Updated: 11/3/2011 9:47 PM ET|
Is your home underinsured? 8 keys
The only way to know how you're protected is to read your policy, front to back.
Many policies peg your contents coverage to a percentage of your overall policy limit. If your home is insured for $200,000, for example, your contents coverage might be $80,000 or $100,000 or $150,000, depending on the insurer's policies. Obviously, there's a lot of variation, and these limits don't reflect whether your furniture consists of Chippendale or chipped-and-dented. The only way to be sure you're adequately covered is to do a detailed household inventory, writing down all of your possessions and what they would cost to replace. A drag? Of course. But it's time you'll be glad you invested if you're ever faced with making a claim.
Make sure the good stuff has its own insurance. If you own something truly valuable, chances are good that your policy restricts how big a check you'd get. Most policies put payout limits of $1,000 to $2,500 on such items as jewelry, firearms, artwork and antiques. If you want full coverage, you need to purchase a "floater," or "rider," on the items at added cost. Consider your individual needs. Your policy likely has some other gaping holes.
Homeowners insurance typically won't replace equipment you use for a home-based business. Property belonging to a tenant is usually excluded. Damage from certain causes, such as a flood or sewer backup, won't be covered either. In these cases, you can get supplemental coverage -- and you probably should.
Protect yourself from lawsuits. That's the role of liability coverage. Chances are pretty good that you don't have enough protection, which means you could be in danger of losing everything you own to someone who decided to sue you.
Again, choosing how much liability to buy is tough. You can't predict who is going to sue you or for how much.
Although most insurance experts advise buying liability coverage equal to one or two times your net worth, a jury could come back with a whopping award that bears no relationship to what you own or could earn in a lifetime.
Still, trial attorneys tend to go for the easy money and often settle for the amount of your policy -- unless you're vastly underinsured. Then they're likely to go to the time and trouble of identifying, and going after, all of your available assets.
That's why Steve Vidmar, an insurance defense attorney in New Mexico, recommends that most homeowners have at least $1 million in coverage.
That means buying the maximum coverage your policy allows -- typically $250,000 to $500,000 -- plus an "umbrella" or personal-liability policy that provides coverage up to $1 million.
"I'd recommend even higher limits," Vidmar said, "for those with teenage drivers."
Fortunately, boosting your liability coverage is still relatively cheap. A $1 million umbrella policy usually costs $200 to $300 a year.
The time to make these adjustments is now. It's too easy in the chaos of living to put off investing in your coverage, but it's too late once a disaster strikes.
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
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