Homeowners Insurance -- Newbie questions
April 1, 2016 7:41 AM Subscribe
Hi all. Mrs. Hall and Oates and I are home buying noobs and are a bit confused about how much we should insure the house for, and what our deductible should be. Hope us pleaes?
The agreed up purchase price for our new home is, let's say, around 300K. The appraisal of the house came in slightly over -- about 305K. Now, why are different companies giving us such wildly variable quotes for dwelling protection?
Liberty Mutual has set the dwelling protection at the appraisal price. Allstate has set the dwelling price much higher -- around 335K. State Farm, who has been our car insurance provider, is dead set on 250K as the dwelling protection price (basically the amount of the loan). State Farm's argument is that it doesn't matter what the actual number is set at. All the matters is the cost to rebuild the dwelling, and that won't be more than their quote. Is that true? And if it's true, why are the other companies so much higher -- are they just trying to over sell?
State Farm's standard deductible is also much higher than the other companies -- their's is $2,300 vs. 1K for Allstate and 1,250 for Liberty Mutual. In your experience, how important is it to get a lower deductible?
The agreed up purchase price for our new home is, let's say, around 300K. The appraisal of the house came in slightly over -- about 305K. Now, why are different companies giving us such wildly variable quotes for dwelling protection?
Liberty Mutual has set the dwelling protection at the appraisal price. Allstate has set the dwelling price much higher -- around 335K. State Farm, who has been our car insurance provider, is dead set on 250K as the dwelling protection price (basically the amount of the loan). State Farm's argument is that it doesn't matter what the actual number is set at. All the matters is the cost to rebuild the dwelling, and that won't be more than their quote. Is that true? And if it's true, why are the other companies so much higher -- are they just trying to over sell?
State Farm's standard deductible is also much higher than the other companies -- their's is $2,300 vs. 1K for Allstate and 1,250 for Liberty Mutual. In your experience, how important is it to get a lower deductible?
There are four things to consider:
1. The actual structure.
2. The value of the land, which should the structure disappear will still be there, to be built upon and/or with it's own value. So if the whole house and land is $300k, it makes sense that the land is $50k, and the structure is $250k.
3. Replacement of your interior goods.
4. Liability for someone getting hurt on your property
Your deductible should be what you can comfortably afford to pay out of pocket. If you have $5,000 in a savings account, go with a $5k deductible if it brings the cost down.
I will say that if you're caviling at a difference of $1k in deductible...you need more savings before buying a house.
posted by Ruthless Bunny at 7:54 AM on April 1, 2016 [3 favorites]
1. The actual structure.
2. The value of the land, which should the structure disappear will still be there, to be built upon and/or with it's own value. So if the whole house and land is $300k, it makes sense that the land is $50k, and the structure is $250k.
3. Replacement of your interior goods.
4. Liability for someone getting hurt on your property
Your deductible should be what you can comfortably afford to pay out of pocket. If you have $5,000 in a savings account, go with a $5k deductible if it brings the cost down.
I will say that if you're caviling at a difference of $1k in deductible...you need more savings before buying a house.
posted by Ruthless Bunny at 7:54 AM on April 1, 2016 [3 favorites]
Best answer: The replacement of your home, should it burn down completely or be swept away by a tornado, assumes that the land is still there. Your purchase price of the home includes the value of that land, so there is no reason to insure for full purchase price. Your lender will want to get paid if the house is destroyed, so they are interested in your getting insurance to cove the loan amount.
A higher deductible will usually come with a lower insurance price. In my experience, home insurance claims are rare, and you can make up for the deductible with the lower price over a decade or more of no claims.
posted by Midnight Skulker at 7:55 AM on April 1, 2016 [3 favorites]
A higher deductible will usually come with a lower insurance price. In my experience, home insurance claims are rare, and you can make up for the deductible with the lower price over a decade or more of no claims.
posted by Midnight Skulker at 7:55 AM on April 1, 2016 [3 favorites]
The agreed up purchase price for our new home is, let's say, around 300K. The appraisal of the house came in slightly over -- about 305K. Now, why are different companies giving us such wildly variable quotes for dwelling protection?
