Homeowner's Insurance Mistakes to Avoid

If you have a mortgage, chances are pretty high that your lender requires you to have homeowner's insurance. Even if your home is paid off, it is still a good idea to have. People can make a lot of mistakes when it comes to getting homeowner's insurance. They might have too much coverage in one area, or not enough in another area. Having the wrong amount of coverage actually caused me to lose my home. Try to avoid these insurance mistakes so you won't pay too much, or won't have enough coverage.

Mistake 1: Not Having Enough Loss of Use Coverage

This was the mistake that I made. There are several different components of your homeowner's insurance policy. When most of us think about homeowner's insurance, we think of the insurance that covers the structure of our home, or perhaps its contents. Another important component of insurance is Loss of Use coverage. Have you ever thought about what would happen if your house caught on fire and you had to live somewhere else for six months while it was repaired? That's what happened to me. If you think that your mortgage company will allow you to defer payments while the house is being repaired, think again. You'd have to pay for both your temporary apartment or home rental and your mortgage. After our house fire, I discovered that we had $600 in loss of use coverage. We were unable to pay for a place to live and our mortgage, and we lost our home. Most homeowner's insurance policies have more loss of use coverage than this, but you need to check to make sure that you have enough.

Mistake 2: Not Reviewing Policies Regularly

When you don't review your homeowner's insurance policy on a regular basis, you could be paying for too much or too little coverage. It's a good idea to check your coverage once or twice a year. Over the past year, you may have made changes to your home, the value of your home may have increased or decreased, or there may have been changes to your family structure (you may have gotten married, for example). When you review your policy, you'll want to make sure that you have enough coverage, and you may want to check other companies and compare rates. You may discover that one insurance company will give you a better rate now that you have reached a certain age or have improved your credit score, while your current insurer may not offer the same discount.

Mistake 3: Making Too Many Small Claims

If your house catches on fire, you're going to need to make a claim, but do you want to make a claim if you break a window or if someone steals a stereo? Making too many small claims could increase your homeowner's insurance rates by 10 to 15%. While you're at it, you might want to consider raising your deductible. If you increase your deductible from $500 to $1000, your rates could drop by as much as 25%. Put away the difference in premiums into a savings account, and you'll quickly come up with enough money to pay that deductible if you ever need it for a large claim.

Mistake 4: Not Paying Attention to Your Credit Score

Your credit score will probably have an effect on your homeowner's insurance rates. Although there might be some offending items on your credit report, there are some things that you can do to improve your score. The easiest thing that you can do is check to see if there are errors on your report. You may be paying more insurance because of an item that was mistakenly placed on your report. If there are errors on your report, you will want to send a letter to the credit reporting agency asking for it to be removed. If your credit score is not as high as you'd like it to be due to mistakes that you have made in the past, do your best to pay your bills on time from now on. Your score is more heavily affected by recent activity than to events that happened over a year ago.

Sources:

Max, Sarah. "Five Things You Need to Know About Homeowner's Insurance." Money, September 2010, p. 46.

Personal Experience