashville, and yes, I do know this person…it’s cool, but insuring it is another story! That’s a free-standing bathroom to the left of the trailer, and it’s located in his back yard!
The final point is on VACANT dwellings. These are what the “house flippers” are buying. This is the most expensive type of dwelling insurance out there…for obvious reasons. Once again, some companies will do these, some will not. It’s best to have a personal comprehensive agency take care of all aspects of this venture. Liability risk plays into vacant dwellings more than any other.
If you live in the hot urban areas of Nashville, such as East Nashville, Inglewood, Madison, Wedgewood/Houston, or Woodbine, you’re seeing transitions like this daily! I recommend insuring it monthly for the future value, including materials and labor, and it’s been a good strategy so far.
A Final Word On Deductibles
You might have forgotten my comments in the section on “How to Use this Book”, but I mentioned “recapturing and redeploying” dollars leaving your life. One of the greatest wastes of people’s $$$ is through mismanagement of the deductibles on your auto and property insurance coverage.
The lower the deductible, say for an auto collision, then the less you will be out of pocket IF you have a claim. The lower the deductible, the higher the annual premium as well.
You’ve carried $100 deductibles for comprehensive and collision on your autos for the last 20 years. The annual premium averages $1000/yr.
You’ve never filed a claim.Had you carried $1000 deductibles for the last 20 years, the annual premium is $600. That’s $400/yr you’ve given the insurance company FOR THE RIGHT TO PAY LESS if you file a claim.
$400/yr. X 20 years = $8000 that has left your life forever, never to be brought back. If I applied a rate of return of 5% to that, over that period the lost dollars equals =$13,225.00…GONE!
I call that a “lost opportunity cost”. If through the course of this book, we can find multiple instances of money leaving your life unnecessarily, how much better off would you be?
Remember this as we move forward into future chapters…especially when we get to the chapter on budgets!