How much is the land worth by itself? If there's a fire that takes out the house, the land doesn't have to be replaced.
posted by Candleman at 8:05 AM on April 1, 2016
How much is the land worth by itself? If there's a fire that takes out the house, the land doesn't have to be replaced.
posted by Candleman at 8:05 AM on April 1, 2016
Response by poster: I will say that if you're caviling at a difference of $1k in deductible...you need more savings before buying a house.
That seems pretty uncharitable when I'm just asking questions about differences in policies.
posted by (Arsenio) Hall and (Warren) Oates at 8:19 AM on April 1, 2016 [11 favorites]
That seems pretty uncharitable when I'm just asking questions about differences in policies.
posted by (Arsenio) Hall and (Warren) Oates at 8:19 AM on April 1, 2016 [11 favorites]
In your experience, how important is it to get a lower deductible?
It means that some minor misfortunes won't be covered at all by the insurance, but those are the sorts of repairs that it's often better to just cover yourself anyway rather than risking your overall rates going up or your policy getting canceled.
As far as major catastrophes, take the amount it saves you compared the higher deductible. How many months of payments would it take to save up the difference with the higher deductible? Combine that with what you think the risk of a major incident happening is plus your personal risk tolerance. If it would only take 5 years to bank the difference, I'd like go with the higher one personally, but I'm also a high earner in a pretty safe area and can soak the higher deductible if I have to. If you don't have that ability, it means you have increase your emergency fund size.
posted by Candleman at 8:37 AM on April 1, 2016 [1 favorite]
It means that some minor misfortunes won't be covered at all by the insurance, but those are the sorts of repairs that it's often better to just cover yourself anyway rather than risking your overall rates going up or your policy getting canceled.
As far as major catastrophes, take the amount it saves you compared the higher deductible. How many months of payments would it take to save up the difference with the higher deductible? Combine that with what you think the risk of a major incident happening is plus your personal risk tolerance. If it would only take 5 years to bank the difference, I'd like go with the higher one personally, but I'm also a high earner in a pretty safe area and can soak the higher deductible if I have to. If you don't have that ability, it means you have increase your emergency fund size.
posted by Candleman at 8:37 AM on April 1, 2016 [1 favorite]
It means that some minor misfortunes won't be covered at all by the insurance, but those are the sorts of repairs that it's often better to just cover yourself anyway rather than risking your overall rates going up or your policy getting canceled.
This is the key for me. I don't want to make a claim against my homeowners' insurance for small stuff, because I don't want the ding on my record. If I'm only going to make claims for huge stuff, I might as well make the deductible as high as I could afford to cover in one of those rare situations.
posted by primethyme at 8:42 AM on April 1, 2016 [1 favorite]
This is the key for me. I don't want to make a claim against my homeowners' insurance for small stuff, because I don't want the ding on my record. If I'm only going to make claims for huge stuff, I might as well make the deductible as high as I could afford to cover in one of those rare situations.
posted by primethyme at 8:42 AM on April 1, 2016 [1 favorite]
Response by poster: Good points re: when and when not to actually make a claim, and how that impacts the size of the deductible. Thanks for the advice here, folks.
posted by (Arsenio) Hall and (Warren) Oates at 9:32 AM on April 1, 2016
posted by (Arsenio) Hall and (Warren) Oates at 9:32 AM on April 1, 2016
If you dig into the fine print of a homeowner's policy, you'll find the limits of coverage for all sorts of things. So, the replacement value of the home itself will be one number, the liability for injury to a houseguest will be another number, and the contents will be a bunch of specific numbers (so cash is insured to one limit, jewelry to another, art to another, and so on). If you doubt the replacement value of the home, you can ask how they're calculating the number and maybe give them an updated appraisal if it turns out they're going off an old one. If you need specific riders for things like art or electronics or your collection of vintage baseball cards, you can also add them.
