Insurance 101: Prepare before you need it
Fires on Maui. Flooding in the Southeast. Natural disasters have made headlines lately, providing a timely reminder about the need to plan homeowner insurance needs and review them from time to time.
This includes making sure you have adequate coverage, understand the claims process and safeguard key documents. It’s also wise to compile a list or inventory of your furnishings and other belongings.
Checking your insurance policy
A key first step is to make sure you have adequate coverage. One key factor is to distinguish between whether you have an actual cash value or replacement-cost policy.
With actual cash value, your insurance company won’t fully reimburse you for a new item at prevailing prices. The rationale is that your belonging has decreased in value over the years as you used it and as it aged. Replacement-cost policies will reimburse you in full for a new appliance or other item at today’s higher prices.
If a laundry-room fire destroys your washing machine, for example, a replacement-cost policy would reimburse you for a new machine, at today’s prices. You would receive only a portion of the cost of a new appliance with an actual cash value policy, since your older machine has depreciated owing to use and age.
Alternatively, you might want to opt for an extended replacement-cost policy, especially as it pertains to your home. With these, “Your insurer will pay a certain percentage over the limit to rebuild your home — 20 percent or more, depending on the insurer,” wrote the Insurance
Information Institute in a report. “If building costs go up unexpectedly, you will have extra funds to cover the bill.”
Most policies provide “adequate coverage” because they include inflation clauses to keep up with increases in local building costs, the institute added. But you should verify what type of coverage you have. It’s also smart to inform your insurer when you have added rooms or made other substantial upgrades to your dwelling.
Taking inventory of your possessions
Renters wouldn’t need to worry about structural damage, but they, too, should be concerned about the contents of a home. Both renters and homeowners might be surprised by how much stuff they own. To track and document all of it, insurance experts used to advise walking around your house with a pad of paper and camera in hand. Then videocameras became handy for doing this. Now you can do much of the work by snapping photos with a cellphone and listing product details there or on various apps.
If possible, describe each item by manufacturer, model and serial number, State Farm suggests. Include the price and date of purchase, if known.
Photos will help. “Pay special attention to your most valuable possessions, such as antiques, art, jewelry, collectibles and electronic equipment,” State Farm suggests. Don’t forget about your wardrobe, which could be substantial.
When you’re finished, take care to store the information in a secure place such as in a fireproof safe or digitally in the cloud. You might even send an email with the inventory to your insurance agent, State Farm suggests.
The Insurance Information Institute offers tips for creating a home inventory, as do various insurance companies.
After an incident, to substantiate your losses, you likely will want to prepare another inventory, listing the damaged or destroyed items. This can include structural damage such as cracks in walls and missing roof tiles, and you might want to get the home’s electrical system checked.
“Don’t throw out damaged items until the adjuster has visited,” the institute recommends in a commentary. “You should also consider photographing or videotaping the damage.”
After-incident tips
In the event of a fire, flood or other calamity, a good first decision is to contact your insurance company and find out which damage is covered, how to file a claim and how long the process might take.
Also, take reasonable steps to protect your property from further damage, such as by draping a tarp over broken windows or a damaged roof. Save receipts for these expenses. “Payments for temporary repairs are part of the total settlement,” said the institute. So if you pay a lot of money to a contractor for temporary repairs, this might not leave enough money for permanent repairs.
Also, keep records of expenses for temporary accommodations, as homeowner policies provide coverage for living expenses if your home is damaged by an insured disaster.
Dealing with contractors can be complicated and frustrating. The institute warns about contractors who ask for a large deposit upfront and those whose bids are unusually low. It recommends dealing with licensed contractors and obtaining bids in writing that specify the materials to be used, with expenses broken out as line items.
It advises against making extensive permanent repairs until a claims adjuster has assessed the damage. Adjusters, who are trained to assess damage, might be able to negotiate a better price and recommend contractors.
A fire or other calamity also might destroy financial records, though many of these can be relatively easy to recover, at least in electronic form. For example, you might lose your paper copy of a prior year’s tax return, but taxpayers can receive free federal-tax transcripts or summaries by contacting the Internal Revenue Service at 1-800-908-9946 or by using the “get transcript” feature on irs.gov.
Still, certain types of financial records can be difficult to replace, such as original purchase statements for a home. That’s another reason to take an inventory of your possessions and key documents from time to time, before the need arises.