We recently wrote a column on home insurance and how much coverage an insurance company may require a homeowner to have. We received several comments from readers that we’ll share over the next few weeks. (Please note letters may be edited for space or clarity.)
What you should have said was that insurance companies insure property at the replacement value, not market value, but depending on how long the policy is in force, insurance companies add 2 to 3 percent in coverage every year as an inflation index.
So if a customer has had a policy for 15 years with the same carrier, and he hasn’t contacted the agent or company about reviewing that cost of living increase, that’s a good first move.
Most insurance carriers are more than willing to review that cost of living increase, and decrease coverage depending on how long the policy is in force. The longer the policy is in force, the more out of whack the replacement cost will be, because of the magic of compounding.
You should also shop your homeowner insurance every year or two. While that’s totally counterproductive, and there is equity in a customer keeping the same carrier for many years, you may find your carrier wants to keep a good customer and will reward him or her with a lower rate.
The suggestion that they could rebuild the house for a lot less is possible, but the owners would have to hire a contractor to do a complete pro-forma on the rebuild, which is not time efficient. My suggestion of contacting the broker or carrier to review every facet of the replacement cost is what he should have done. That’s the correct answer, and that’s what we would have done if they were my customer.
A: Thanks for your thoughtful response. Our one concern with your comment about how insurance companies raise their rates annually is that we’ve seen increases in policies that far outpace the rate of insurance and are far higher than the 2 to 3 percent cost of living increases that insurance companies may place on policies.
We do agree that it can be a real pain to get new insurance policies for both home and auto (since many homeowners co-buy those policies from the same company to save money), but if you don’t shop around, you won’t know where the market is in pricing. If insurance companies gave existing homeowners the benefit of lower pricing when they lowered their rates, we’d feel differently about our advice to our readers. But we still feel that our readers should know that the cost of their insurance policies may increase annually and that they should know to compare and shop around. They may not need to switch carriers every year or two, but they at least will know that their insurance carrier is pricing their policies in the ballpark.
But the way you, as an insurance agent, deal with your customers is welcome. You seem to have your customers’ interests at heart and are willing to tell them whether switching would be the right thing to do and when. Unfortunately, not every homeowner has an insurance agent that is looking out for their best interests.
We've seen situations where insurance agents have been happy to let insurance policies increase in cost even when those increases far outweigh the increases in construction costs and the increases in the cost of living. It almost seems that the insurance carrier was increasing the insurance premiums with the hope that the homeowner would not switch carriers and simply keep the customer for another year until the customer noticed.
And, yes, auto and homeowner insurance claims will affect that homeowner's ability to switch carriers. But if you don't shop around, you'll never know what the possibilities are. It's worth being able to compare what you're paying now and what you would pay with a new carrier. If the difference in cost is significant and the switch outweighs the time and effort, we think homeowners should consider it.
Thanks for the comments. We invite other insurance agents to share their perspective and experiences.
Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact them through her website, ThinkGlink.com.