The replacement value should be somewhat predictable so that broad range is a little weird. In general it's the appraised value of the home after subtracting out the appraised value of the land. They should be figuring out the replacement value based on improved cost per square foot, so if they're especially low you have to wonder if they're giving you adequate credit for the finish of the home.
And on the deductible: my personal rule of thumb is that I should be just slightly uncomfortable with the number. High enough it'll cut into some discretionary spending, not so high we can't actually afford it. It's unscientific but it works for me. When our house was burglarized we paid out of pocket for the window the burglar broke, and ate the loss on the stuff he took. We even have a rider to cover all my computers, but the particular computer he grabbed (and dropped when he was interrupted) was worth less than the deductible on that rider, so I had to keep telling the adjuster "no really, I looked it up and it was worth $67. And it's dented but it still works. No really, I don't want to claim it."
posted by fedward at 9:51 AM on April 1, 2016 [3 favorites]
The replacement value should be somewhat predictable so that broad range is a little weird. In general it's the appraised value of the home after subtracting out the appraised value of the land. They should be figuring out the replacement value based on improved cost per square foot, so if they're especially low you have to wonder if they're giving you adequate credit for the finish of the home.
And on the deductible: my personal rule of thumb is that I should be just slightly uncomfortable with the number. High enough it'll cut into some discretionary spending, not so high we can't actually afford it. It's unscientific but it works for me. When our house was burglarized we paid out of pocket for the window the burglar broke, and ate the loss on the stuff he took. We even have a rider to cover all my computers, but the particular computer he grabbed (and dropped when he was interrupted) was worth less than the deductible on that rider, so I had to keep telling the adjuster "no really, I looked it up and it was worth $67. And it's dented but it still works. No really, I don't want to claim it."
posted by fedward at 9:51 AM on April 1, 2016 [3 favorites]
Best answer: I used to work both in the insurance department of a large lender (Wells Fargo), and for an appraisal management company, so I'm probably uniquely suited to answer this.
All your lender cares about is that the dwelling coverage is the full replacement cost. The amount of the loan does not matter, and when you start earning equity, the remaining principle does not matter, either. The replacement cost is the one number.
Each insurer has different means of estimating replacement cost. Some of the bigger companies (I'm almost certain this includes State Farm, but I don't remember any others off the top of my head) have actual worksheets that take into account the square footage, materials, fixtures, etc., and base the cost on that. Other companies just make up numbers. As long as the lender has something on file saying "replacement cost", they don't care what the actual number is. (The insurer/agent can face repercussions if they say something is replacement cost and it turns out not to be.)
The replacement cost and the appraised value have absolutely no relationship whatsoever. The replacement cost is exactly what it sounds like: if a giant hurricane annihilated your house tomorrow, how much would it cost to Ship-of-Theseus the exact same structure? The appraised value, on the other hand, is how much you can reasonably expect your house to sell for, based on the market you're in. So, if you live in a trendy neighborhood, the appraised value is likely to be significantly higher than the replacement cost. Your insurer will not care what your appraised value is.
The deductible question is different for everyone. It's just a question of how much you feel comfortable spending before your insurance kicks in. I can't answer that question for you, but I can give you some insight into the various companies. State Farm's deductibles are higher because their business model is based on not having claims. They give you a high deductible so that it deters you from filing claims. When you do file a claims, your premium will shoot up. It's their way of firing you as a client. Their target customer is someone who buys insurance and never uses it (or, as they would say, "low-risk individuals"). Allstate's low deductible is because they jack up your premiums several times a year, and so if you had a lower deductible, it would quickly become too expensive. (Allstate is a horrible insurance company; do not buy insurance from them.) Liberty Mutual is middle of the road - there's nothing noteworthy about them, good or bad.
