Home insurance goes through the roof
Premiums are shooting up, and insurers are dropping some types of coverage that once were standard.
This post comes from AnnaMaria Andriotis at partner site SmartMoney.
After rising steadily for the past few years, homeowners insurance premiums are expected to jump an additional 5% this year to $1,004, according to the Insurance Information Institute. That's the biggest yearly increase since the market downturn and will mark the first time the national average premium is above $1,000.
Premiums will rise even more in some states. In Georgia, GuideOne Insurance will raise rates by 12% on average starting this month. Farmers Insurance is increasing rates in Texas by 10% on average. Last month, Allstate started raising rates by 15% in Pennsylvania. And Florida insurer Citizens Property Insurance and North Carolina Farm Bureau are raising rates on some condo and homeowners by 21% and 6%, respectively.
The higher premiums come at a challenging time for American homeowners, as millions are behind on their mortgage payments and many are "underwater."
Insurers say the higher premiums are partly to cover their rising costs: Insured catastrophe losses in the U.S. totaled $35.9 billion in 2011, compared with a 2000-to-2010 average of $23.8 billion, according to the III. The companies are also paying more in premiums to so-called reinsurers, which provide insurers coverage for widespread catastrophic events, says Steven Weisbart, senior vice president and chief economist at the III. (Post continues below.)
Meanwhile, insurers’ returns on their investments -- roughly 70% of their assets are in bonds -- have been low, he says, and they're looking for other ways to make up that lost revenue. "The only other place insurance companies can get money from is premiums," he says.
Typically, when policyholders are informed of premium increases they shop around for better prices, but experts say that's become harder to do. As insurers exit some markets altogether, homeowners are left with fewer companies to choose from. For instance, starting in May, State Farm will not renew roughly 11,000 homeowner policies in five coastal counties in Texas. The company says it's trying to lessen its exposure to future losses.
To lower premiums, some homeowners increase their deductible, which means they'll have to pay more out-of-pocket before their insurance kicks in after a disaster. But this strategy might not be as helpful this time around, because some insurers are dropping other types of coverage that were previously part of basic homeowners insurance policies. When coupled with a high deductible, a homeowner's expenses could soar.
Allstate, for instance, recently introduced a new homeowner's policy in Kansas and Oklahoma that doesn't pay out the full cost of replacing all roofs that incur windstorm or hail damage. Kevin Smith, a company spokesman, says Allstate will determine which roofs qualify based in part on their age and condition. If Allstate declines to pay the full cost, it will pay the current value of that roof and the homeowner will be on the hook for the difference.
The company says the homeowner's other option is to purchase so-called replacement cost coverage for roof losses in addition to the basic policy.
Even if homeowners find a lower premium, it might not stay low for long. Experts say many insurers filed requests with states to raise rates this year. (When states approve higher rates, that leads to higher premiums for policyholders.) For instance, last month, Pennsylvania received requests from Erie Insurance and Travelers to increase premiums by roughly 9% by June and July, respectively, according to the state's insurance department. (The companies didn't respond to requests for comment.)
In Georgia, most of the major companies filed requests to raise rates by 18% to 22%, says Steve Manders, director of insurance product review at the state's department of insurance. The states say they don't usually approve requests for increases of the exact amount insurers ask for.
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Elder Wisdom, happy to help answer your question, it's a good one.
A few years ago, when home prices were skyrocketing, insurance replacement cost value did not. The cost of rebuilding a home went up much less than the market value did. Nobody complained about replacement cost on the policies, then.
Now that the real estate market is in the tank, the cost of rebuilding a 25 year old home is much higher than the cost of buying a 25 year old home. The cost to build a new home hasn't dropped, only the land prices have.
Think about it this way: If your home is destroyed, there is no 25 Year Old Lumber store, wiring store, etc. You would buy new lumber and wiring, etc to rebuild it. When rebuilt, you would not have a 1987 home to put on the market, you would now have a 2012 home.
If you don't have a mortgage, there is another choice for you. You can get a "Market Value" policy and insure it for much less than replacement cost. This policy wouldn't rebuild your home if it is a total loss. It would pay the Actual Cash Value of the home (market value) if destroyed. It woulld not build the home back since it would be insured for much less than it would take to rebuild it.
Hope that helps!
It looks like a home is becoming less and less your best investment. I have been preaching this for years way before the market crash of 2008. Real estate is a good investment if managed correctly but your primary place of living should never be treated as an investment. This is where you raise your family in a secure environment.
Insurance is based on the materials to rebuild a home not the view people consider as a market value. Building material such as lumber and copper are going up in price. Plus the amount of claims in the last few years have increased in the past few years because of the extreme weather. So, of course, insurance premiums have increased. Get over it people the insurance industry is a business.
Part of the problem is the insurance companies are not watching their cost.
We had a claim and it took us over a year and a half to get paid. In the mean time they had to pay for us to live in an apartment with rented furniture. By the time it was all over we had gone through four adjustors and all of our outer living expenses. We got smart and hired an attorney before we had to start paying our own living expenses. We sold the house as is and took the insurance money and purchased a new home with it.
Just last year we had a very small hail storm in our neighborhood. I think every roofing company in the state of Texas showed up within a week to start asking for work. By the time it was over 1/3 of the homes got new roofs. Hard to believe when you think all of these homes where less then 18 years old and have 30 year roofing products on them.
Thanks, Wake up and put down the joint. Your explanation does give me food for thought.
Now, if only my income could keep up. These 1% interest rates on retirees lifetime savings don't balance out with inflation real well!
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