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What You Should Know About Buying Home Insurance

Buying home insurance today is much different now than it used to be. You need to understand how because it effects you personally. Surely September 11th and the steep stock market decline forced insurance companies to reevaluate their positions in the marketplace. But overall, the industry weathered well the devastating terrorist attack; and the equity markets are recovering. So what’s different now? The answer lies in technology. Vast amounts of digitalized data collected on you from multiple sources lay waiting in huge databases.

Credit Scores Aren’t Used Just For Loans

Banks use your credit file to size you up. If you’ve ever missed an installment payment, a credit card bill, a mortgage payment, etc. your credit file is notified and red flagged. Suddenly any company that extends credit retrieves this data. Good or bad, it gets run through proprietary software programs that “calculate” the risk of doing business with you.

Insurance companies are no different.

Insurance actuaries (the number crunchers with the pencil protectors in their pockets) compare “credit scores” against “claim histories” of its policyholders. This is the grand merger of the data collected by the big credit agencies with the insurance industry. The “numbers” show a correlation (careful, not a cause) between lower credit scores and a higher than normal claim frequency. This doesn’t mean that if you have a low credit score you will likely submit a claim; nor does it mean that if you have a magnificently high credit score you are immune from suffering a loss. Understand this: an insurance company sets rates and makes a profit based on its ability to predict the future. The company bets its capital for a relatively small fee (your premium) that you will not submit a claim costing hundreds of thousands of dollars. In return, you trade your premium dollars for the piece of mind on not suffering financially if your house burns down or total your car. Some like to call this “sleep insurance.”

The policyholder asked the insurance company to fulfill its obligation!

A worried homeowner called a few months back. His insurance company sent him the non-renewal notice but he didn’t do anything wrong. He and his wife paid their homeowner premium faithfully—year after year after year. In 2002 a pipe burst. Then two trees stuck his deck in a storm. Then this past winter, a sudden thaw after heavy snow and freezing temperatures caused water to seep in the house ruining the wallpaper. A few thousand bucks for each claim. The homeowner has been paying his premium for twenty years. Now after two claims, two events beyond his control, the insurance company is canceling? What’s this all about? Not only did the insured always pay the premium, he paid the $500 deductible each time. Isn’t that what the insurance contract states? You pay the premium, and the insurance company pays the loss, less the deductible.

Where does it say in the contract you can’t put in claims?

I’ve read insurance contracts from start to finish. Nowhere in the contract does it say that if the policyholder submits two claims the insurance company isn’t waiting around to pay a third claim. But, in effect, this is what’s happening now. It’s the merger of financial data and loss data refining the prediction process—increasing the house’s chances that it keeps more of your money.

What You Can Do To Protect Yourself Now

My first recommendation is to raise your homeowner deductible to that option closest to 1% of the coverage on the house. For instance, if your home is insured for $480,000, go for a $5,000 deductible. If you have a $2,000,000 home, elect the $25,000 deductible. Why do this? You’ll save money and lots of it. Personally, when I increased my deductible on my $500,000 house from $500 to $5,000 I saved $739! That’s a lot of money, especially year after year. The higher deductible takes away the temptation to submit nuisance or maintenance claims. The higher the deductible, the better off you are in the long run.

Preventative Maintenance

What you can do is order a personal C.L.U.E. report. It costs $5 and can be ordered through our office. This report reveals any and all claim history on your current residence; it describes the event and how much was paid out. Even if “0” dollars were paid, the record is still there. And if you are looking at buying another home, definitely ask the seller to provide you a copy of their C.L.U.E. report on the property. Just in case. If the property has a handful of claims, you could be buying more than you bargained for! A history of water damage claims might raise your premium 300% or more! I can’t get it all in one report, but I trust you found this information helpful.

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