What is homeowner's insurance?"It is insurance
that protects a homeowner against loss from fire and other
hazards that may impair the value of their home.
"Is homeowners insurance a settlement cost that must
be paid upfront?"
Yes, it appears on the Good Faith Estimate as an
estimated amount, and the actual amount is shown on the
HUD1, which is the closing document that lists all
settlement costs.
It is not a mortgage cost, but lenders require that their
"minimum insurance requirements" be met before they will
fund a loan. The house is their collateral, and they don't
want to lose it to a fire or other catastrophe.
The insurance requirements vary from lender to lender but
on a house purchase, most require that the premium be paid
for the first year at closing. If the borrower is
maintaining an escrow account, an additional amount equal to
several months of premiums must be paid to fund the account.
"Can I shop for homeowners insurance on my own?"
You can and you should. Homeowner's insurance is a lot
easier to shop for than a mortgage because premiums change
only occasionally, so the price you are quoted is very
likely the price you will pay.
Shoppers should be aware that carriers today have access
to databases that combine claims data from many companies.
If you have been making numerous small claims, all the
carriers you shop will likely be aware of it. It is still
worth shopping, however, because the carriers use different
risk evaluation systems.
In shopping for the lowest premium, you must be very
careful to compare apples with apples. The principal factors
you must hold constant in soliciting quotes from different
carriers are the deductible and the coverage.
The deductible is the loss amount that is the homeowner's
responsibility, e.g., $1,000. Only losses above that amount
are insured. Higher deductibles carry lower premiums.
The coverage dictates the maximum loss the policy will
pay. There are four levels of coverage, called "actual cash
value" (lowest coverage), replacement cost," "extended
replacement cost," and "guaranteed replacement cost"
(highest coverage, but not necessarily available). Higher
coverage carries higher premiums.
"Consumer Reports suggests carrying a high deductible.
Do you agree?"
Yes. I have the highest deductible my carrier offers, and
if they offered a larger one, I would take it. I live in a
heavily wooded area, and every other year or so, a large
tree falls that I must have removed. Even if the cost
exceeds my deductible, I don't make a claim because it will
raise my premium. The number of claims a homeowner makes
figures importantly in premium setting.
Homeowners insurance should not be used as a way to
budget expenditures for minor mishaps, such as my falling
trees. Even if small claims did not impact the premium, the
carriers price deductibles so advantageously that it pays
homeowners to self-insure.
If the typical homeowner took the largest deductible,
banked the saving in premium, and used the account to pay
for what would have been claims under a smaller deductible,
the account would grow over time. The saving in premiums
using the large deductible would more than cover the claims
under the small deductible.
"My premium just jumped 160 percent, even though I
have had no claims. Why is this? What can I do?"
Welcome to the club, more homeowners than not have had
their premiums raised over the last three years, and some
have lost coverage altogether. Insurance carriers have been
getting tough because they have suffered unexpected losses.
Wildfires and mold have caused losses over large groups of
houses in the same areas, as opposed to the randomized
individual losses that carriers expect.
In addition to general increases in premiums, the
carriers have become more discriminating. In setting
premiums, carriers today use industry-wide data on claims
experience, and credit scores, which they have found are
related to claims experience. The result has been larger
premium spreads between individual homeowners.
A premium increase of 160 percent probably means that you
have been shifted into a higher-risk category. Given your
record, ask your carrier to explain the premium increase.
Sometimes they will retreat. If they don't, shop a few other
carriers and see if they have you categorized similarly.
If all the carriers have you labeled as high risk, you
may want to explore the possibility that the information
they are using to make that judgment is in error. Credit
information is known to be error-prone, and it is likely
that insurance claims information is as well. Web sites that
you can use to check it out are
www.choicetrust.com and
www.equifax.com.