Also note that you should be able to negotiate your deductible. You could probably get State Farm and Liberty Mutual to lower their deductibles, although your premium would increase accordingly.
I would also recommend talking to a local independent agent (look for the Big I logo), who can quote you from several different companies. The service is much better, and they can explain the process more clearly.
posted by kevinbelt at 10:48 AM on April 1, 2016 [11 favorites]
All your lender cares about is that the dwelling coverage is the full replacement cost. The amount of the loan does not matter, and when you start earning equity, the remaining principle does not matter, either. The replacement cost is the one number.
Each insurer has different means of estimating replacement cost. Some of the bigger companies (I'm almost certain this includes State Farm, but I don't remember any others off the top of my head) have actual worksheets that take into account the square footage, materials, fixtures, etc., and base the cost on that. Other companies just make up numbers. As long as the lender has something on file saying "replacement cost", they don't care what the actual number is. (The insurer/agent can face repercussions if they say something is replacement cost and it turns out not to be.)
The replacement cost and the appraised value have absolutely no relationship whatsoever. The replacement cost is exactly what it sounds like: if a giant hurricane annihilated your house tomorrow, how much would it cost to Ship-of-Theseus the exact same structure? The appraised value, on the other hand, is how much you can reasonably expect your house to sell for, based on the market you're in. So, if you live in a trendy neighborhood, the appraised value is likely to be significantly higher than the replacement cost. Your insurer will not care what your appraised value is.
The deductible question is different for everyone. It's just a question of how much you feel comfortable spending before your insurance kicks in. I can't answer that question for you, but I can give you some insight into the various companies. State Farm's deductibles are higher because their business model is based on not having claims. They give you a high deductible so that it deters you from filing claims. When you do file a claims, your premium will shoot up. It's their way of firing you as a client. Their target customer is someone who buys insurance and never uses it (or, as they would say, "low-risk individuals"). Allstate's low deductible is because they jack up your premiums several times a year, and so if you had a lower deductible, it would quickly become too expensive. (Allstate is a horrible insurance company; do not buy insurance from them.) Liberty Mutual is middle of the road - there's nothing noteworthy about them, good or bad.
Also note that you should be able to negotiate your deductible. You could probably get State Farm and Liberty Mutual to lower their deductibles, although your premium would increase accordingly.
I would also recommend talking to a local independent agent (look for the Big I logo), who can quote you from several different companies. The service is much better, and they can explain the process more clearly.
posted by kevinbelt at 10:48 AM on April 1, 2016 [11 favorites]
Response by poster: Thanks, kevinbelt. We were leaning toward State Farm and I think you've sold us on going that route.
posted by (Arsenio) Hall and (Warren) Oates at 12:52 PM on April 1, 2016
posted by (Arsenio) Hall and (Warren) Oates at 12:52 PM on April 1, 2016
Just a note: I have found huge difference in premiums between Allstate, State Farm, And AAA.
posted by H21 at 1:08 PM on April 1, 2016
posted by H21 at 1:08 PM on April 1, 2016
If you go with State Farm, make sure to ask for a discount for bundling your auto and homeowner's insurance. Many insurance companies give a discount for that.
posted by cynical pinnacle at 3:15 PM on April 1, 2016 [3 favorites]
posted by cynical pinnacle at 3:15 PM on April 1, 2016 [3 favorites]
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We insured for replacement value -- what it would cost to rebuild the house. We should revisit this, (now 15 years later), with our agent (and get more price-shopping quotes from others).
It made sense at the time, though as you present: what if the loan is for $300k, but the replacement cost if $250k, then there's a $50k difference if the house burns down the next day. Who is on the hook for that difference ?
And there was a good question/note on the green here about how to handle claims for a fire with all of your goods inside the house, so you may want to go over that with the agents as well.
posted by k5.user at 7:47 AM on April 1, 2016