The most trending tax and financial industry issues.

Author Picture

Lane Keeter, CPA

Partner: Tax Consulting, Estate Planning, and Heber Springs Managing Partner

A Sober Reminder About Your Homeowner’s Insurance Coverage

The images of the pounding taken by Puerto Rico from Hurricane Fiona and more recently showing the damage and devastation that Hurricane Ian caused across a wide swath of Florida are indeed startling and sobering. Lives have most certainly been turned upside down, and many people, businesses and communities may never be the same again.

But they also serve as a stark reminder that none of us are immune to the tragedy of natural disaster, and that we need to be as prepared as possible. While we here in Arkansas certainly have little risk when it comes to hurricanes, we are no stranger to other disasters, such as tornadoes, earthquakes and flooding. An essential part of being prepared for property owners is making sure that your insurance is adequate and up-to-date.

Let's begin with the most basic consideration for homeowners, that being the amount of insurance coverage on your property. Is the coverage high enough that in the event of a disaster it would adequately cover your loss? 

While I am not a licensed insurance agent, I can tell you that there are several different homeowners insurance options, ranging from policies that cover only the cash value of your home with no coverage for personal property, to those that at least in theory cover replacement of the house and contents. It is vitally important that you make sure these values are adequate given current market conditions. 

Further, I strongly suggest replacement cost coverage, if at all possible, even though it often is more costly. Further, with the skyrocketing building costs that we have been experiencing the last few years, it's a good idea to have a serious discussion with your agent about whether the stated replacement cost amount in your policy is really sufficient, or needs to be expanded.

As to personal property coverage, which you should not go without, this also needs to be addressed. Many policies default to an amount that is a percentage of the dwelling coverage amount. You should periodically take stock of your belongings and their value to make sure that the covered amount is adequate to compensate you in the event of loss. Another consideration is whether you have particularly valuable belongings that need their own coverage by way of a policy rider. Valuable pieces of jewelry that exceed standard policy limits, for example, are often covered this way.

Another aspect of coverage to understand is just what disaster related events are actually covered. While many events are covered under your standard policy, some may fall under a different section of the policy with a separate deductible, or may not be covered at all. You need to know these details and plan around them.

For instance, many people assume most homeowners policies cover earthquakes, but the fact is typically they do not. Since we live in an area that is prone to small earthquakes and in which many experts predict a major earthquake could occur within our lifetimes, obtaining separate earthquake coverage is a wise thing to consider.

The same thing is true of insurance against flooding. It is estimated that only about 15% of homeowners have flood insurance. Depending on where you live, and given the increasing occurrence of flooding due to heavy storms, not having flood insurance could be catastrophic financially should you suffer loss due to flooding.

An additional thing to consider is your plan deductibles. They can be, and often are, different for different aspects of your policy. Also, they may be stated as set amounts, such as $500, $1,000, $2,500 or what have you, or could be a percentage of your coverage amount ranging from 1% to 5%. You need to understand these and determine if financially you can sustain such an out-of-pocket hit. 

For example, let's say your home is insured for $400,000 with a 5% deductible. Your out-of-pocket cost on that should you suffer a loss event would be $20,000. Can you manage that or do you need to pay a bit more now for a policy with a lower deductible so that during a time of already great stress, the financial burden at least is lessened somewhat? Or, perhaps the opposite is true and you have the resources to absorb a higher deductible later if needed, allowing you to save more now with a lower premium.

These are just some, albeit in my mind the most important, considerations in evaluating your loss policies to minimize your risk. A good place to start is to sit down with your property and casualty agent, and undertake a thorough review of your coverage. Then you can make wise choices that fit within your budget, yet protect you from severe financial strain in the event of a disaster.

Prev Next