In his book "The Seven Habits of Highly Effective People," Dr. Stephen R. Covey presents the principle "Begin With the End in Mind." Dr. Covey teaches that effective people visualize the end of a process right at the beginning. We can apply that principle to our purchase of homeowner's insurance. What is the end of the insurance process? Why, the possibility of an insurance claim and subsequent payment! In the absence of a claim, ALL insurance is equal. We must look at our insurance purchases with a claim in mind.
Should we buy the cheapest insurance we can find? No! A better suggestion is to research the coverage you need and find the least expensive policy with the best company that meets that need. Homeowner's insurance is about the best insurance bargain going. For about $1,506.00 per year the average home in Georgia is covered by Replacement Cost insurance that covers their home, belongings, other structures on the property, temporary loss of use, and a large amount of liability insurance. (1) That is an average of about $350,000.00 in coverage, all for $1,506.00 per year, or $125.50per month. Compared to other types of insurance, homeowner's is dirt cheap!
Let's say that you own a typical home that is insured for $150,000.00. Then let's say that you are cooking on the stove, you get distracted, and the next thing you know your kitchen is ablaze and all your smoke detectors are going off. You grab the kids, the dog, your cell phone, and run out of the house dialing 911. By the time the fire department puts out the fire the kitchen is totaled, every room is smoky black, and all your stuff is covered with dingy gray-black soot. Suddenly, literally, all you own that is worth having are the clothes on your back and an insurance policy. Sound terrible? It is, and it happens almost every minute of every day. In 2014 there were 494,000 structural fires killing 3,275 people, causing 9.8 billion dollars in damage. And that's only damage by fires!
So, understanding that it can happen, to you, let's go back to our scenario. You are standing in your driveway with your family owning only an insurance policy, and you paid about $1,506.00 for that policy. Now, to make the math easy, let's say that your home has suffered $50,000.00 in damage (according to the contractor you have selected) and another $50,000.00 in damage to your belongings. Oh, and you have to have somewhere to stay, so you get a short-term lease apartment, rent some furniture, bedding, kitchenware, and a TV, all for, say, about $2,000.00 per month. That makes your total claim, with a four-month rebuilding period, somewhere around $108,000.00. That $1,506.00 insurance policy is looking pretty cheap right now, isn't it? But wait a minute. Just because your home has $50,000.00 in damage does not necessarily mean that your insurance company will want to pay that much! Suppose that your adjuster shows up and presents you with an estimate for $30,000.00, all figured according to the "going rate in your area." Suddenly you have a problem. You are $20,000.00 short for your repairs, at least if you want to hire the contractor of your choice. Your adjuster is telling you that your contractor is too high, that the work can easily be done for his amount and that's all he's paying, period. Oh, yeah, he's also only paying for that apartment for four months, after that it's your dime, so you better get busy finding someone cheaper and get them working, the clock's ticking!
Let's back up, way up, before the fire, to the moment you bought that policy. Knowing what you know now, would you have paid an extra hundred bucks for a better insurance company? How about two hundred? I know I would have, if I had known I was going to have a fire. Dr. Covey says to "Begin With the End in Mind." If you buy insurance, buy it expecting to have a claim. You probably won't, but if it happens you'll be glad you thought it all the way through! Look at the numbers. If you are getting a real deal on homeowner's insurance, say twenty percent below average, then you are saving about $25.00 per month, or $9,000.00 in savings over thirty years. But then you have a claim, and your cheap insurance company pays cheaply. You will lose that $9,000.00 and a lot more. You can pay too much for insurance, but it is far easier to pay too little, and yes, you get what you pay for. Wouldn't it be better to identify some companies that pay their claims fairly and select the least expensive of those? I think so, and next week I will give you some tips to make that selection easier!
(1) Bankrate.com, 2020
