Friday, December 22, 2017

The Tragedy of the Under-Insured

Hundreds of Californians who lost their homes in the recent wildfires are depending on their insurance policies to help them rebuild their lives. In many cases, the payout will be smooth and the amount will be enough to cover the reconstruction costs. However, for others, there could be a rude awakening. 

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The Under-Insurance Problem

Studies show that a shocking 60% of homes in America are under-insured. The average shortfall is in the range of 20%. It is naturally tempting to reduce insurance premiums so that the money saved can be spent elsewhere. And 20% does not seem like a huge difference – the gap can always be covered if the need arises. However, thinking this way is a mistake. For example, if a home worth $500,000 is destroyed, a 20% shortfall in the insurance coverage will be $100,000. That is not a small amount that can be easily made up. The gap between your insurance coverage and what you need to rebuild could be where your plans for your family’s future get tripped up. Paying an insurance premium year after year may, over time, appear to be a waste. It is only when you need the money that you realize cutting back on the coverage was a mistake.

Knowing How Much You Need

You pour your life’s savings (and perhaps more) into your home. You know exactly how much it cost and so,you think, getting the right insurance coverage should be easy. But that’s not correct. What the home cost some years ago is not what it will cost today. A home that cost $600,000 in 2010 may cost over $750,000 today. A policy that pays out $600,000 is not going to be enough to rebuild. On top of that, there are all the other expenses that come with paying for temporary accommodation till your home is ready to occupy.

Another problem that occurs is that many homeowners fail to update their insurance policies after making improvements or additions to their homes. A home could have $50,000 worth of work done on it over a few years. That shortfall is bad enough, but it is often worse. The $50,000 worth of improvements could add $100,000 to the value of the home. Without adequate coverage, rebuilding it to the same standard that it was, will be nigh impossible.

Check Your Insurance

The California Department of Insurance advises all homeowners to check and see if their insurance coverage is enough for them to rebuild. In addition, an inventory of the contents of the home should be regularly updated. This sounds simple enough, but insurance is a complicated subject and it is easy to make mistakes. These mistakes may not come to light until a home has been lost and the insurance payout is not enough for rebuilding. Getting the advice of an insurance agent will help you to ensure that you have the right coverage. This is not a one-time exercise but an action that should be undertaken every few years so as to ensure that when required, there will be enough money to rebuild the home and protect your family’s future. 

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